December 2022

Ashley:
This is Real Estate Rookie Episode 240.

Jamil:
Look at the math here. We know that you’ve got to speak to, at minimum, at minimum 200 homeowners before you’ll get a contract. What I see is that if you talk to, say, 50 real estate agents a day, who are each prospecting themselves, imagine if you talk to 50 agents who are each talking to 50 homeowners to try to get listings, how many effective conversations am I having a day if I go that route? If 50 agents are each talking to 50 homeowners, that’s me talking to 2,500 people. So the math doesn’t lie.

Ashley:
My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. I want to start today’s episode by shouting out with someone from the Rookie audience who goes by the username, Dudette Three, and Dudette Three left us an honest rating review on Apple Podcast, a five-star review that says, “Love Ashley and Tony. I love their podcast so much. They provide valuable insight and good motivational stories. Both seem to have a very positive and upbeat outlook on life. I’ve learned a lot and look forward to what is to come.”
Then Dudette also dropped an Instagram handle. It’s at Mitten Rentals, so M-I-T-T-E-N R-E-N-T-A-L-S. So make sure to give Mitten Rentals a follow as well for giving us some five-star love. So if you haven’t yet and you’re listening to this podcast, please leave us an honest rating and review. The more reviews we get, the more folks we can help. And I kind of got some beef, Ashley, because I’m seeing some of these newer podcasts coming up, and right out the gate, they’ve got double the reviews that we have. So I want to challenge our Rookie audience to help us out here. Don’t leave us high and dry.

Ashley:
Yeah. We would appreciate it, you guys. Tony diligently looks at the reviews constantly. I cannot, in case there’s a bad one. So I rely on Tony to read all of the good ones when we are recording, and I appreciate every single one of them. So thank you guys so much. So Tony, today we have a unique episode again, just like the past several Rookie replies have been, where we were live at BPCON. But while we were at BPCON, the first day we decided to do an Instagram giveaway, where we announced it at BPCON on stage that we were doing this Instagram giveaway and we had to be tagged in their story. The very next day we picked a winner.
We gave, I think, Ethan, what, maybe an hour-and-a-half notice that he was going to be on the podcast and we’re recording live and to come meet us. So we have Ethan Wilson on, who we just met at BPCON. We randomly picked his Instagram account. We messaged him and he was able to come. So we also have another guest on with us too, Jamil Damji. So we literally took everyone that we knew you guys would want to hear, and we dragged them into our podcast studio at BPCON. So we have two guests on for this episode, and they both provide tremendous value. I mean, Ethan, I think we hit the jackpot. We were shocked like, “Wait, this is your story, and we just randomly picked you? This is amazing.”

Tony:
Yeah. It was so funny. I was in the back of one of the rooms, so it was actually the social media presentation of BPCON. Sarah was on stage, and our good friend Rob was moderating and Brit was up there, a few other folks. I was at the very back of the room, and this kid comes up to me and he shows me his phone, and it’s an Instagram message from Ashley. He’s like, “Hey, is this real?” There’s a lot of fake profiles floating around, so I wasn’t sure. I was like, “I don’t know. There’s a lot of fakes out there.” I messaged Ashley and I was like, “Hey, is this real?” She’s like, “Yeah.” So it was funny how all of that came together. But Ethan was a great story. Then Jamil, if you guys don’t know Jamil, Jamil is first just a fantastic human being.
This guy just radiates positivity and warmth. Not only that, but he’s also an amazing real estate investor, and we definitely have to get him back on the podcast to give a masterclass to all the Rookies listeners around his strategy for finding off market deals. But anyway, before we go too far with Ethan and Jamil, we do want to take a question from the Rookie audience. So if you guys want to leave a question, get active in the Real Estate Rookie Facebook group, or you guys can go to the BiggerPockets forums. Today’s question comes from Heidi Cawood. Heidi’s question is, “When buying from a wholesaler, is the asking price pretty much what you have to pay? Or is there room for negotiation?” Luckily for you, Heidi, there is always room for negotiation. Like most transactions, like most buying and selling, you can always negotiate the price.
We’ve purchased a few deals from wholesalers at this point, and pretty much every time we’ve been able to negotiate a little bit off of the purchase price. Wholesalers are just like regular sellers. Sometimes they’re going to price a little high in anticipation of the fact that people will probably negotiate and the price will come down a little bit. I guess I just do want to share a story. The last time that we purchased a property from a wholesaler, there was a significant amount of negotiation on the purchase price. I can’t remember the exact numbers, but this is a property that we had under contract for, I don’t know, $250,000. I had never seen the property in person, and I’d just seen photos and videos. So we get the property under contract, and I’d worked with this wholesaler before, so it wasn’t the first time I worked with them. So I knew them. We already had a relationship.
We get the property under contract. Then Sarah, my wife and our crew, they go and walk the property without me. As soon as they get to the house, Sarah calls me, all upset. She was like, “Babe, what are you doing? We’re not buying this house.” I was like, “What are you talking about?” I was like, “I know it’s a little rough, but it’s not terrible.” She was like, “The whole roof has collapsed inside.” So when you walked into the living room, the ceiling inside of the living room had literally collapsed. I went back and I looked at the photos and I was like, I would remember if the roof had collapsed on the photos. That wasn’t the case. So I called the wholesaler, I let them know what happened, like, “Hey, my wife and my crew are there and the ceiling has collapsed.”
He was like, “Are you sure?” I was like, “Yeah.” I sent him the photos that my wife had sent me and I told him, I was like, “Hey, this is going to be the cost to get this repaired. We need this deducted from the purchase price.” He was like, “Hey, I’m sorry. We sell all of our properties as is.” I think if I was a new investor, I probably would’ve panicked a little bit. But given this wasn’t my first rodeo, I knew what to look for. So I politely pointed out to him that pretty much every purchase and sale agreement, at least a good one has a clause that says the condition of the property cannot materially change from the time that it is placed under contract until you close. I asked a wholesaler, I said, “Do you think that the roof collapsing would be considered a material change?”
I was like, “Look, we have two options here.” I was like, “You guys can give me a discount on the price, or I can take you guys to small claims court. And it’s up to you. But I would think that if I showed a judge, an arbitrator, whoever that this is what it looked like when I placed it under contract, this is what it looked like today, they would probably agree that a big gaping hole on the roof would constitute me being right and you being wrong.” So a little bit of back and forth, and eventually they were able to negotiate the price down, and we all walked away from that transaction pretty happy. So that was my experience from negotiating on a good wholesale deal.

Ashley:
What happened with this house? Did it turn out to be a great rehab?

Tony:
It actually did. Not before it got really, really terrible because immediately after we closed, we went back to start demo and we couldn’t get in. We ended up finding out there was a squatter in the property after we had closed on it. So we had to kick the squatters out. It was definitely a challenging rehab for us. But the property’s actually done now. We should have our permit here for the short-term rental in a couple of weeks, and then we can put all of this behind us.

Ashley:
Good. Well, thanks for sharing that story with us, Tony. I think it gives a little bit of insight that even as an experienced investor that things don’t always go smoothly, and there are a lot of challenges that we all face every single day. I’ve actually never bought a property from a wholesaler, and I think it’s mostly because there’s not a … I’m investing in rural areas, where there’s not a huge supply of wholesalers going in and buying these markets where there’s very few investors investing in.
But in the actual city of Buffalo, I’m on quite a few buyers’ lists for wholesalers, and it’s always interesting to see. I was at this meetup once, where wholesaler came up to me and said, “Someone said I need to talk to you, that you buy in this area.” It was not even half a mile from my childhood home growing up, and I knew exactly where the house was. So I’m looking at the address and I’m like, “I know something about this house. What is it?” And just by googling the address, it comes up meth house, meth bust, people arrested, all this thing. I was like, “Oh yeah, that’s why.” And I just want to say I grew up in a very nice home life. I did not live in a bad area growing up.

Tony:
No breaking bad.

Ashley:
Literally in the middle of nowhere. My bus ride to school was an hour long. So this little house there had been a meth house, and it probably had been, but when this happened, it was probably eight years, 10 years before that. And the house has sat since then. Somebody has owned it. I don’t know if it’s changed hands or what. But with some place being a meth house, you want to have some kind of remediation. So I asked the wholesaler, “Has there been any kind of remediation on the property?” He had no idea that it was a meth house at all.
So he was like, “Do you think you could send me that information you found?” And this was literally just by me googling the address, all this stuff came up and it was just kind of a shock to me, like, “Oh my gosh, wholesalers don’t even google the properties that they’re trying to sell, just to see any kind of information that’s out there that definitely could benefit them before even putting the property under contract.” So I’ve followed the property a little bit, and I’m assuming they canceled the contract because I never saw that it changed hands at all from the current owner.

Tony:
Yeah. I mean, so would you have bought the house at the right price?

Ashley:
Actually, yes, because I looked into the remediation of it, and it was just like mold. People are scared of mold. I used to be scared of mold. But now that I work with this great mold company, I’ve bought a couple of houses now with mold. They come in and do the removal, and it costs money, but I know what to budget for it. So yeah, you just have to budget for it. But what he had it under contract for, he eventually told me what it was, after I said that I wasn’t interested or whatever, and he wasn’t even trying to make that much off the assignment fee. But yeah, he couldn’t move because he didn’t know when he went into it that it needed that remediation.

Tony:
Yeah. That just makes me think if can, when you’re working with a wholesaler, if you can put off submitting your EMD until you have had a chance to walk the property, that’s always ideal. That’s an area that I shared with that wholesaler. They have a non-refundable EMD, and I want to say it wasn’t a small EMD, it was 15 or $20,000 we put up as EMD, and it was non-refundable from the moment that we wired it in. So that’s why I had to threaten them with litigation to either get my EMD back or for them to discount the price. But if you can, when you’re dealing with a wholesaler, if you can walk the property first, get a sense of what might need to be done to it before you submit your EMD, you’ll have a little bit more flexibility there as well.

Ashley:
Yeah. I smirked when you said it was only 15, $20,000. The last property I put an EMD down, it was $2,000.

Tony:
Wait. Okay, let me share one story about, I think, the best return on EMD that I’ve ever gotten. I don’t even know if that’s a phrase, return on EMD, but this is what it was. So everyone knows we have cabins in the Smoky Mountains, and we bought a bunch in 2020 and 2021. We haven’t purchased anything in 2022 yet. But we got a new construction cabin under contract at the end of 2020. It was December of 2020, and it was a $2,500 refundable EMD, fully refundable EMD, $2,500. The cabin, I think we got it under contract at 780 is what we got it under contract for. It was supposed to be done in the spring of 2021, so six months after we put that EMD down. Well, supply chain issues, labor shortage, I don’t know what, but it got pushed from spring of 2021 to fall of 2021, and then from fall of 2021 to winter or to spring of 2022, and from spring of 2022 to fall of 2022.
So we’re actually just now closing on that cabin in about 30 days. But here’s what’s happened over that timeframe. The cabin is in a new development of short-term rentals. So I think altogether there’s 22 cabins that were built in this one development. Well, out of 22, my cabin was number 21. So one through 10, 12, 15, my cabin has already been built, the same exact floor plan, and some of those cabins have already sold. And my cabin under contract at 780, the exact same cabin sold for 1.2. So we built, what is that, almost $400,000 in equity on a $2,500 refundable EMD. So it was crazy. That was the best EMD I’ve ever put down in my life.

Ashley:
I remember we had a guest on who was doing that in Austin, Texas with new builds.

Tony:
I can remember that.

Ashley:
Yeah. As soon as was a new development, he’d put a deposit down. It was like $1,000 to have it built. By the time it was actually built, they put in so much equity, and he was doing this every year and house hacking it for a year, then going on. As soon as he closed on that first one, he’d go put a deposit on for one for the following year. Since these were the first houses in that development, by the time people were coming into phase two to buy them, they were paying more than he had paid for that phase one. Yeah, super interesting. Okay. Well, today let’s get into our actual guests that we have onto the show. So you can meet Jamil, and you probably have heard him On the Market, the podcast. Tony and I like to joke that it’s the second best podcast and we’re number one, but it really is truly an amazing and informative podcast. So if you guys haven’t subscribed yet, you really should.
Then also we have our winner on, Ethan, and I’m not even going to say anything about him as to what he’s been going on, except that he is very young and fresh out of college and is doing amazing things. So make sure you guys check out this episode. Ethan, welcome to the show. So we also have Jamil here with us from the On the Market podcast. So this is a super special episode that we are recording live here at BPCON. So Ethan actually won a giveaway that we did on Instagram. We decided to do this yesterday, and he was our chosen winner, the lucky one, and we are so honored to have him here with us. He just gave us a 30-second little spiel of what he has going on, and we are already amazed and can’t wait to hear more. So Ethan, you can tell us a little bit about yourself and how you got started in real estate, please.

Ethan:
Yeah, well, thanks first and foremost for having me. I’m honored and grateful to be part of it. Yeah, so I’m 23. I started my real estate journey just a year ago, a year and four or five days ago. Closing my first single family house down in Huntsville, Alabama. I was in college at the time. I was a busy guy running around. I was playing soccer, taking graduate classes, coaching and trying to make it through school and everything. The opportunity came up to get the house just in the neighborhood next to the college. So I got it. I rented out to my roommates who were my former teammates, and they paid my mortgage and a little extra. I fell into a good group of people. A big fan of Bigger podcast. I found Cody Davis and Christian always good on BiggerPockets, listened to their podcast, loved their story, loved what they were about. It really spoke to me, resonated. So I joined them, joined their mentorship and, like I said, got around a really good group of people. Learned a ton over the past couple months. On Friday we just closed on our first eight-plex-

Tony:
Congratulations.

Ethan:
… down in Texas. Yeah. So, super excited about that. Three weeks ago I quit my job to do this full time, pursue my passion. Real estate’s just what burns my fire. It just wasn’t in … the jobs are dangerous, as they say. It’s comfortable. It’s easy to get stuck in the nine-to-five and just do real estate on the side as I planned. But I’m young. I took on the risk and took the leap, and I’m loving it, under contract for a six-unit outside of Knoxville, Tennessee and going from there.

Tony:
Dude, first, congratulations, man. At 23, I think I was working at Foot Locker, so you’re doing some amazing things, brother.

Ethan:
I appreciate it.

Tony:
So what’s next? So you quit your job, you’re going full time, you got a few small multis. What is the goal for you?

Ethan:
Yeah. So one of my buddies, Eddie from Nashville, we’ve been best friends. We’ve always been hustlers together. We’d work our internships and then immediately after going, start doing landscaping, hauling, moving, stuff like that and saving up our money. He started a business. I bought my first house. Next, he’s going to leave his job soon. I left my job. We’re going to go together in real estate and take it on together. He’s more of a flipping guy. He flips couches and he wants to flip houses. He’s going to be the capital-

Tony:
Very similar.

Ethan:
Yeah, exactly. What’s the difference between a couch and a house? But he’ll be the capital provider for my long-term opportunities and in the meantime find private investors to come in with us.

Ashley:
So being so fresh and so new at doing these first couple deals, what’s your one piece of advice for a rookie listener right now?

