October 2023

David Stevens, former FHA commissioner, joins ‘The Exchange’ to discuss his proposal for how to lower mortgage rates, the supply-demand imbalance in housing driving mortgage rates higher, and more.

Recruitment is inherently biased. When you sit opposite someone in an interview, whether in-person or virtual, you’re falling for so many cognitive biases you don’t even know exist. If they are confident or good looking, your impression of them will be inflated. If they are similar to you, it will be even more so. Even the colours they are wearing, the quality of their camera, or how good they smell can influence your decision beyond the job role itself. But that’s the most important part.

If you’re not sure whether or not to hire someone, gather additional information to help you make your decision. Without this, you might be sidetracked by a known bias. Use these prompts to boil it down to the basics and decide based on what will matter in the long term.

Copy, paste and edit the square brackets in ChatGPT, and keep the same chat window open so the context carries through.

Run your recruitment decisions by ChatGPT

Compare candidates with the job description

You wrote that job description for a reason. Before you’d met any candidates, before you had a person in mind, that document represented the best and least biased version of the role you needed to fill. It’s easy to forget the job description once you meet real people during interviews. It’s easy to get swayed by their ideas and experience, and start