Ethan:
Jump in. Whatever you think that obstacle is, it’s probably not as real as you think it is. My obstacle was just the lack of knowledge and just the fear of not doing it. I think a lot of people struggle with, and this is all over BiggerPockets, I know, but analysis paralysis. I read Rich Dad, Poor Dad years ago and started studying, studying, studying, analyzing deals, looking all this, what am I going to do? I finally pulled the trigger. If I had done it earlier, maybe I’d be somewhere different, but live with no regrets. That’s my advice, just jump in.

Ashley:
Well, super cool. And thanks so much for coming on the show. Ethan is actually going to help us co-host today as we talk to Jamil. So Jamil, welcome to the show.

Jamil:
Thank you. Thank you for having me. Ethan, first, it’s evident why you’re the chosen one, bro. So congratulations again. Just phenomenal work.

Ashley:
And you know what? It was random. We got super lucky. Great guests.

Jamil:
Just super random? Wow. Wow. I mean, I would’ve picked him. Really cool, really cool story.

Ashley:
Yeah. So Jamil, tell us a little bit about yourself for anyone who doesn’t know who you are.

Jamil:
Well, thank you for having me, guys. I’m Jamil Damji, the co-founder of Keyglee, in my opinion the best wholesale operation in the country. We are franchised in 130 markets. I started Keyglee in a coffee shop with my sister and two other business partners, Josiah Grimes and Hunter Runyon. It has been a phenomenal ride. We do on average in our corporate store, anywhere between 60 to 80 transactions a month. Then our franchises do hundreds of deals. Outside of that, I am a dad, a loving husband. I love my wife, she’s the best. Also, I am the star of Triple Digit Flip with my best friend, Pace Morby on A&E. So that’s super fun. On top of that, I am the leader of AstroFlipping which is, again in my opinion, the best wholesale community that exists on this planet.

Tony:
Jamil, so not to make you feel like outshined, but what were you doing at 23 years old?

Jamil:
Man. I was working at Taco Bell. Yeah, I was working at Taco Bell. I still had ambitions to be a doctor, so I was living my parents’ dream at the time. I come from an East Indian background and for us, it’s you either be a doctor or don’t come home, right? That’s our life. So I tried to get into medical school and I failed at that. I actually, I did really well in the medical school entrance exam, had a near 4.0 GPA and I bombed the interview. So when I wasn’t accepted into medical school, it was heartbreaking for me because I literally had done everything right. I was volunteering. I was all of the extracurriculars that you could possibly think of, I was doing.

Tony:
Then why do you think you bombed the interview?

Jamil:
Well, I was young.

Tony:
Was it a subconscious thing where you-

Jamil:
No. I was answering truthfully. And I think what ends up happening in those is people rehearse and they come in with a prepackaged, they tell the interviewer what they want to hear. I was very honest with what my ambitions were. I wanted to be a plastic surgeon because I wanted to make money. So I was honest with the panel. And I was told that I was a little immature and that I should try to reapply again after some time, but that was a great candidate. Now what’s funny is that my cousin, who might be listening to this, sorry I’ve been outing you as of late, but he cheated off me on the medical school entrance exam and he got in.

Tony:
Is he someone’s doctor today?

Jamil:
Yeah, he’s prescribing people stuff. So when I think of that, it’s like outside of the fact that I made the decision consciously to never let somebody be able to decide my destiny, and I think that was the moment because I had worked so hard and somebody else could decide. That’s when I knew I had to be in a field where I was driving the boat, and that’s what happened. I went from there into entrepreneurship. It was a bumpy ride. I got into a business at the time, this is now 2001, 2002, and we had started a media company, where we were convincing businesses that they should stop advertising in the Yellow Pages and move their business online, start advertising with a website.

Tony:
Wild idea at the time.

Jamil:
Wild idea. So my job essentially consisted of cold calling businesses out of the Yellow Pages, and explaining to them how some of their funds that they’ve been spending on advertising here could be used to go online so that people could find them, and that it was this revolutionary way that people were going to start doing business. We did really well. I did really well at my job. I was a phenomenal closer. I was selling these five-page websites for 600 bucks a pop. The problem was, is that my business partners hadn’t really ran our costs right. So every time I sold a website for 600 bucks, we lost $100. So I did so well at my job that I put us out of business.
The beautiful thing though is that I was given proximity to my business partner, who was also in real estate. And him and his father were knocking down these old houses, and this is in Calgary, Alberta, and they would build new duplexes on these old lots, and they were having a problem finding more building lots. So thus my real estate journey begins because I basically interjected myself into a conversation they were having, and I came to find out that if I could just help them find some of these houses, I could make some money. So the next day I was walking my dog, called a For Rent by Owner and the rest is history. My first wholesale deal. I made $47,000 after I paid the lawyer their piece and never looked back.

Tony:
So I want to give you a chance to ask Jamil some questions too because this is a great opportunity for you. But before, so Jamil, our audience are mostly rookies, right? So if I’m a rookie and I’m terrified of talking to strangers in rejection, what are some tips you might have about cold calling and being effective with that?

Jamil:
So here’s the thing, right? They’re strangers. So what’s going to happen? I mean, let’s just think about it. What is the worst that could possibly happen? Somebody is mean to you? I mean, okay, right? It’s a person you don’t even know that’s being mean to you. So I think that just understanding the reality of what the fear is based off of. The fear isn’t that someone is going to cuss you out or be not receptive to your call. I think the fear is really, “What if it works? Now what?” Because you don’t know what to do next, right? So many people get stuck and then they think, “Well, I’m all alone in this.”
That’s why I’m just such a big proponent of being a part of a community. There’s so many communities out there. I mean BiggerPockets, for instance, is a massive community of helpful, wonderful people. You can get into the forums and you can talk to folks who are going through the same thing as you. You can squat up with people and really help spread the burden of that fear out. I think once you start to talk to people who have walked that walk, who have literally done the thing that you’re trying to do and they’re alive, nothing has happened to them. They may be richer for it, right? So once you start doing that, I think that the imaginary fear dissolves and then life opens up.

Ethan:
Yeah, I love that. I want to back up first and say, I love what you said about the entrepreneurial mindset. I don’t want to give my time to anybody else. I’d rather work 80 hours for me a week instead of 40 hours for somebody else. So that was always the mindset getting into something like this. And that’s a great question from you, the cold calling, because that was one of my biggest problems was picking up the phone and just calling somebody. I didn’t know who they were, I didn’t know what they did, I didn’t even know if it’s the right number, and I didn’t know who was going to pick up. So I’d call and be like, “Hey.” At first it comes off super salesy. I don’t even know what to say. But I think you hit it on the head with joining a group. I said this already before, but I was in a great group.
There’s guys younger than me, they’re 19 years old, Caleb and Chucky in the multifamily strategy group, they are just wheeling and dealing. And it’s good to have those people who are ahead of you. Christian and Cody, who have shined the light on where I want to go. They helped me from day one all the way to get to where I am. But it’s also good to have people in the group who are exactly where you are and moving along with you. Those guys are same guys who are making the cold calls. And you meet up every night and you’re like, “Dude, I can’t talk to any of these people.” And they’re getting deals and deals. But then you look in the group, and there’s people who are still with you and to help you move through those challenges. It’s definitely good to have those support groups. It goes a long way. There’s a lot to be said for that.

Jamil:
I agree. May I ask, Ethan, the first deal that you did, how did you get that deal? What was your lead generation strategy?

Ethan:
Well, the first one was just the single family house on market.

Jamil:
On market? Awesome.

Ethan:
I offered the asking price. It was just me and one other bidder. It was right after the peak of COVID, so it had just started going down and I think a lot of people were afraid. So I lucked out. I was willing to take the risk and it paid off for me.

Jamil:
Awesome. I want to clear a bit up about my strategies because it’s always been a little bit different from the common conception of how wholesalers will go out and find deals. For the most part, you see a lot of wholesalers out there pulling lists of distress and skip tracing those lists and then calling homeowners direct. I am too lazy for that. I realized that there was a much smarter approach at doing this. I primarily … And the second piece to that is that you can’t build relationships with those people. It’s how do you scale that? How do you scale a business where I’ve got to spend a dramatic amount of money to get one contract? I think the average cost per contract right now in the US going direct to seller is anywhere between 7 and $14,000. I mean, that’s insane, right? That means you’ve got to make at least 10 to 15K just to break even on time and energy.
So my approach has always been a relationship-based approach, where how can I do a certain amount of work but be able to come back to the well and keep drinking? So the approach that I’ve taken is I work primarily with real estate agents and other wholesalers. Now there’s a complete different cadence, technique, follow-up process that is required to do that. You have to be really good at underwriting, you have to be really good at communicating. You have to really be able to take down the guards of these agents who have come to the conversation. When they hear about wholesale, they’re immediately, it’s like their spine stands up because they’ve heard all these horror stories of working with wholesalers. But the facts are is that we provide a significant value to the business place, especially for these houses that are in such terrible condition that they’re not financeable.
And for oftentimes these retail real estate agents don’t have the wherewithal to even handle a house like that. And typically they’re of such low value that it’s not even compelling for them to want to do the deal. So first and foremost, I think that everybody listening to this right now, if you have any ambitions to do wholesale, bet on yourself doing this for a while, right? Believe that you can create an incredible business from building relationships. I look at my wholesale business as one of the most incredible money-printing machines that you could ever have. We’ll do a million, do a million dollars, a million-and-a-half dollars a month in assignment fees. I mean, how many properties do you have to own to have that, right? So this is the approach. And I think that we have to, as a community, understand that we don’t have to go to sellers.
We don’t have to go and try and get one over on grandma to get a deal. That’s not what this is about. For me, I love working with agents who understand what I’m looking for, who know that when you are buying a house that’s in distress condition, that it has an as is cash value. And that cash value has to be compelling to somebody in order to come and make the investment. So this whole question of getting, taking equity, it doesn’t even exist because this equity doesn’t happen until I force it. I’m forcing appreciation on all of these deals by adding value to the situation. So that’s my approach. I’m not a cold caller. I don’t text people. I’m not going to be the guy who’s coming into your phone right now that says potential spam. That’s not me. Everybody that I’m talking to, the real estate agents and wholesalers, they want to hear from me.
Realtors spend thousands of dollars to just make their phone ring. When I call, I’m an actual cash buyer that has the ability to close. I mean, that’s compelling. That’s something that I think that especially if you are getting started in this business, the fastest way. Last thing I want to say to that. Look at the math here. We know that you’ve got to speak to, at minimum, at minimum 200 homeowners before you’ll get a contract. So what I see is that if you talk to, say, 50 real estate agents a day, who are each prospecting themselves, imagine if you talk to 50 agents who are each talking to 50 homeowners to try to get listings, how many effective conversations am I having a day if I go that route? If 50 agents are each talking to 50 homeowners, that’s me talking to 2,500 people. So the math doesn’t lie.

Ethan:
Real quick point, I just want to reiterate the importance of what you said about the relationships. I mean, it doesn’t matter if you’re in wholesale, flipping or multi-family commercial. The most important investment you can make, in my opinion, is relationships, especially early on. I mean, that’s the biggest thing for me is the people I’ve met, the people who I’m going to meet, who are going to provide me with the opportunities and the knowledge that I need to reach my goals.

Jamil:
23 years old, right? You do this for 20 years, man, you’re going to be, I mean, you will be one of those people that people talk about. You’ll be on stage at BiggerPockets. You’ll be the guy that folks will be learning from, right? It’s just so incredible to see young people coming in and being as willing to care about their futures as their parents want to care about their futures. Like you said, 23 years old, man, I was working at Taco Bell. I wanted to be a rapper. What was wrong with me?

Ethan:
Can you rap?

Ashley:
Can you do a little piece for us?

Jamil:
No, no. [inaudible 00:34:49]. Yeah, yeah, I listened to too much Tupac.

Tony:
So I also wanted to be a rapper.

Jamil:
Did you?

Tony:
Literally I have two mixes out on fooling around here.

Jamil:
Get out of here. I got to find them.

Ethan:
I mean, when you first started, what was your biggest focus? How did you go about cultivating those close relationships?

Jamil:
So simply, I literally called between 30 and 50 real estate agents every single day. That was my goal. I could hit that sometimes in a few hours. Sometimes it would take me all day if I got a Chatty Cathy on the other line. But I would make it 30 to 50 calls every single day. And my business exploded. It exploded. I mean, it’s not even close. If you compare our deal volume, our deal size, our longevity in the business and the fact that we franchise now into 130 markets, no one can touch us when it comes to our process and our capacity to get this business done.
So it was absolutely focused on real estate agents. It was minimum KPI. I would try to have my conversations last two minutes to five minutes at most, and that was just it. I was relentless. I never let a day go by. The only day I took off was Sunday, out of respect for people and their time with their families, and if they were going to worship that day, I didn’t want to be bothering them. But beyond that, I was on it, consistent. I showed up every day, and now look at it.

Ethan:
Yeah. I think that’s super important. I think anybody can watch a YouTube video or have a little conversation and get motivated, but staying consistent, being disciplined and putting in that work to kick off those relationships, making those calls, that’s a whole another story.

Jamil:
Absolutely, brother.

Ashley:
Well, Ethan and Jamil, thank you so much for joining us. I mean, that was really awesome. Yeah, the round of applause you hear in the background.

Ethan:
Perfect timing.

Ashley:
So Ethan, can you tell us where everyone can reach out to you and find out some more information about you?

Ethan:
Yes, I am E 7 Wilson on everything. Instagram, E 7 Wilson, Snapchat, Facebook, Venmo if you want to bless me. But E 7 Wilson, that’s my social media.

Ashley:
And Jamil, what about you?

Jamil:
You can find me on IG at J-D-A-M-J-I. Also on YouTube, it’s just youtube.com/jamildamji. But you can also find me on the … I’ll just because you guys, the second best podcast on BiggerPockets, On the Market, where I have an awesome time with Dave Meyer and the rest of the crew there. It’s just so fun to be a part of the BiggerPockets family.

Ethan:
Love it. One more thing. I think I speak for you guys as well. Please do reach out to me. Reach out to these guys. I mean, everybody who’s here is very willing to have a conversation in the DMs, on a phone call if you can find the phone number. I mean, if you’re ahead, next to us or beneath us, I mean, everybody’s in their own path and wants to help each other. So please do.

Ashley:
Well, thank you guys so much for joining us. We really appreciate it. I’m Ashley at Wealth from Rentals. He’s Tony at Tony J. Robinson. And I will say it, we are the number two podcast compared to On the Market. But you’re still right, the whole BiggerPockets host community really is amazing, and just to be able to be a part of this family is really awesome.

Jamil:
Can I say one last-

Ashley:
Yep.

Jamil:
Hey, if any of you guys can find the mix tape, I will pay you $250. So go out there and find the mix tape and make some money.

Ashley:
How much for a music video? Because I do have the link to that.

Jamil:
Oh. 300.

Ashley:
Deal. Well, I have to go make $300. So thank you guys so much for joining us and we’ll see you next time.

Tony:
Later.

Speaker 5:
(Singing)

Dave:
What’s up everyone? Welcome to On the Market, we are here for a very special show, we’re doing a flipper roundup. If you’ve been listening to a bunch of our shows, we’ve been doing a couple of these panel shows with one or two of the OG regular panel, but bringing in some experts based on the specific strategy that we’re talking about. And we’re going to be doing that for flipping today, which is going to be a really awesome show. We just had a great conversation with Leka and Dominique and of course for our flipping, we had to bring in James. James, what’s going on man?

James:
Oh, just enjoying the sunny weather today. I’m excited, I was just in flipping in Seattle where I was getting rained and just, it was freezing cold, wet and now I’m in sunny California.

Dave:
That sounds lovely, that’s actually what I’m doing, I was in Amsterdam. Amsterdam and Seattle have the same weather, but Jane and I decided to just get out of town and now we’re in Portugal and it’s so sunny and beautiful, it’s lovely.

James:
I’d rather be in Portugal, that sounds amazing.

Dave:
I forgot to ask Kathy, I wanted to figure out what she’s doing there with the Golden Visa thing, but we’re working and so and then just eating a lot, but it’s been great. But before we get into the flipping show, which is awesome, you are friends with Leka, so you know her, but we have Dominique Gunderson who first time I’m meeting her, incredibly talented young flipper, great conversation, but I corralled you into joining us beforehand because we just saw some data drop two hours ago, three hours ago, about October inflation numbers. And I felt like they were pretty encouraging.

James:
That was great, when I woke up this morning and I saw that hit my phone, I was like, “Oh, thank you.” Because it’s not just the data numbers, it was the prediction, finally. They’ve been predicting wrong for six months and they keep over pushing and pushing. It’s the first time I think that what? Inflation came out at what? A 0.4 increase and they were anticipating 0.6, is that correct?

Dave:
Yep. Exactly.

James:
And they were a hundred percent wrong last month, they predicted 0.3 and it came in at 0.6, so it’s a step in the right direction of what’s going on.

Dave:
Totally. Yeah, and last month, so September data that we got in October was a pretty big step back. It felt like, here we go, things were not getting better, but if you look historically, the July numbers were pretty good, the August numbers were pretty good, those September numbers were scary and now we’re back down to pretty good numbers. And so what happened, just to recap for people is inflation last month was at 8.2% year over year, now it’s down to 7.7%, which is the lowest it’s been since January, so that’s really good.
And then the core inflation rate, which is really what the Fed cares about, it strips out energy and food costs because they’re volatile. And that went down from 6.6 to 6.3%, so we’re not out of the woods by any measure, but after last month, having that scary bump up, it’s good to see that overall the trajectory seems to be that inflation is heading down.

James:
Yeah. It definitely makes you feel be… I mean last month I was like, “Man, is this ever going to work?” I’m like, “Are we really stuck with this for 10 years?” And so just watching that trend for this month is great, great news. Definitely made my morning better.

Dave:
Oh totally. Yeah. And just so people know, the way it works, what we’re talking about, 7.7%, 6.6%, that’s a year over year data, so we’re comparing October 2022 to October 2021. And the interesting thing is inflation was bad in 2021, but it really started getting bad around this time last year. And so in all likelihood, even if inflation in an absolute basis keeps going up, the year over year number which is what the Fed cares about, what we should care about, is probably going to keep going down. If you look at it just mathematically, not even policy changes, nothing, just mathematically it is very likely that it’s going to keep going down slowly, but I think this is a sign that we will probably start to see more normal numbers. We’ll probably start to see the Fed instead of raising it to 75, maybe they’ll cut it down to 50 basis points in December. And hopefully this is-

James:
Don’t jinx us.

Dave:
It’s not a victory, but it’s hopefully maybe a turning point in the battle against inflation, still a long way to go, but hopefully this shows that we’re heading in the right direction.

James:
Yeah. And at least you can… we just want to get to stabilized. If it’s high, that’s okay, we want to get things stabilized out and moving in the right direction. This is not an overnight fix, but it’s showing that we’re taking the right steps and that things are getting better.

Dave:
Absolutely. All right well, we’ll you all posted as we hear more, but now we have to wait another month, but I was pretty jazzed about this, I’m such a nerd, but I was very excited about it. All right, well, let’s bring in the rest of our panel for this conversation about flipping in 2023, but first we’re going to take a quick break.
All right, for our flipper roundup, we have a great, mostly new panel with us today. First we have Leka Devatha, how are you Leka? What’s going on?

Leka:
I’m doing great. I just saw inflation numbers come in and I’m a little bit optimistic at the core index numbers going down just a smidget, but there’s so much in the news, it’s some exciting stuff, some not so exciting stuff, so I’m just peachy, thanks for asking.

Dave:
When you talk about inflation, you’re speaking my love language, so I appreciate that, but can you tell us a little bit about your flipping credentials and what your experience with it is?

Leka:
Boy, I started flipping back in 2014, so almost a decade ago, all in the Greater Seattle market. I have mainly done full gut remodels, so everything that is structural engineering, just massive reconstruction of homes. I don’t touch the cosmetic stuff, it’s just not fun for me. And true story is that I’ve bought 90% of my inventory from your other co-host James Dainard.

Dave:
Oh.

Leka:
I absolutely have enjoyed, loved working with him and his team. It’s just been such a great partnership, I’ve learned a lot from them and they’ve just given me this landscape to go do some crazy projects and have always had my back. So having that amazing team by my side and then having an amazing contractor team, I’ve been able to do about 75 massive remodels in this area.

James:
I can vouch for that, she’s done some major… I’ve sold her some total turd boxes and she puts them back together. Oh yeah, I mean there’s definitely been a few [inaudible 00:07:24] in there.

Dave:
I was going to ask what happened in the other 10% of the business? You’re just letting that get away.

Leka:
It was before I knew him.

Dave:
Oh, okay.

James:
Yes, they always say 10% of the deals you buy are bad, well-

Leka:
That’s just a [inaudible 00:07:39]. He’s so right though, he’s so right.

Dave:
Yeah, the list of all your failed flips have come from a different provider.

Leka:
And I’m like, “James, what do I do?” He’s like, “Don’t [inaudible 00:07:53] them anymore.”

Dave:
Nice. Well, we also have Dominique Gunderson joining us. Dominique, can you tell the On The Market listeners a little bit about yourself?

Dominique:
Yeah, absolutely. Thanks so much for having me, super excited to have this conversation that’s super relevant today with flipping and what’s going on with the market in that space. I got my start in real estate right after I graduated high school at 17, that was back in 2015. I worked just kind of doing some real estate agent mentoring type stuff for the first little bit and then I jumped into investing. When I was 19, I started wholesaling in Los Angeles where I grew up. Did that for a little bit, about a year and a half. I wholesaled 40 deals and got super comfortable with the process and how to close escrow and do deals. And so that was when I branched out and started my own company out of state in New Orleans, which is where I flip today, and started that in 2019 and have been flipping there ever since. Just kind of started slowly and learning and then have been just hustling and scaling over the last couple of years. And now I’m doing usually about seven or eight flips at a time.

Dave:
Wow, that’s incredible. Definitely doesn’t sound like you’re scaling slowly, to me that’s very, very impressive. Just out of curiosity, why New Orleans?

Dominique:
New Orleans is where my dad lives, so it was a super accessible out of state market for me. And when I decided to start my own company and go out of state, I was still living in Los Angeles at the time, so I was definitely looking for a more accessible, cheaper, lower barrier to entry type of market. And I think one of the biggest things you can do right when picking an out-of-state market is picking a place where you have someone trusted on the ground that can really, even if they’re not in real estate, just show you the basics of streets, neighborhoods, zip codes, what’s going on, having local connections, stuff like that, so that was my major driver for picking that market.

Dave:
Awesome, that’s great. I love that city, it’s just a very fun, delicious place to go. Well, James, everyone knows you but can you remind everyone listening what your flipping credentials are?

James:
Yeah. We definitely like to flip stuff up the Pacific Northwest, so we’ve been active investors since 2005. Been flipping homes throughout from 2005 all the way up until today. Right now I think with our company, we’ve completed about 3000 flip transactions with our clients and ourselves, and then we personally have… we’re coming up on definitely the thousand mark. I’ve lost count, to be honest, how many houses we’ve tore apart at that point, but we’re active guys in Seattle. I think right now we have about 25 to 30 million in active projects with flips and development going on, all short term investments. So we’re active people, always buying different types of stuff and figuring out how to slap them back together.

Dave:
Well, thank you all for being here, I appreciate this is going to be a lot of fun show. I admitted to you all before we started recording that I’ve never flipped a house so if anyone listening to this is thinking like, “Oh Dave’s doing such a good job pretending and dumbing this down.” It’s no, I’m actually just that dumb about flipping houses, so I’m going to ask a lot of silly questions here for you guys, hopefully, everyone else learns something here. But James, can you just tell us a little bit and start sort of set the scene here for where we are with flipping right now. What are the market conditions that are driving the flipping industry right now? And how do they compare to some of your previous experience in the industry?

James:
Yeah, so right now what we’re seeing is we just came off the biggest bull run in appreciation that we’ve ever seen. The last 24 months have been absolutely absurd with the amount of appreciation, I think we’ve seen what? We’re up 35% from 2019 or 2020 roughly in appreciation, so we’ve seen this rapid increase and what that’s done is because it became so profitable. Flipping has always been a very high risk business, you’re buying something on a short term yield, you’re buying something that also needs a lot of repairs, there’s a lot of unknown factors in it and you’re buying at a discount and you have to put the right plan together. But over the last two years what we’ve seen is this rapid amount of appreciation to where a lot of investors have gotten into the market with flipping because what became very high risk and very hard became somewhat easy over the last 24 months.
And so what we’ve seen is the cost of capital has increased roughly 45 to 50%, and what that’s done is it’s slowing the market down. The fed kept their rate at zero for the last two years and we all got the reward out of it. As cost of money’s cheaper, things go up in value, and so as the cost of money has gone up substantially or the fastest we’ve ever seen over the last 90 days, we’re starting to see things starting to decline back and normalize out with pricing. And so right now what that means is as the Fed increases rates and as the rates increase, it becomes an even riskier playing field to be playing in right now. And in the flipping community, we are seeing people get caught where they were buying a lot of property, they’re rolling their profits in, they’re going into bigger properties and it has now became a lot harder to control.
So why is it harder to control? Inflation is still going up or is still higher, so costs are hard to track right now, so people are typically going over budget. The market is cooling down and there’s a lot of uncertainty in the market which is starting to confuse the consumer buyers and there’s less people looking for deals, which means you’re going to hang onto your flips longer at this point as well. And so what we’re seeing is the market’s starting to come down, things are taking longer to sell and we’re in this correction mode to where we’re trying to get to stabilization, but it does make flipping very risky right now because you have to kind of time and really predict the market well with the forecasting. And so I think you’re seeing a lot of shock in the market because a lot of new flippers have not gone through downturns in the market. And since we’ve been doing this since 2005, we’ve seen ups, downs, we’ve seen crashes, we’ve seen things level out, and it’s all about pivoting and changing up your plan.
But unless you go through those types of cycles, you don’t really know what the next steps are, right? In the last 12 months we’ve done a l… or the last four to five months, we’ve done a lot of pivoting in what we’re doing and how we’re running our construction sites, how we’re evaluating things, we learned that from flipping in 2008, because in 2008 when we went through the same type of market correction and pullback and well, not the same type but we are seeing a drastic pullback, that’s where we had to kind of learn how to evaluate properties, look at things a little bit differently and change up all of our plans. And I don’t think right now what we’re going through is the same as 2008, but the impact in the short term is about the same because we’ve seen about home pricing, at least in our market, come down about 20 to 25% from peak pricing in a very short amount of time which can cause damage, and that’s where all the risk is coming from.

Dave:
Dominique, are you seeing something similar in your market or your margins getting impacted or how has the recent shift in market dynamics impacted your business?

Dominique:
Yeah, it’s super similar to what James was saying specifically with investors and flippers. I am seeing so many properties that I either passed on six months ago because I didn’t think the margins would work if the market shifted and went down or even deals that I bought and just decided to wholesale because I knew I couldn’t make the margins work and other flippers picked those up and I can see where they ran their numbers and how they projected for spending X amount and selling for X amount that it would work, and putting it up for that price and it’s just not working. And there’s long days on market and tons of price reductions, especially in the flipping space. It’s super common right now in the New Orleans market, just people who didn’t expect us to be in the place we are right now, maybe even expected things to continue to go up and were shooting for slightly higher than that past sold comp or equal to that past sold comp.
And I mean the main reason why I would pass on those deals six months ago is because I was expecting to actually shoot for lower than that last sold comp. And that’s kind of how I’m running my numbers even still right now, and I have been for the past six months just kind of anticipating this. But so many people that aren’t in that head space and aren’t doing that yet, they’re definitely paying for it right now. Whether it’s when they actually sell losing money or even just paying holding costs for three extra months because they priced way too high and they’re just sitting on the market.

Dave:
And are you able to preserve your margins then and just because you’re buying the right deals or in these type of times you sort of accept lower margins but keep moving forward because you have to do something?

Dominique:
For me I’ve kept to my margins pretty strong, just passed on a lot more deals, really narrowed in on my buy box and I’m only buying in specific neighborhoods and zip codes that I know that have high demand. On the resale side, I’m only buying in the entry level price point right now. So when my product comes out finished and renovated, I want it to be one of the cheapest, nicely renovated homes on the market. So for me in my market that’s kind of in the 200K and under price point, on the resale. So I’ve really just narrowed down my buy box, specific location, specific price, specific type of asset. And so I’ve just passed on a lot more deals that I didn’t think would work with overinflated projected margins.

Dave:
That makes sense, and sounds like you’re adapting well. I see Leka just getting excited about the idea of $200,000 flips over there.

Leka:
That’s the cost of my rehab.

Dave:
Yeah. What is the price point of your average project Leka?

Leka:
So the acquisition price is between, I want to say 500 to 700K, now it’s 750 maybe sometimes. And then the cost of rehab is between 150 and 225, 250 just depending on how extensive it is, whether it’s full permitted all new everything is more like 200, 250. And then with holding costs and all of your property taxes and buying and selling costs, it’s about a million on an average to do a median price point flip in my market.

Dave:
Wow. And what do you target selling those for?

Leka:
Before we would list it for say 1.1, 1.2 and then get 2, 300K over ask. Obviously, that’s not the goal now, my goal now is to deliver above market qualities for under market pricing.

Dave:
Mm-hmm.

Leka:
So then still charge a premium, but then the minute the buyer walks in, there has to be this wow factor like, “Okay, yes I’m paying 6%, 7% in interest, but this is the house that is worth that.” And so I treat every flip as if it was my own primary residence. I’m still able to keep my costs low because I’ve worked with the same team for five years and then we kind of understand each other. I also bring on my contractors as my bridge financers, so they’re also part of the deal, they get a portion of the profit when we do sell the flip.
And so because of all that I’m able to keep my costs low and still offer all these crazy sizzle features and I design them to the tee so that it doesn’t have to be expensive, but it’s a little accent wall here, a little wallpaper there, some wainscoting, something cool and different like ceiling sconces next to the master bed. These are just cool features that not most flippers do, so when they walk into a project or a house, I want them to feel like, “This is my home, I need this home.”

Dave:
I like that term, sizzle features.

Leka:
Sizzle features.

Dave:
That’s a good term. Is that an industry standard? Or is that just what you-

Leka:
It is. It is. It is a total industry standard, when you flip your first home, Dave.

Dave:
I’m never flipping a home, it’s too much work, I’m too lazy.

Leka:
It is too much work.

James:
And what Leka just talked about is really important right now in the market as you’re flipping, right? The rates are going up, I mean actually what Dom also talked about, there was two major things that they just discussed, which is really important for flippers. A, knowing your buy box right now, and sticking to what you’re good at. When you have rates that are volatile, that means that the market’s volatile, it’s a higher risk. So if you know what you want to buy and you know how to execute that plan, that’s where you can mitigate your risk in the flipping. And then knowing what you are flipping, like what Leka is talking about, where her average price point on her flips right now, or I mean I’m her broker so I kind of know the nu… it’s 1,000,050 to 115.

Leka:
Yeah.

James:
And that is a market that has kind of became expensive with the cost of money, right? It is a lot more to service that debt, so adding in those little extra flavors is how you get those deals clicked out. And just kind of that, the little sizzle features are very, very important right now to get that pri… you got to give people a reason to buy in that price point.

Leka:
Right.

James:
Whereas, Dom is flipping in the lower price points, which is a lower risk because you can stabilize it, you can keep it, you can do… she’s buying what she knows, where she knows and also there’s multiple exit strategies. Whereas, in Leka’s market or our market, there’s not a whole lot of exit strategies, it is your selling that property. [inaudible 00:22:22]. And that is the riskier factor, but there is the huge margins that come with that risk at that point.

Dave:
Leka, you mentioned that you were able to control costs, which seems like a pretty big accomplishment over the last couple of years because material prices for pretty much everything have just skyrocketed. Is that starting to slow down? Are you starting to see better or more, at least more predictable pricing for materials?

Leka:
Yes and no. I’m just ordering cabinets for 15 units right now for a 12 unit apartment building and then two luxury flips and all the cabinets are basically back ordered till mid to late December. So then will I step in and pay a little extra to get them in first week of December? Yes, so there’s that. There’s still kind of a lack of inventory with regards to just basic stuff like garage doors, appliances, so if I have to pay a little extra to get those things then I will pay it just to get my project done and on the market as quickly as possible before the Fed raises interest rates, another 75 [inaudible 00:23:38], so yes and no. Lumber has definitely come down, but then I do flips, I don’t do new construction so we don’t use that much lumber for framing. So it’s kind of a wash for me.

Dave:
Dominique, what about you? I think it seems like the two issues… well, flipping over the last couple of years has had some tailwinds, which is the appreciation, but the two headwinds seemed like both material costs and labor was just super expensive and difficult to come by. Are you still facing some of those challenges? Or what are you seeing?

Dominique:
I would say pretty similar to what Leka said, I have also been working with pretty much the same team of contractors since I started and they kind of manage all of my projects. So labor wise it hasn’t changed that much, we have a really good set of both managing level and then subs that I haven’t seen huge differences in their availability or their price points as far as labor goes, but materials I would say a little bit different than what Leka said just because we are in that basic entry level kind of more simple price point as far as the renovations go. So we use a lot of materials from Home Depot and Lowe’s and Floor and Decor and some of those larger box stores, so inventory is typically easier to come by and there hasn’t been crazy amounts of back order.
But at the same time I mean if you look at early 2020 pricing on materials compared to now, it’s still so much higher. I’d say anywhere from 30 to even up to 50% higher on certain objects. Just a toilet, I always used to pay $89 for toilets at Home Depot and now they’re a $119 or bathtubs, same thing, it’s like they were a $120, now they’re $220. So you’re definitely still seeing those higher prices, but again, I mean with inflation that’s gone up over the last couple of years, it’s kind of expected. We haven’t really dropped back down to that 2019, 2020 level yet, so…

Dave:
That’s an interesting point that sort of the lower end finishes are more readily available. You’re using a regular toilet, I’m sure James and Leka use those Japanese toilets that when you walk in they-

Leka:
[inaudible 00:26:06] toilet.

Dave:
Yeah, they say hello to you and they warm up and do all this stuff. Actually a friend of mine released an apartment with one of those recently and his landlord came in and got it from… he retroactively, he was like, “I miss my toilet.” [inaudible 00:26:25] just put in a regular toilet, and he is like, “I can’t use just a regular toilet anymore.”

Leka:
Oh my God. I mean heated seats, come on.

Dave:
It sounds nice, I admit. So I’m curious James, I’m sure you talk to a lot of people who are aspiring flippers. What do you think the market is like or what advice do you give to people who are considering flipping or maybe starting to flip in this type of market? Would you recommend it?

James:
Yeah, I mean I think if you make a decision in any kind of business, if your goal is to grow your capital right now, flipping is actually still a really good business. It’s a very high risk business but I really don’t think it’s much different now than it’s been historically, it’s always been a high risk business. When we’re looking at these flip deals, we’re looking at making 30, 40 and 50% cash on cash returns in a six month basis, right? That is an extremely high return. That comes with an inherent amount of risk though, and if you have to move and you really need to perfect your business to get going. And so if you’re a new investor, you can get into the market, and actually to be honest, there’s a lot better buys right now.
I mean where we learned how to flip homes was in 2008 when the market… we would predict, we would run values on a property and let’s say it was worth 500 grand, by the time we went to sell that we were factoring that we were going to sell that at 430, we were knocking 10 to 20% in a very short amount of time to get the values down. So if you’re a new investor, you can definitely get in the market, there’s actually way better walk-in margins right now that can actually help you. You’re walking into a lot better deal, which is going to kind of mitigate the risk down, but you want to take the right steps like what Dominique’s talking about is buying the right type of deal.
If you want to get into a flip, buy a low risk deal. What is a low risk deal? Well, that is a cheap price point where there’s multiple exit strategies. For some reason if you buy that property, you renovate it and it looks awesome, but the market is not moving right, you can still refinance it, stabilize it, wait for the market to calm down and then sell it later or maybe just keep it as a bur down the road. And that’s the first thing I’d be looking at is lower risk deals which require lower capital.
The second thing is you want to make sure that you understand the construction cost, because what we are in is we are in the inflationary period where costs are still well above where they were two years ago, but they are coming backwards. But you have to kind of know that right now to kind of really watch and see what you can get your pricing down because the public knowledge isn’t that the pricing is coming down, it’s guys and girls that are actively in the market working with people and kind of reading the trends there. I’ve seen at least a 10 to 15% drop in construction pricing in the last 45 days, but we’re also getting that price adjustment off construction because we’re changing our plans up, we’re not just accepting the answer that’s given to us. If I’m getting high flooring costs, we have to floor 5,000 square feet at an apartment building we’re renovating right now.
My people in my office are calling all the different flooring companies to find out what they have on overstock and clearance because they did buy up too much product. And so it’s up to the investor to execute that plan and really create the value. If I go get the quote from my flooring company, it’s still going to be 30% higher than it was two years ago, but now what we’re doing is we’re chasing down the product and we’re going to have to find that good deal, and that’s always how flipping has been. When we were flipping in 2015, it was, how do we get our faucets cheaper? How do we get our handles cheaper? And going and actually finding the solution rather than just getting it. And so if you’re a newer investor, buy the right deals, buy something low risk, low that you can sell it, you can keep it, that will make it to where you’re not going to get clipped.
If you’re buying an expensive property and you go to refinance it and you’re losing a thousand to 2000 a month because the loan balance is too high, that’s a hard property to keep. In addition to the lower price points, you’re less susceptible to big hits, right? If I’m flipping a house that’s a million dollars and the values come down 10%, that’s a hundred thousand dollars I have to deal with inside my [inaudible 00:30:50]. If I’m flipping a house that’s $200,000 and it comes down 10%, that’s 20 grand. I can absorb that, that’s not going to bankrupt me at that point. And so just you can get in the market, you just want to buy the right type of deals. In 2008 there was nobody really buying flips and we were not experienced flippers but we were buying constantly. And so we were brand new people flipping the most amount of houses, but we had to figure it out. We had to have a good lender, good construction team and a very padded up [inaudible 00:31:18] to where we just knew the deal would work every which way.
Every deal has a stress test, you can put the value on it, and then what we’re doing right now in riskier markets is if we see the value is today is a million bucks, we’re going to knock 5% of the value off that. If we think our construction costs are going to be a hundred grand, we’re going to add 10% to that deal. If we think we’re going to keep it for five months, we’re going to put seven months of debt cost on there, and that’s how you stress test your deal. And if you can pad that all the way through and the deal still makes money, then that’s something that I’m going to consider.

Dave:
Yeah, I mean that makes a lot of sense James, and it’s excellent advice. It sounds like you have been a very experienced flipper for many years and it sounds so logical when you say these things, but Leka, I’m curious, do you think these, are they achievable for new investors? It all makes so much sense, but do you think, does it take time to learn the skills that James is talking about?

Leka:
I was doing this analysis just a couple of days ago and what I saw was my hard money costs, so if I were to buy a deal, the same deal that I bought earlier this year, if I were to buy that same deal today, just my hard money costs are 25% more. And with prices for flipped homes coming down with the target, right? The market target that is ever changing and with… yes, there’s a lot more labor now than there was a year ago because there’s a lot fewer people actually flipping and investing in real estate and actually reconstructing. So there’s a lot more general contractors available, there’s a lot more labor, but if you don’t know what you’re doing, it is very stressful, it is very high risk. So yes, you can still flip, you can still buy homes and I’m also seeing homes… before, earlier this year, I would see about four deals come to my inbox every day, most of which I would pass on. Today I’m seeing 15 to 20 deals coming my way.
So now what I’m doing is I’m like, “Okay, this house is just a flip, but this house can be a rooming house or a midterm rental or a short term rental, this house I can add an ADU three years down the line if I wanted to just hold it as a rental property and not fix it up right now, so when the interest rates come down, I’ll fix it up, I’ll subdivide lots, I’ll change zoning variances.” I am looking at it through a different lens, which is very hard for a new investor to do. So what I am encouraging all the newer investors to do is go partner with more experienced flippers. Flippers like James, who has been through many market cycles, right?
I started flipping in 2014 and while I started was pretty slow, but then as I… 2015, 2016, 2017, it was peachy, right? It was amazing. And then 2018 we saw [inaudible 00:34:24], and then 2019, 20, 21, boy, I have made more money than I could have dreamed of, right? And so I have seen that cycle that has set me up really well for right now that even if I have to offload properties at a discount or at a loss, just getting the money that I put into it is enough of a liquidity factor for me to go out and buy some killer deals in 2023.
For a newer investor, if they were to partner with someone like James or myself or Dom and then just shadow us and see, okay, how are we pivoting? How are we being flexible? How are we constructing? How are we designing these projects to sell for a profit, not a loss. I think that is much better use of their time and money than going out and buying their own project and maybe taking a huge loss hit.

Dave:
Yeah, that’s great advice, taking the time to learn right now, especially if you learn in these adverse conditions when market conditions improve, you’re just going to be set up for success for the long term. But something that always struck me about flipping, especially in challenging markets is if you do it enough, the probability is that you’re going to make a lot of money over the long run, right? But on any one deal you could lose money, right? I don’t know if any of you want to share, but you do lose money on some deals, right?

Leka:
Ah, never.

Dave:
[inaudible 00:35:55].

Leka:
If someone that has done as many deals as us says they have never lost money, run in the other direction because that is a lie, that is a [inaudible 00:36:05] lie. Yes, a hundred percent. You do as many deals as you do and for no rhyme or reason you can lose massive amounts of money on a deal. It could just be that you got hit with a crazy inspector in the city that makes you do 37 inspections on your project, basically [inaudible 00:36:24] away all your profit. It could be that Amazon announced a head tax and everyone stopped buying real estate and then you just had to sell your property for a loss in a very hot market in a very hot neighborhood. It could be that you overspent on finishes, it could be that you just bought the wrong house at the wrong time, it could be so many factors. But yes, I have lost, the most money I have lost on a deal is $65,000. My own flip, it was flip number 37, so it’s not like I had just started flipping homes, I had quite a bit of experience, so yeah.

Dave:
Well, thank you for sharing that, but I think that’s what worries me personally about flipping or getting started in adverse conditions is if you’re putting a lot of your own capital into it and it’s all of your money, right? It would be scary, and if that bad luck happened to you on your first deal, if you don’t have the ability to absorb the loss, that’s a little bit scary, I’m just telling you why I don’t flip houses now.

James:
And that’s a bad business plan, you should never put any of your money in any one asset class. You need to break it up, and that’s where people get caught. I mean it is a real thing when things come down quickly, we lost 380 grand on a house.

Dave:
Yeah. Whoa, jeez.

James:
That’s a big number.

Dave:
Yeah. Wow.

James:
And luckily we could pay for it, but because we were rolling all our profits for two years. Like I said, bull run, we were making a lot of money for two years. So good news is we made a lot more than we lost, but it can happen very quick. And in 2008 I got wiped out, I went from… I thought I was rich, I was 23, I had saved up 450, 500 grand wholesaling, saving every penny I could, re-investing. And in six months I had 20 grand left.

Dave:
Ooh.

James:
And it was very, very rapid and it can hurt. High risk, high reward, and so yes, do not put all your money into one thing. Take your time, spread it out, start with one. We all started with one and then we start learning the systems and then go in and if you don’t have all the money to… or if you’re putting every dollar into that project, then look at investing with someone else because then you can give portions, you can spread it out, you can get in different markets.

Dave:
Totally. Yeah, you wouldn’t buy just one stock or if you’re a tech investor, you wouldn’t just put it all in one startup in hope, you would spread that around a little bit.

Leka:
Yeah.

Dave:
Even within real estate. Dominique it sounds like you have sort of gone into a couple of different strategies yourself, you’re wholesaling, you’re flipping, is your plan to continue to be primarily a flipper?

Dominique:
That’s a good question, I would say in the immediate future, because I have good systems in place and we’re buying deals and it’s still working. I want to keep the flipping going at sort of the volume or maybe a little bit more than we’re already doing. But I’m definitely starting to shift a little bit, I flipped for the last couple of years mainly just to kind of get experience, get started, save capital, really learn and kind of master the different neighborhoods in the market that I’m investing in. But now I’m definitely starting to shift and starting to make offers and prospect more into small multi-family deals, apartment buildings, things that I can still renovate and flip but not necessarily have to sell right away, maybe keep it for five to seven years and then sell. Maybe sell right away if that makes sense, but just kind of scaling up doing bigger deals under one roof.
But definitely still kind of what James and Leka were saying, there’s still a way to flip and make money. People are doing it, the people that know what they’re doing are still buying deals, are realizing that this is actually the time better than the last couple of years to buy a lot, there’s way more opportunity right now, there’s way less people buying, prices are coming down. So I’m going to keep it up, I mean I’m going to keep buying flips and flipping houses in my buy box that I know that works. And also just kind of backtracking a little bit, something I wanted to add just for newer investors that are trying to get into flipping and analyzing the risk if they can pull it off in this market, I would say one of the best things to do to start is to become the absolute expert on your market, specifically the zip codes or neighborhoods that you want to buy in.
You should know every house that’s on the market pending, that’s recently sold, how long it took, how far over or under ask price people are getting? That’s easy, you can go on Redfin, Zillow and do that research and figure those numbers out, but I think that’s one of the best things you can do if you’re getting started because that’s where you’re going to get hit, if you don’t know those numbers on the resale. If you’re still in April of this year running your numbers, you’re going to lose money. You have to know, you have to be up to date on what’s going on right now and judging by that what’s going to continue to happen in the next three to six months.

Leka:
I have to piggyback on that, that is such great advice. That’s all I did the first six months I started wanting to invest in real estate, that’s all I did. And that kind of laid this foundation that I still have today. When I buy a house in a market, you can ask me about any other house that’s for sale, that went pending, or that’s sold and I’ll tell you about it. My broker called me yesterday and she’s like, “This house sold for 1,000,060.” And I was like, “I know why.” I walked it, it was a piece of [inaudible 00:42:11] flip, it was bad finishes, it didn’t have a garage, it was a choppy floor plan, I know exactly why that house sold for a certain price and that’s why my house is worth a lot more. And this is something I honestly learned from James when I first started because I would ask him about any house because I would do seven, eight flips and he would do 50 flips.
So I would ask him about any house in any market and he’s like, “Oh yeah, and the house next door, and the house opposite, and the house on this other street.” He just knew what houses, and why they sold. And then what happens is your brokers can’t BS you, your wholesalers can’t BS you, your contractor can’t BS you because all the numbers are right there in front of you. And then the people that you are selling brokers, right? The people that are bringing in buyers, when they bring in a buyer, you always want to… in whatever market, if you are the seller, you want to be selling from a position of strength, not a position of failure or loss because that’s when you make… you just give up all your money, you just give up all your equity and your profits. So I always go in like, “I have my numbers, I know why this house is worth as much as it is.”

Dave:
That’s awesome advice. Yeah, I think just there’s no real shortcut to understanding your market, you have to just spend time in it. I mean when I first got started I would just… you’d just be driving around and see an open house, you’d just pull off the road and just go in it, even if you had absolutely no intention to buy it at all, just to learn about the houses. And I feel like that’s been gone the last few years, there was no open houses, people were just… things were going so quickly. So this is a really good time with things sitting on the market longer for you to go and just see more properties and just get that practice, get more repetition that Leka is talking about, so you can really understand it. And then eventually you can become the Will Hunting of house flipping like James where he is got all of the pictures of houses and the red string that connects them all his office. [inaudible 00:44:15]. Yeah. Yeah, exactly.

James:
I’m the janitor in the back, yeah [inaudible 00:44:23].

Dave:
No, no, you’re the genius who comes in on the chalkboard and solves all the problems at night.

James:
[inaudible 00:44:30].

Dave:
Well, yeah. Well, Leka, I wanted to ask you, what are you sort of looking forward to in the next year? Do you see any market dynamics changing or do you think we’re sort in for more of the same over the next couple of months at least?

Leka:
The truth is that I don’t know. I mean don’t know, what I do is I try to be flexible and versatile with what I buy. I’m also doing multi-family syndications, I am leasing out my office building that I just renovated, so I want to diversify as much as possible. So you know how people say, “If you’re flipping homes, just stick to that.” “If you are buying multifamily, just do syndications.” I think that’s bad advice, I think as long as there’s a common thread, my common thread is that I only play in one market, in the Tri-County Greater Seattle market. And because I do that, it doesn’t matter if I’m buying self storage or apartment building or office building or single family flip or a multi-family [inaudible 00:45:35], I know my market, I have my systems in place, I have my contractors in place, I have property managers, I have mentors, and so I have my network and your network can solve massive problems.
So going into next year, I’m looking at a frat house next to Washington State University where it’s already hitting 1% rule and it’s only rented 50% and they want to sell it at one third of the dollar. So I’m like, “Okay, that’s a really good buy in any market.” So why would I not go research that? Or look at midterm rentals? We have such a shortage and a lack of midterm rentals, we have lots of short term rentals which might convert to midterm, so that could be an inventory problem, but right now there’s such a lack of midterm rental opportunities that I’m like, “Okay, if I’m renovating a 12 unit apartment building, why not put one unit on midterm rentals, see how it goes?” So constantly even just playing with my portfolio that I own now and seeing how I can increase profits on my own portfolio, but also going forward, how can I buy more versatile properties?

Dave:
That’s such good advice, I love that advice because I feel like there’s these people who say, “Only do one thing.” Or “Just specialize.” But what you’re describing is so interesting, you can become an expert either sort of horizontally, you pick a strategy and then you can use that across the country or you just vertically integrate in one market and you’re just like, “I know Seattle so well that any property I can make work because I have the network.” I think that’s very, very good advice and really helpful for people trying to figure out how to scale. There is definitely more than one way to do it.

Leka:
Yeah.

Dave:
What about you, Dominique? Is there anything you’re expecting or you said you’re going to go into some smaller multi-families, but are you seeing anything in the market that you think might impact your strategy or anything that you’re looking forward to, think will be big opportunities in the next year?

Dominique:
I personally still see a lot of opportunity in the single family space, in the kind of outskirt neighborhoods of New Orleans. I’ve always seen opportunity there and I think that I’m continuing to see it. The reason being is just because there’s a lot of people in that market that are renters. And so you have a lot of people that are kind of in that space where they’re trying to transition from rent to own, just getting qualified, first time home buyer maybe using an FHA or VA loan, so what are they likely to buy? And that’s kind of looking at the population of the greater area. What I’ve always tried to focus on is I see that there’s a lot of demand in that lower end, first time home buyer, single family home type of space. I mean most likely these people aren’t going to be buying a duplex or something like that.
They’re looking for that entry level, what is nice? What can I take pride of ownership in? Type of property, and there’s just a lot of inventory in the kind of outskirt neighborhoods of New Orleans. There’s a lot of single family homes, there’s a lot of tract home type streets and stuff, so that’s what I think is still a lot of opportunity in that market. Kind of [inaudible 00:49:04] staying outside of the city, there’s a bit less regulations, stuff like that. That’s where I’m going to probably continue to play, and yeah, like I said, some smaller multi-family stuff as well, but I think I’ll still be heavier on the single family stuff for the next couple of years.

Dave:
Nice. All right, great. What about you, James? Any last piece of advice for people who are interested in flipping heading into next year?

James:
No, I think don’t be afraid of flipping, I mean I know we’re not. I mean the reason being is the margins are still big, the returns are still really high, if you can make 40, 50%, that’s a good thing to be looking at. I mean that’s how we grown our whole portfolio is flipping properties, taking the returns of 40, 50%, stacking them away, buying more, right? So we’re always going to be buying, but right now it is risky, do not buy more than outside your SCIs. Do not put all your money into a deal, keep 50% off to the side to kind of work whatever… if you got to come up with some cash, you want to make sure the cash is there, but buying with multiple exit strategies is key. If you’re looking at a deal, make sure that you know what you can do with that deal. Is there multiple channels? The more channels you have, the less risky that deal is.
And that’s why I definitely don’t agree with people saying, “Just do one thing.” The more things you know how to do, the less risky real estate is, so learn. I mean the fact that Leka or Dominique they’re value add investors, they can take that skillset and go and get into every type of market, but if you’re a new investor, learn the skillset, which is increasing the value on the plan, know how to execute that plan and then start expanding out. Don’t go all in right now, take baby steps, work with other people and just be cautious, but just make sure the deal checks out, make sure that deal stress tests, add in the extra contingencies and then you can get going, but there is really good buys right now. I mean screaming buys and so if you sit too long on the sideline, you’re going to miss these buy opportunities.

Dave:
All right, great. Well, thank you all, we do have to start wrapping up. This is super helpful for complete noobs like me, and hopefully everyone listening got some value out of this. James, if people want to connect with you, where should they do that?

James:
Best way to do that is probably on Instagram @jdainflips or you can go check out jamesdainard.com, we do a lot of value add construction talks, learning about ripping houses apart.

Dave:
Oh yeah. Leka, what about you?

Leka:
I’m on Instagram, Leka_Devatha or on LinkedIn, just Leka Devatha, or you can check out my website, rehabithomes.com, and same, we just have a lot of value add stuff that we do and we’re always talking about it.

Dave:
Great. And Dominique, what about you?

Dominique:
Instagram is great, I’m @dom_flips_nola and yeah, same I’m there for messages, answering questions, putting out content about our flips and stuff, so yeah.

Dave:
All right, great. And I’m Dave Meyer, you can find me on Instagram where I’m @thedatadeli where I talk mostly about sandwiches. Dominique, I meant to say my favorite sandwiches in the whole world is in New Orleans. Have you ever been to Cochon Butcher?

Dominique:
I don’t know if I have, but I’ve definitely heard of it. And I have heard of the amazing sandwiches, a lot of people have told me that, Downtown New Orleans.

Dave:
[inaudible 00:52:22] I’m sending you a gift card to Cochon Butcher, you have to go there, it’s so good. All right. Well, I could talk about that all day, but we do have to go. Thank you all so much for joining us and thank everyone for listening, we hope you enjoyed the show. If you did, share it with a friend and give us a five star review on either Spotify or Apple, and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only, all listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets Podcast show 695.

Andrew:
But between 10 and 14, I was really getting into books and really obsessed with Warren Buffett. And when the market crashed, it was all over the news. And that’s when I was like 14, like what’s the stock market? I mean, I was already doing grain and I was doing other things. And so I went and just threw $4,000 into Ford at 99 cents. Bank of America at $3, just bought a bunch of random stuff. And that’s $4,000 between 14 years old and about 15, 16. So like a year and a half went to $80,000.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, and the baddest real estate podcast in the world. Here today with an amazing show that is sure to blow your mind with my co-host, Henry Washington. In today’s show, Henry and I interview future billionaire, Andrew Abernathey out of North Dakota of all places who is building a business and real estate empire based on sound principles and smart business choices. And we share all of it with you today. Henry, what are you thinking after just talking to Andrew?

Henry:
Oh, no, I think this was a phenomenal conversation. Man, it reinforced a lot about… Well, for me especially, I got into this business to improve the lives of my family and he was a beneficiary of some fantastic financial knowledge imparted on him by his parents at a very young age. And it was imparted on him in a way that it actually stuck and he started to implement it at a young age. And the lessons that he learned then have just created this stair step that he’s used to build this real estate empire that he has now. And it started with this foundation when he was probably younger than most people would think you would want to start educating some people on advanced financial topics. And so it just reinforced to me that I should probably spend more time talking to my kids about the intricacies of what I’m doing and not just showing them through my actions.

David:
Yeah, that’s a great point. I mean, we’re going to get into that more in the interview, but I like what you said about his stair step because Andrew just got started early with a great foundation and never stopped climbing. He just keeps going. Every time he hits a new level, he says, “Okay. What would be the next step?” It’s always very practical and even simple in some ways, and anybody can follow that path. Now, not everybody’s going to go into want to climb to the levels that Andrew’s at, but everyone can be climbing higher than where they are right now. Today’s quick tip is very simple. Consider bringing your kids into your world in ways that you might think they’re not ready for. Andrew tells a story about being 10 years old and being introduced into stocks and 14 years old buying his first property. And that sounds crazy to hear right now, but when you consider the mentorship that he had from the people that were in his life and his father, it actually doesn’t sound that crazy. And he makes a really good point too.
He always looks for people’s passion and he only hires people that are passionate about what their job is to do. If you’ve got kids that are passionate about business, that like looking at spreadsheets or they like looking at CRMs or they like being involved when you’re meeting new people and networking, bring them along with you. Kids don’t like it when you make them do something that they don’t enjoy, but if they enjoy it, they probably want to be a bigger part of your life. And for some of them that could be real estate.
And before we get to Andrew, if you’ve got a quick second, please go give us a five star review wherever you listen to podcast. We want to stay the biggest, the best and the baddest podcast in the world. We can’t do it without your help. You, us, we are in a relationship together and we need your support just like you need ours and bringing you this information. So if you could just go to wherever you listen to the podcast, Apple Podcast, Spotify, Stitcher, whatever it is, and leave us a five star review. We really appreciate it. All right. Let’s get to Andrew. Andrew Abernathy, welcome to the BiggerPockets Podcast. How are you today?

Andrew:
I’m good. I appreciate letting me on. I’m excited.

David:
Yeah. Well, thank you for joining us. We’re excited too, because you have an incredible story. I don’t want to beat around the bush. Okay. Take me back to the first time that you decided that you were going to make money through investing. Okay. Where were you, what were you thinking about, and how old were you?

Andrew:
Oh, good question. Yeah, I was the ripe old age of 10 years old, family farm in North Dakota. And my dad noticed I enjoyed numbers. I was a little bit of a nerd and he started having me doing the marketing on the family farm, selling grain futures, puts calls, all the goods.

David:
Okay. So you knew what puts and calls were at 10 years old? We need to unpack this.

Andrew:
I learned it at that point.

Henry:
Did you just say you were 10 years old and you talked to your dad and then started trading puts and calls? When the kids in my neighborhood are thinking about making money, there’s a stand outside and they’re selling some random lemonade juice from inside the house. But you started trading stocks, puts and calls? I need a little more information there.

Andrew:
Little more detail. Yes. So I love numbers. When I was before 10, like six, seven, I would take stuff from one sibling’s room and sell it to another, right? So just always obsessed with it. Dad’s like, “Hey, I’ll give you $5 an hour if you want to do the marketing.” And I thought I was doing it all on my own and making the calls to the brokers. Found out later on, my dad was calling the broker after like making sure they were good trades and stuff. But just the learning experience was phenomenal.

David:
Why don’t you unpack what a put and a call is for everyone listening who doesn’t know what the heck we’re talking about here?

Andrew:
Yeah. I mean, basically it’s buying on paper, right? So you either write it or you don’t. So if you’re buying a put, you expect the markets to go down. If you buy a call, you expect it to go up, you pay a premium to have the option. If the market does the opposite of what you thought, you’re out to your premium. That’s it. And if it does the opposite of what you thought past your premium cost, you make profits. So some guys actually write the paper, there’s a lot more risk on that end. We were just trying, so we had a few hundred thousand bushels of commodities on the farm at all time. And then we would buy some on paper and sell it on paper too. So we were dealing with both concrete grain and also paper grain.

David:
So you were basically speculating what the market’s going to do?

Andrew:
Pretty much. Yeah. And the nice thing is what we always did is the opposite, so it’s almost like an insurance policy, right? So I said, “I’m going to buy a put on this so if it goes down, that must mean that there’s a lot of crop in out there, which means that we have it.” And if it’s a drought, it means the crop’s going to go up, which means we’re not going to have it. So we’ll make money on the paper. So it’s basically an insurance policy on what we were growing in the fields because usually it’s the opposite of what we would produce.

Henry:
So you were hedging?

David:
And you were being taught how to hedge at a very young age by your dad, is that right? Was he your first mentor?

Andrew:
Correct. For sure, 100%.

David:
All right. Now this is cool because the family business is a farm, right? It’s funny that you mentioned Warren Buffett because you’re in North Dakota and he’s in Omaha, Nebraska. And this is probably not cool to admit, but in my head that’s like the same thing because I’m in California and we don’t know-

Andrew:
It’s Midwest,

David:
… how the Midwest works. That’s exactly right. Omaha and Fargo. I might have thought that’s just a different name for the same city. I’m Joking. I’m not that-

Andrew:
I’ve heard that before. That’s all good.

David:
There’s something about very, very powerful minds that come out of these places. So that’s what we’re trying to dive into today. So here’s what I’m curious about. I’m imagining that your dad has a strong emotional connection or relationship with the family business that’s a farm. So he’s constantly thinking like any good owner or investor would be, “How do I protect myself from the downside while maximizing the upside?” And that’s where you’re being taught these concepts like puts and calls and insurance policies and hedging and all this stuff at 10 years old.
Tell us what those of us who did not grow up on a farm don’t know about farms. Like the business side of this, because when we picture farming, it’s like, oh, you get up in the morning and you milk a cow and you got a John Deere tractor somewhere in the front yard that you sit on your grandpa’s lap and he’s got his coffee and you’re listening to George Strait as you’re plowing a field or something. I have a feeling that there’s a whole lot more entrepreneurialship and numbers that go into it. Can you share with us that are ignorant of how farming works a little more what that lifestyle is?

Andrew:
First off, I love George Strait. You got that part right. But yeah, so my dad always said back in when we started back in the early 1900, it was whoever could just work the hardest, right? That was farming. It was just 99% hard work. And then in the ’50s and the ’60s then it was like, “All right. You really got to be really good at business, but also 70% work still hard.” And nowadays, and I’m not saying farmers don’t work hard. They do, but what I’m trying to say is 90% of the money now is made in the office, right? It’s a globalized economy. It’s become more globalized as technology has come around.
So yeah, I mean, you’re in the field, you have to be a mechanic, you have to know how to market, you have to know how to pick which crops you’re going to put in. You have to know how to negotiate with vendors on input costs. I mean, you basically have to wear 17 hats. It’s one of the most unique things ever. And it’s really cyclical. I mean, it’s one of those businesses where you’re really reliant on weather and cyclicality. So you’re literally putting all your money out, going to hedge as best you can and hope the weather doesn’t mess it up. So when we were young, news was always on the weather and my dad was pretty good, but his mood was dependent.

David:
It’s so crazy. You’ve got all this money invested into this asset that you have no control over, the main thing which is weather, which is probably the most volatile thing in nature, right?

Andrew:
Yeah.

David:
You think about the market can shift with real estate investing or the economy can shift, nothing changes as unpredictably or wildly as the weather and that’s the baseline that you’ve built this entire thing on. What does that do to someone mentally to have to live with that level of uncertainty when they have this much money invested into an enterprise?

Andrew:
Well, though are some of the first… And that leads me some of the first books that I was reading in 10 to 13 was human nature because I think every dollar behind it has a person, everything’s human related. So that all leads to that point is I learned how to manage emotions and I learned the different mental states you have to be in, right? I mean, you can’t control the weather. If you’re stressed about something, focus on things that you can control and your stress lowers. And I had to learn that at a young age with weather and prices of crops and all of that. I mean, you can’t control it. It is what it is.

Henry:
So I imagine that’s where the hedging really came in for your father in teaching you, because if you’re reliant on something as unpredictable as weather, then you darn sure better be playing both sides in the event that the weather doesn’t do what you need it to do, that you’re not just out all of your money, that you hedged against it and then hopefully maybe you break even?

Andrew:
Yeah, you try to have as much upside as possible with protecting your downside. And also vertical integration was something I was introduced to early. My dad started selling fertilizer, drive fertilizer and hydris. Anything that he could do, he started selling seed. Anything to cut our costs down on our input costs, anything that we could do in-house.

David:
Because that’s how one of the ways that you protected your downside, right?

Andrew:
Correct.

David:
Now, I don’t want to gloss over this. This is actually wildly intelligent. This is what business is, for people that are in their business, they understand it is all about maximizing upside while protecting downside. In fact, it makes me think a lot about poker. One of the things you learn… And I’m not a super good poker player, I play once every four years, but I play enough to understand how the game works. It’s not about winning more hands, it’s about when you win, how big was the pot that you won. Okay. You could lose 20 hands in a row and win one big one and you’re now in the best position on the table. That’s what business is. And I think a lot of analysis paralysis comes because people are looking to eliminate risk. And if they see risk, they’re like, “Oh, I don’t want to do it.”
Whereas the successful athletes, entrepreneurs, business people, they know you don’t eliminate risk. Their confidence comes from their ability to reduce it while maximizing the upside, because if I can hit a home run on a couple deals, I’m not afraid of taking an L on a couple other ones. And it separates you from the power of the fear where you’re like, “Oh, God, if I lose everything and I can’t lose.” I see you smiling. It sounds like this is something you got introduced to at a young age. Can you tell me, am I on the right path here with how your brain works?

Andrew:
100%. And it’s Warren Buffett would say the best thing about investing is it’s a sport where you have more than three strikes. In baseball, if you strike out three times, you’re out. Well in investing, you can watch 1,000 deals fly by before you take a swing. So you always try to take calculated risks, stay in your circle of competence, the basic stuff. I’m more of a baby boomer than a millennial, I tell you that much. But no, you’re absolutely correct.

David:
Yeah, that’s just something I want everyone to notice because you had a huge advantage getting taught these lessons at 10 years old when your brain is forming. And I can only imagine how comfortable you got with this concept of risk and how to manage it versus you at your whole life, and no one really gets introduced to risk on purpose when they’re young. You go sit in class and you get good grades by just memorizing what you’re told and waiting for a bell to tell you where to go, right?
You just follow rules and to succeed. And then you get out of school and you get into this what we call the real world, and no one cares. And following rules doesn’t get you wealthy. It can actually keep you trapped. And so you have to learn how to do the stuff that you’re thinking and I think it’s amazing that you learn this. And I hope more parents are teaching their kids how to do this at a higher level than just the lemonade stand that we typically expose kids to. Now, you also learned a little bit about managing money, right? So my understanding is you were making $5 an hour when you were young. Tell me what this work agreement was that you had and what you did with that money.

Andrew:
Yeah. So 10 years old, I mean, I was not only marketing grain, but I was running grain cart combine in the field and I was getting $5 an hour. And during harvest and springs work, I’d be taken out at lunch, my brother and I from school. And so we were getting 12, 13, 14, 15 hour days in during the busy times of the year. And then I was cleaning equipment at the local John Deere dealership for seven, 25 an hour. I was flying out to Rehoboth Beach, Delaware, working at a Chinese restaurant in a bed and breakfast for cash onto the table. I mean, anything that I could do to get cash. And anyways, by 14 I saved up $6,000. I actually only had $4,000 left because I bought a go-kart for $2,000, a red go-kart. I mean, can’t really blame me, I was 14. But-

David:
Of course.

Andrew:
… the $4,000 I had left is actually when I entered the investment market. I wanted to have my money work for me and that’s when it all began.

David:
I’m falling in love with North Dakota right now. You guys have John Deere dealerships.

Henry:
John Deere-

Andrew:
It was the worst job. I mean, a great dealership, but cleaning combine sucks. I mean, oh, my God.

David:
I think of a dealership like a Porsche dealership or equipment.

Andrew:
Yeah, mostly equipment. They were possible the same as a Porsche. But yeah.

David:
So they have the showroom tractor, like the big-

Andrew:
Oh, yeah.

David:
… shiny cool one that has all of the cool attachments that you could buy with. That’s like what they’re upselling you, right?

Andrew:
My job with waxing that thing, making it pretty.

David:
If this was a transformer, it would turn into this. That’s really funny.

Andrew:
Only $500,000.

David:
Yes, you got to take a huge loan out to get the John Deere $4,000 that can… It’s got this rating of it can do this many square feet of hoeing in a certain period of time. This is hilarious to me being in California and not exposed to that. So you got exposed to hard work managing money, learning a lot of cool business principles at a very young age. At what point did you transition into actual real estate investing as opposed to go-kart investing?

Andrew:
I love it. So actually, so the market crashed when I was 14. It was about March 2009 is my 14th birthday. And fortunately that was only a few days after the bottom of the market. Again, lucky didn’t know, but between 10 and 14 I was really getting into books and really obsessed with Warren Buffett. And when the market crashed, it was all over the news and that’s when I was like 14, “What’s the stock market?” I mean, I was already doing grain and I was doing other things. And so I went and just threw $4,000 into Ford at 99 cents, Bank of America at $3, just bought a bunch of random stuff. And that $4,000 between 14 years old and about 15, 16. So a year and a half went to $80,000.

Henry:
Geez.

Andrew:
And that’s when I took it out and got into real estate.

David:
Henry, you had a strong reaction to that. Tell me what you’re thinking.

Henry:
Yeah. Yeah. So I think what’s going to happen is a lot of people are going to hear this story and first they’re going to make some assumptions, right? They’re going to make some assumptions that you were some rich well-off kid whose dad just gave you a bunch of money to play with. That’s not the case, right? Your parents taught you about financial education and then you went and worked your butt off to save money and then you were smart enough to… Yeah, have some fun, but then put those principles to work by investing. But then you also had the good fortune of entering the market at a good time. And some people will see that as luck. And sure there’s some element of luck to the timing, but had you not done all those things before, had you not positioned yourself to be able to jump into the market at the time you did, you wouldn’t have done it, right?
And so it’s not just all luck that you jumped into the stock market at that time. It was the culmination of all the lessons you had learned previously, all the information that your father had passed onto you and then you actually applying it and implementing it and you still had to have some discipline to go ahead and be able to take the money you worked hard for. And as a 14 year old, think I can’t spend all of it. Right? That’s super powerful And I want people to understand that when they hear this story because you get a lot of naysayers, it’s like “Ah, well his parents did it for”, that is not the case at what’s happening here. And you didn’t get lucky by entering the market at that time. You had put in the work, you had put in the effort, you had put in the discipline to be able to be ready to invest when you did. And it just so happened to be a really good time. So I think that’s super cool and I want to make sure people really understand that.

Andrew:
I appreciate that. Yeah, success is when preparation and opportunity meet. I spent four years preparing and looking for opportunities in 2009 and opportunity came up and I jumped on it.

David:
There’s something else I’d like to dive into with this with you being 10 years old, 10 years old, 14 years old.

Andrew:
Yeah.

David:
Either you’re some kind of savant Doogie Howser esque. Do you know who Doogie Howser is actually?

Andrew:
Yeah, that’s actually my nickname from my friends.

David:
You look a little like him.

Andrew:
Yeah, they call me Doogie.

David:
Neil Patrick Harris, right? That’s the actor’s name from How I Met Your Mother. He was in this really old TV show where he was a doctor at 14 years old or something like that. And the movie or the show would portray the challenges he faced as a young kid. And I remember at the end of every show, he’d be like typing on his computer because computers weren’t very common when I was really little talking about what he learned in journaling. But he was this pheno, either you’re that or teenagers and preteens are capable of more than what we think. That’s what I started thinking about, right? We typically take kids, send them to school, say whatever your teacher teaches you, whatever curriculum they have is all that you have to do. I’m not responsible for educating or training my kid, I just go to work and do my own thing.
I put them through the system and I hope that they turn out well. But I just think some kids can understand deeper concepts than what we think. If you’re at 10 years old able to understand puts and calls and you’re watching your dad playing on the computer and he’s talking you through the logic of how he’s looking at this or you’re learning how to take apart complex machinery and clean it and put it back together when your brain’s being formed, it’s learning mechanical aptitude and how several pieces fit together, which is actually a very important thing if you understand how the economy works. And we’ve already talked about mitigating risk and increasing reward. It sort of sets this example that young children and teenagers are actually capable of dealing with some adult level stuff if you introduce it to them in the right way. I see you smiling at this comment. Is this something you also believe? Is this something you plan on training your kids in when you get them?

Andrew:
Yeah, 100%. And I just want to add, I’m a big believer in passion. I hire based on passion and I think kids should be directed on passion. What I mean by that is… There’s six kids in my family and I remember as a kid we’d sit around the dinner table and my dad would throw out topics, random topics, farming topics, money topics, whatever it may be. And whoever’s head turned the kid wise, and you could see their eyes would change, spark and their voice would change, you could tell they were intrigued. And then he would spend one on one time with them on that topic because his belief was I want to help my kids find their passion at an early age and do what I can to help them down that road.
Because if you do something that you’re passionate about, the odds of you succeeding are much higher. So for example, one of my sister is a doctor, one works at the church, one’s a teacher, my brother farms, I’m in finance. My point is we all followed our passion and we’re all wildly successful at all of our fields. And it’s not about the money, right? I mean, luckily what I do is makes money, but my sister, she’s an amazing teacher and finances are different. So we were taught to follow passion, not money. And I think that kids have so much ability if the parents can do that.

David:
So we had started to get into how you started investing in real estate. The market had crashed. You said you were 14 years old and you got your first property, is that right?

Andrew:
Yeah. So yeah, I turned the $4,000 $80,000 and I realized I wanted to be in real estate. This is funny story. So I go and I grab the $80,000. So my brother and I were renting my grandma… Grandpa’s and my dad’s equipment in custom combining in South Dakota trying to make some extra money. I mean, there’s a lot of little things that I was doing during this time. And anyways, when we were driving back through Bismark, the state capital North Dakota, three hours south of where we lived, I was 15, 16, I saw this apartment for sale. It was a 16 plex, two buildings, $1.2 million. Nice old couple. I called him up like, “Hey, like to buy your building.” “Great.” So I sell my stocks, I put $20,000 earnest down nonrefundable. And I go back to Mohall, my small town of 800.
And I go to my buddy’s dad, he’s a banker and I’m like, “Hey, I need a $1.2 million loan, here’s $80,000 down payment.” And I’m like 15, 16. He’s like, “Andrew, that’s awesome, but you need another $300,000 and a balance sheet.” And that’s when I was like, “Well crap, now I got to raise money. How do I do that?” So I went and printed off Warren Buffett’s original 1956 partnership agreement and whited the names out, because I couldn’t afford a lawyer. And I went to Crosby, a local town and I convinced someone to invest $300,000 in the project with me.

Henry:
Okay.

Andrew:
So I’m going to stop there.

Henry:
So first of all, here’s my first takeaway. You turned $4,000 into $80,000 and your first thought is not let’s run it back in the stock market, but let me pull it out and go invest in some real estate that I have never done a transaction in before. And so what spurred that thought versus just continuing to invest in the thing that you had success in?

Andrew:
Yeah. So I went and I thought real estate was going to be a good play. So anyways, I mean, stocks are great. There’s a control issue, there’s the leverage issue. And Charlie Munger when you read that he actually got in with Warren later on, but they were friends and they say the quickest way to make money is in real estate, but at some point there is a diminishing returns. Once you get billions and billions and billions, there’s diminishing returns due to scalability.
So I knew that the quickest way to get a jumpstart was real estate. So that’s why I wanted to get into real estate. And then I’m also a history buff. And in 1980 the oil boom hit for the first time in North Dakota and real estate markets were flying up in the ’80s. Williston went first, mine at second, Bismarck third. Well, in 2000… Well this is probably 2010, when I did these apartments, Williston was inflated because the Bakken hit. And Minot was 90% inflated and Bismarck was sitting there like nothing’s going on. So I’m like, “I got to buy some real estate in Bismarck. I mean, if history repeats itself, that’s the place to be.

Henry:
Man, that’s super cool, because it sounds like you did a ton of research, right? Then trusted that research and then acted on it. So you take this $80,000 and you see and you’re like, “Oh, there’s an apartment building in this town where I feel like they’re going to have an appreciation pretty soon.” And then you go and you put $20,000 down nonrefundable before you have the rest of the money, which-

Andrew:
That’s risky.

Henry:
Which forced you because you put yourself in a position where you had to go find it, you had to go raise the money. And so there wasn’t this thought of “I can’t do this”, there was a thought of, “I absolutely have to do this”, right? Which is I’m sure what made that transition necessary is I think the word I want to use there. And so then you thought, “Okay. I’ll go ask people with money.” And I think you used the word, “I convinced a guy”.

Andrew:
It’s convinced is the right word.

Henry:
To loan on this project. So go into the details there, what does convinced mean? What were you, 15, 16?

Andrew:
Yes, 16 I think now.

Henry:
How did this 16 year old convinced this wealthy… What was he? A farmer to invest in your real estate deal that you just drove by and saw on the side of the road?

Andrew:
I made it a no-brainer. I mean, I literally went to him and said, “Hey, I’m going to throw an $80,000, you throw in $300. I’ll work for free. And the first $80,000 we lose if we do can be mine.” So I’m first out of the money if something happens. So the guy sitting there, like, “Well geez.” I mean, how do you turn that down, right? I mean, it’s hard real estate. He’s going to do all his work for free. $80,000 is first money out. Pretty good cushion.

Henry:
Yeah. Yeah, that is a pretty good cushion. That’s a creative way to think about the solution. I talk to people all the time about borrowing money. So I’ll talk to different private money lenders about borrowing money and it’s similar to me. I’m trying to make this a no-brainer for you. How can I creatively structure this to make it seem like, “Hey, if anybody’s going to lose here, it’s not going to be you, it’s going to be me because I’m going to make you whole.” Right? And you can get creative when you’re using private money to be able to do that. I think that’s super cool.

Andrew:
Exactly.

David:
And how old were you? Remind me when you’re putting this deal together.

Andrew:
I was about 16.

David:
Okay. 16 years old. Now, did you have your dad or anybody else advising you like, “Hey, here’s how you should structure this or here’s how you should present it”?

Andrew:
No, because I mean all the family did was farmland. So when I went and did this apartment thing, it was actually a foreign concept really. I mean, I was really just going off reading and I watched some Harvard classes on YouTube and learned some stuff. But yeah, no. So anyways, we got the apartments, 16. I felt like the history was going to repeat itself. And again, I hate to use the word locking call what you want. It happened, I mean, the Bakken formation hit in a city. So I bought these apartments. There was six apartments right next to this middle school in Bismarck. We owned the two right in the middle. And I got a call from the city saying, “Hey, we need to buy your apartments. We’re doing an addition because of all the kids coming in from this oil boom.”
And they said, “We’ll give you $1.5 million.” And I said, “No, no, I’m good.” And this was like six, seven months after we bought them for one too. And then anyways they bought the other ones, they tore them down. We were the last man standing. Finally, I accepted an offer. I think it was about $2 million. So 15 to 16 months we owned them. I was a junior going into my senior year in high school. After paying the loan off, we had $1 million from that original $380,000 roughly a little over.

David:
Yeah. Speechless here. I mean, I’m just trying to think of what I could even compare this to you, like how you hit this many grand slams your first time.

Andrew:
I know, it was weird. I have some losses later, so don’t worry about that.

David:
Okay. I was about to ask, have you lost yet?

Andrew:
Yes.

David:
Because without any losses, you might just be floating in space with any form of… I don’t know what the word I’m looking for here. There’s no framework to put this in. So I’m glad to hear that you’ve lost in some way. Not that [inaudible 00:28:52]

Andrew:
I got my tissue kicked in 2017, so we’re good there.

David:
Okay. And that brings some balance to the force and gives you… Probably makes you succeed even more.

Andrew:
But the nice thing is when I went back to this guy that gave me the $300,000 he’s like, “Andrew, that was impressive. How about this-”

Henry:
Do it again.

Andrew:
Yeah. He said, “There’s $1 million here, give me $500,000. You keep $500,000.” Even though I was supposed to only get like $200,000 or whatever that number was, $250,000. So he gave me $500,000 of the million and then he is like, “And keep my $500,000 and I want you to invest it and charge me this time.” So that’s how that was left off.

David:
What kind of people are in North Dakota that they’re willingly giving up their profit? You’re going to have a rush of people, like I want to raise money out there. Now I’m guessing this person probably knew you knew your family, right?

Andrew:
Yeah. I mean, farming communities, again, I found an opportunity and I bounced on. I mean, farmers are very niche. You are a farmer, you’re not, they’re very… Some guy coming in from New York could never raise money. It’s just they’re very a niche thing I guess.

David:
So I know at one point you had some success, but you said that you weren’t really being fulfilled. What was that like to win this big, that young?

Andrew:
Yeah. That is tough, right? Because it’s like a drug. I mean, you get these hits and then… Because I’m a big believer in slow and steady wins the race, but you get these grand slams and you get these highs and then all of a sudden normal life doesn’t feel that exciting, and I mean that in the best way. Not like I was depressed or anything, but you know what I mean. Gosh, you get those highs before you’re 18. Like gosh, that’s a high benchmark.

David:
Yeah. So what were you going through? What were you feeling when you actually had that happen?

Andrew:
I mean, the toughest thing too was not being really normal. My siblings were all really good in school and popular and good at sports, and I really wasn’t any of that. And so I think just being different was tough. But again, looking back now I’m blessed. I’m so glad. But in the moment, it is tough to not really know who you are.

David:
So what did you do when you decided you were going to niche down? How did that decision come to fruition?

Andrew:
Well, when I went to Fargo and I decided I didn’t want to farm, so my brother and I are partners in the farm, but I’m not an active involvement, and that was my big decision to tell my dad. And that’s tough in the farming community to go tell your dad that you don’t want to farm and you’re one of the two sons, but he was very understanding. And that’s when I figured out that I need to raise so much money to follow my dream, right? Because that’s my answer is just follow my dream, be me and don’t pretend I have to farm. Because up until 2013 I felt like I just had to farm. This was going to be a side hobby when really my hobby is what I love the most. So that’s really how I just jumped into it two feet.

David:
So did you end up going to college?

Andrew:
I did for about two semesters and then I dropped out. So my dad called me. So when I was a year into college, I already had a $15 million raised because I kept raising money. And my dad called me and said, “Andrew, you either need to give the money back and go to college and I don’t blame you because I went to college and I had fun. Or you need to get out of college and manage this money because these people that invested in you deserve your full attention.” He said, “Make a decision. I don’t judge you either way.” Well, I decided to drop out and here I am.

Henry:
You didn’t figure you’d make a $500,000 net from getting your first job out of college?

Andrew:
Correct. Yeah, I figured pass that.

David:
So what was your real estate investing like during those times?

Andrew:
Well, that was actually my confusing years a little bit. So I went and raised a blank check fund where I basically could invest and do anything I wanted. So I raised about $15 million and I went and bought an equipment dealership in Great Falls, Montana, Warren Buffett play. I bought insurance company out of Alabama that was on the Nasdaq and actually I became the largest shareholder through stock purchases and I had to change the laws in Alabama to become a board member when I was only 23 at the time. And then I bought some HUD building commercial… That was the point, right? Those are my last years. Everything I was doing was working, except for the helicopter company. I lost my butt on, lost 15% of our portfolio, but we don’t need to talk about that right now. But anyways, everything was working. But that’s when I called Gary, I did my cold call and that changed my life.

Henry:
So what do you mean? So everything was working, you were seeing the success you were hoping for, you had raised the money and then you thought, “I need to call somebody and get some help.”?

Andrew:
Yeah, I wanted to call Gary because when I look at billionaires, I read something once that billionaires are created on focus and its wealth is preserved on diversification. So I looked at people in even Fargo, Ronnie Offutt, John Deere dealerships, Harold-Newman-Signs, they all became very successful on one thing. They were the best at it. So I cold called Gary Tharaldson, he’s a North Dakota billionaire. I actually called the top 10 wealthiest people in the state. He was the only one that really called me back and gave me any time, which I’ll take the richest one I guess.
And I called his secretary, said he is not in, I just called his office because he didn’t know me from Adam. I mean, I grew up six hours away from here in a small farm. He didn’t know who I was. And she’s like, “Yeah, yeah, he’ll give you a callback.” And I’m like, “Okay. Sure. Yeah, okay. Sounds good.” So I leave my number and my name and a month later I get a call from this Vegas number and I pick it up. I thought it was the telemarketer. I was about to be like, “Don’t ever call me again.” But before I could say that, this old raspy voice comes in, it’s like, “Hey, this is Gary Tharaldson giving you a call.” And I’m like, “Oh, Gary.” Right? That hit, I’m just speechless. And then that’s when we talked for like 45 minutes.

Henry:
So what do you say in that… You cold called him, he called you back and you’re in shock. And then what is it you say to keep the man on the phone?

Andrew:
I think I blacked out because I was so shocked. It’s like when you ask your wife to marry you, but I said things just like, I like, “Hey, I’m from a small town.” I knew a lot about him. I creeped on him a lot. Similar things, “Here’s what I’ve done. I’m in Fargo, I’d love to just have some pie.” And Gary’s the guy that I later on learned, loves to share his story and he loves young people that have ambition. I was the perfect person to tutor for him. I mean, it was great. Match made in heaven.

Henry:
That’s perfect. It’s super cool. The reason I was asking those questions is one of the marketing methods that I like to use, and especially that I encourage younger investors to use is network marketing. So sending out marketing with the intention of making a connection and networking with somebody more so than the intention of buying their property. Because when you can network with… And I specifically tell them, you look for older people who have a handful of properties who have owned them for years. And the idea is that you connect with these mom and pops, right? And then you have lunch or coffee instead of saying, “Hey, I want to buy your place.” You say, “Hey, I want to talk to you about real estate.” Because that group just is wildly passionate sometimes about younger investors going down the same path and you’re able to build this strong relationship.
And then they always know all the people, they always know old so and so down the road, who’s got this business or this thing, they’re looking at selling or got this opportunity and you can go learn this. And they’re so connected and you can gain so much just from those networking relationships. And I think 100% totally agree with you that there’s a lot of people who are older who have been around the block. And you can use your youth as an advantage because you have the drive and the hustle. They see a lot of themselves in you at that age. And you can use that to your advantage, not in a bad way, not taking advantage of anybody, but you can use building that relationship to your advantage greatly. And then the idea is that when you get there, you do the same thing. You give it back to somebody who’s got that same ambition.

Andrew:
Exactly. And that’s what they love. When you get older and you make a lot of money, normally the thing that they want is to leave something behind a legacy. And they want someone that wants to learn, they want somebody to want to listen to their story really.

David:
Well, they want to feel significant. And that creates significant. So they know if you can learn from my story and the lessons I went through and you don’t have to go through the same, then that it’s a rewarding feeling for someone. It’s hard when we’re in the grind or the struggle for money or building mode. It’s hard to even conceive of what it would be like to not have money on your mind. And I don’t mean money is in greed. I mean, once you build a decent amount of wealth, I’m sure this is probably where you’re at, Andrew, you seem like someone who’s halfway into offense. How do I build, how do I scale? And that’s my next question for you. But then you’re halfway into defense. How do I protect what I’ve already got? How do I not lose it? And so not all of money is about greed and yachts and super cars and trying to look cool.
A lot of it is just, “Okay. I’ve got responsibility for all of these people that work for me and people that have invested in my company and my family that leans on me and I don’t want to lose what I’ve already created.” And so it just occupies a lot of the space in your head. And you get to a certain point of wealth, like your mental, you’re a billionaire where… I mean, if you think about being a billionaire, no one actually knows what their net worth is when they’re a billionaire because it’s not being measured in money in a bank. It’s various companies that are worth different things. And all of that’s fluctuating as far as stock values and the reports of what revenue was for that quarter. It’s like billionaires, it’s very tricky to know how much money they actually even have. They have so much of it that it doesn’t mean the same thing to them that it does to us.
There’s not a connection anymore between buying something and having a price you paid for it. So obviously their mind’s going to be focused on different things. And I think it’s fascinating to see if I didn’t have to worry about money, which most of us will spend our entire lives on earth without having that luxury, what do I think about? And it sounds like what this person was thinking about was legacy and significance and wanting to feel like their life mattered and shared something. What were some of the biggest lessons that you took from those conversations with Gary?

Andrew:
Yeah, I’m glad you said that. So we started, he said, “Yeah, let’s meet up.” So every week we were meeting up having pie at the Village Inn in Fargo. And we started just talking. And I actually, when we first met, I asked him to invest in me. And he’s like, “No. I’m like, “Oh, okay.” So then I’m like, this is more of a mentorship, sounds good. But what I learned was he saw me, we talked business, him make mistakes, all that. And his model was very simple. In the 1980s, Gary wanted to print an asset. He said, “Billionaires, no matter what they’re in their manufacturers.” What he means by that, he’s like, “I was in the hotel business, but I manufactured hotels. I printed hotels.” He opened a new hotel every eight days in his peak. He built 500 hotels and only sold 100 of them to continue to build.
But he also vertically integrated. He was the best in the business. He didn’t touch anything but hotels. He used the Marriott brands for branding. He owned the construction, he owned the wiring company, he was the realtor, he was the best at it. And that’s what he taught me. So when I was doing all these things and making money here and there, and then I went and invested 15% of our portfolio in a helicopter company for all things and it went bankrupt and we lost 15% for the first time. Our share value actually dropped some and it wasn’t a kill the business investment, but it was a good drop. And I was at [inaudible 00:40:28] and I told Gary about it and he looked at me and said, “Andrew, you’re good at a lot of things, but you’re not great at anything.” And that sunk in. And that was when I knew that I needed to figure out who I actually was instead of just dabbling in a lot of things.

David:
So how did you make the decision of what you wanted to be great at?

Andrew:
Yeah, good question. So I asked that question to Gary, “Well, what do I do?” There’s so many ideas. He said, “Andrew, everybody in the world thinks that there’s the idea. They wait around until they’re 50 until the idea pops up.” He said, “There actually isn’t the idea.” He said, “There’s millions of ideas, you just got to pick one, focus on it, put your blinders up and make it the idea.” So I took that and I said, “Okay.”
So the next week I came back and I had two asset classes I had interest in. One was self storage because it reminded me a lot of the hotels in the ’80s, it’s very fragmented. And at that time in 2017, public storage, the Marriott of storage for the first time was allowing people to use their brand just like Marriott did in 1982. And so storage was one of them and assisted living was one. And Gary just said, “Which one feels better to you?” And I said, “I’m a simple farm boy. So I like storage, there’s no toilets, there’s very little people involved. It’s simple, it’s scalable.” And he said, “Sounds good, let’s do it.” So we jumped on his plane, went out, met with Public Storage and Extra Space and started discussing third party management agreements. We were one of the first 50 to sign up.

David:
Okay. So that makes some sense why you’d want to get into self storage. What was the benefit of signing up with a company that was going to let you use their brand?

Andrew:
So Gary’s big model, so he pays Marriott 12% and he still has to run the hotels. So he’s got 3,000 employees today for his hotels and he pays Marriott 12% for the name. Public Storage and Extra Space and Life Storage, they just started this model in 2017 for the first time in history and they were only charging 4% to 6% of revenue, and they would manage the facility and brand it and use their algorithms. So Gary said, “I’m a big believer in being the best developer and owner there is. Let the people that have been doing it for 50 years that have built a brand that have $2 million views on their pages a day, that have the algorithms, let them do all the management for that. I mean, we’re not making much money. And second off, what do you want to do? Don’t swim against the tide. You’re going to go try to recreate their algorithms. What’s the point? Just be the best owner and developer you can be and own the rest of the process.”

David:
So that’s what ultimately you became great at was owning real estate and developing it. So tell me, from the perspective of becoming a billionaire, what are some things that you want to focus on within the project or the asset class or the business that you’re taking on?

Andrew:
So what we do now, so fast forward, we’ve raised… Because Gary did finally invest by the way. So that’s nice. So we’ve raised about $120 million in cash and then we go and leverage, Gary and I are the only personal guarantees on the loan. So his PGs on the loan, so is mine. So we’ve got about $1 billion in projects in the works here over the next five years. All self storage. So next year we got $100 million in Arizona breaking ground. So Abernathey Holdings, which is Gary and I and a hundred other people, I still own control. The other 100 people have thrown in anywhere from $300,000 to $5 million each. We own the construction company, we own the equipment dealership, we own the garage door dealership and we own the asset. So each building we builds about $13 million. The bank needs $5 million down. Gary throws in two and a half million cash. Abernathy Holdings throws in two and a half million cash, but we get to pocket $1 million from our vertical profits. So really we’re making 40% return before the doors even open on our projects.

Henry:
I like that you point out about how you’re making money before the doors open because a lot of what I’ve heard about building self storage is that you’re not making a profit until year three, maybe year five. And so how are you deciding where it makes sense to do this? And then how long does it actually take from the doors open to when you’re actually seeing a profit on your income statement?

Andrew:
So we try to focus on recycling cash. So it’s cool that we’ve raised $120 million in cash. But the problem is if… I mean, my goal someday and my team’s going to listen to this and laugh because I’m the dreamer, but it’s like I’d like to be building $1 billion a year in storage. Right now we’re at the $100 million, I’d like to be doing $1 billion a year. Well, in order to be doing $1 billion a year, you need a lot of cash. So my goal is to recycle the money as quick as possible. So with our current model, if we own 50% of the property and we have a syndication partner that owns 50%, we owe two and a half down. Syndication partner owns two and a half. But if Abernathy Holdings, me and my investors own 100% of the verticals and have exclusivity to do it, our profits actually take half that out.
Like I said, we get 40% to 50% of our money back before the doors open. The first step of recycling. Now the rest of it right now, we get out at stabilization. So to answer your question on the timeline, so when we find a site in Arizona, we have our own internal land crew about four guides. All they do is look for land, they find a site, they put an offer in, they spend about 12 months in titling it. And we do this whole process in cash. We’ll buy the lot, usually a million an acre in Arizona and then we’ll spend a quarter million or so on entitlement process. Lawyers, architects, engineers, things like that. Takes about 12 months shovel ready. And then we hand it to our in-house construction company. We have our own superintendents, project managers, they go and build it.
And in Arizona, that takes about 12 months at CO. That property that we built for 12 is worth about $17 million. So you had value creation plus, like I said, we got 40% of our cash back on what we paid our own companies to do the work at market rates. And now average in the industry is about three years to stabilize after doors open due to our lot selection, we’re about half that. So this whole process start to finish in Arizona’s three and a half years, we’re looking to get into California, that’ll be longer and cost more, but the upsides higher as well. So to me, what my focus on is recycling capital because if you can recycle your capital quick, then your upsides, your upsides is not as capital intensive, right?

David:
Yes. I mean, this is a very, very, very complex and grandiose per method in a sense. You’re building an asset, you’re stabilizing it, you’re getting the money out, you’re paying off your investors and then you’re saying, “Hey, I got another place to put your money to repeat this process.”

Andrew:
But the cool thing actually is Abernathy Holdings is like Berkshire Hathaway. So we haven’t done dividends in 10 years. So the company that I raised money for 10 years ago, we talked about this is the same entity and the same investors, it’s just the business as morphed into a different model. So it’s cool and unique too.

David:
You mentioned vertical integration quite often you talk about the verticals. What does that mean within the context of self storage?

Andrew:
So only as much of the process as possible. So for an example, Henry Ford, he used to require the people that sent him parts to manufacture to build his cars. He required them to send them in wood boxes, not cardboard because he would then use the wood boxes to put the floors in the cars. So he’d get it for free and then he would burn the extra and sell it for charcoal. I mean, again, he’s vertically integrated as much as he can and you create a product, sell the byproduct. So in storage, for me, I want to own as much of the process as possible, but I also don’t want a lot of headcount because again, employees are tough. Think it’s going to get harder and people, that’s where mistakes happen. There’s a lot of friction there. So for example, we’re our own garage door dealer because there’s about $150,000 of upside to be the dealer.
And it takes one person that’s already hired to push the paper. Pretty good. Net income per head. We’re our own construction company save about $700,000 of building and we’ve got one in a quarter guys per building because of project manager splits. And we are our own equipment dealership. We ship our own equipment site to site. We rent from ourselves. Very simple. You just move equipment once a year. Verticals that we do not do, thought about making our own signs, 50% margin. But now you’re in the manufacturing business, you got materials, parts, you got to ship them, you got labor, you got heads. That’s an example of a vertical we didn’t do. So that’s what I mean by that is we’re bringing as much as we can in house, but I really don’t want to have more than 50 people in my organization.

Henry:
So that was going to be my next question is about how many employees do you have and why haven’t you looked into verticals that have to do with lighting and locks and all the other ancillary parts of the business?

Andrew:
So we have 50 people. Everybody in our storage facilities are actually public storage employees. But we do pay through them through an expense. So I don’t include them, but we have 50 staff. We open to a supply construction supply company. So we do bulk order some materials to get discounts. We also negotiate with architects and engineers to get maybe 30% discounts. So things that we haven’t brought in house for various reasons we put on our negotiating hats or into our bulk ordering hats.

David:
So how are you structuring your companies or your deals so that everybody wins? Because I’ve noticed that’s come up a few times as you’re speaking.

Andrew:
So there’s three people that I’ve followed the model, Warren Buffett, Gary Tharaldson’s simplicity approach, and then Trammell Crow, he was a big developer in the ’80s. He had a partnership approach. So Jesus had 12 disciples. I’ve got six guys because I’m not as good as Jesus. So I have six people that I talk to on a regular basis. And it’s a Warren Buffett style. So we have a guy that has been in equipment for 20 years and he’s passionate about it, I mean he dreams about equipment, he runs that arm, that’s his job. He’s got his people, he runs it the way he wants. Him and I talk, that’s it. We have a guy that runs a development arm. He’s passionate about storage, he dreams about it. This passion is the focal point of our business. He has his people, so on and so forth. So I am the dumbest one in every room and I’m proud of it.
I bring the money to the table. I’m really good at connecting people and I’ve got the energy and the excitement and the dream and the vision. So what I’ve done is I’ve surrounded myself with smarter people in their said field. And then what we’ve also done is we give ownership to each and every said person through shares in the holding company. So a guy that came to us back in 16, he’s now a millionaire and he started with $0. I’m a big believer that the best ROI I’ve ever made for myself and our investors is actually giving more to our employees. They do most of the work. And if I have to give up 15% of every building, so be it. My goal is to make 1,000 millionaires and I’m only a handful in. So a lot of years left.

David:
All right, Andrew. So starting from scratch, somebody who wants to start a small business, maybe they don’t want to be a billionaire, but they would like some advice for how to structure creating a business. Maybe they’re good at buying rental properties, they’ve got one or two or three, maybe they’re a real estate agent that wants to grow their team or they’re a construction worker who wants to start his own business. What advice do you have for people who are in the trade and they want to actually scale into running a business?

Andrew:
No, I love it. Well, again, make sure you have the passion, but if you’re already in the trade, you probably already do and follow the lead. And again, there’s 1,000 ways to do it. So just because I did it this way doesn’t mean it’s the only way. But again, make a deal with someone. Make it a no loss deal for them, just like I did on my first deal. Work for free, work your butt off for equity, whatever it may be, do that and don’t be afraid to call. Don’t be afraid to ask questions. It’s a numbers game. Call 20 people to do a deal with you and you hope to get one that, and I know it sounds simple and generic, but that’s the biggest thing is you just got to get out there, start making calls, bring a deal. Don’t take no for an answer and have good energy. I can’t tell you how many billionaires have told me that my energy and excitement and attitude is a really big reason that they’re attracted. So just make sure you have a really good energy and excitement.

David:
Henry, you look like you’re deep in thought. Anything you want to add before we move into the famous four?

Henry:
Yeah, no, I mean, I totally agree. The energy is huge because people feed off every energy and you want to help people who are excited about what they’re doing because you get to feed off that excitement. And so energy’s big. I often, throughout the day today, I wasn’t feeling like I was a bundle of energy and I knew that I had some phone calls I wanted to be excited about and so I do… I watched a couple of funny videos, something that’s going to get me laughing. Get those positive vibes going to help me build that energy because it’s important.
I think too many times we will get caught up in the negative energy or just say, that’s my mood for the day. I’m having a bad day. And you don’t understand how much of an impact that can have on you as a business. So being intentional about keeping your energy up, there are some things you can do to control that. But I really, really enjoyed this conversation and I love the outlook that you have on life. I love that you took some lessons at a very young age and actually put them into action. I wish I was as smart as you. I wish I was as disciplined as you when I was 15 or 16 years old. I don’t know that I would’ve reinvested $500,000 if it fell in my lap as a junior in high school.

Andrew:
I appreciate that. Yeah, it’s the funny thing is I don’t know any different, been since I was 10. Everybody’s always laugh. I don’t remember when I was nine, so I mean I just always been like this I guess.

David:
All right, we’re going to move on to the last summit ever show. This is the famous four.

Speaker 4:
Famous four

David:
And this segment of the show, Henry and I will fire questions off at you. They’re the same four questions we ask every guest every week. I’m excited to hear your answers. So Andrew, first question, what is your favorite real estate related book?

Andrew:
So I would say the Trammell Crow building an Empire is a great one, it’s very expensive, but it’s classic learning how to grow through partners, partnerships. Gary Tharaldson actually has a book about his life, Secrets of Success: Gary Tharaldson, it’s a red book with his face on the cover. And then another one I like is Shoe Dog. It’s about Phil Knight’s story. I just love all his attitude and all the things that he overcame. So I’m going to throw those three out.

Henry:
Perfect. I’m not even going to ask you the second question because it’s about what’s your favorite business book and I think you just gave us some great ones.

Andrew:
Yeah.

Henry:
So what are your hobbies?

Andrew:
Good question. I got beautiful three boys under five, an amazing wife. So I hang out with them a lot. We’re going to Disneyland actually next week. So I’m jacked. I would say golf. Yeah, hang with family. I’m pretty simple. I mean, business is my hobby too, so that takes most of my time.

David:
I got to ask you, I’ve been considering golf, I never really wanted to do it was never exciting. But I went to top golf one time in Scottsdale and it was actually fun. What’s your advice for me on if I should take golf as a competitive perfectionist? That’s why I never did it because it’s very frustrating and I just don’t like sucking at anything or not being good at it.

Andrew:
I have never been so angry and broke so many things and when I started golfing it was so bad and to me it was a challenge to manage my emotions because I’ve been learning that it was probably the toughest emotional management I’ve ever had, because I’m just like you. So am I glad I did it. Yes, I’m actually pretty good now, but it was the worst couple years of my life, but it was worth it and I think it was actually a pretty good life lesson really for managing my emotions.

David:
I had this theory about golf that it’s one of the most insane things in the world to do. If you didn’t know what golf was and someone said, we’re going to put a hole this big 300 yards,

Andrew:
Like an alien comes like-

David:
Yeah, that’s exactly right. If you’re an alien and you came and you said, so you’re just going to put a whole, like imagine going to the desert, so we’re going to put a whole 300 yards somewhere else. You’re going to get this tiny ball and you’re going to get this stick and you got to hit it and try to get it there in three to four tries. You’d say, “That is impossible.” It could not happen. And it’s like amazing that human beings have both designed the equipment and practiced it to the point where this is even a thing that can happen. It’s like a miracle. Every time I see a person playing golf and we just talk about it like, oh, it’s just golf.

Andrew:
What I love though is it makes someone hang out with me for four hours. So it’s perfect. We can cover off topics. I mean-

David:
They’re going to be investing with you by the time they get done there.

Andrew:
Guarantee, my success rate. Oh gosh, got to be 99% at that game, the full deal.

Henry:
Do it, David, do it. I took it up recently. I love it. I’m terrible at it, but it’s so much fun.

David:
Okay.

Henry:
And there’s so much, so many life lessons that you learn playing golf.

Andrew:
Let’s play in Scottsdale here. We’ll go out.

David:
That’s a good point. I mean that’s Scottsdale is the Mecca.

Henry:
I will gladly embarrass myself in front of you.

David:
All right, my last question. In your opinion, what separates successful investors from those who give up fail or never get started?

Andrew:
Focus. Ignoring all of the shiny objects out there, all the deals, especially with our intention spans, as you know, books are getting shorter, all of that. So long term investment, a big believer in it focusing and being the best at something and ignoring everything. That was the hardest part for me is ignoring all the other good deals I could have done. And then just attitude giving up. I mean, gosh, is that even an option? So I just think it’s mindset, attitude and open to distractions.

Henry:
All right. And the last question is, tell people where they can find out more about you.

Andrew:
Yeah, I’m on Facebook, Andrew J. Abernathy, Instagram and I have a personal website, andrewabernathy.com. And then abernathyholdingsco.com is our company page. So any of those work?

David:
Absolutely. Henry, where can people find out more about you?

Henry:
You can find me on Instagram. I am @thehenrywashington on Instagram. What about you, sir?

David:
I am @davidgreene24, just about everywhere, including YouTube. Andrew, this has been fantastic. My mind is still spinning at some of the things that you’re working with. You are clearly the Doogie Howser of real estate and I can’t believe that we haven’t had you on the podcast before. Now, is there anything you want to share with our audience before we let you get out of here?

Andrew:
Just, I love it. It’s an honor and I’d love to be back if it ever works out. So there’s nothing better than just sharing my story and talking to great people like you guys.

David:
Awesome. Well, thank you for that. And if you have enjoyed this episode, please go leave us a five star review wherever you are listening to this podcast. Whether it be Apple Podcast, Spotify, Stitcher, whatever it is that’s your favorite flavor, please leave us a review there and then if you’re listening on YouTube, subscribe to the channel. All right guys, this has been fantastic. I really appreciate your time. Andrew, we will have you on again. This is David Greene for Henry [inaudible 00:59:38] savant Washington signing up.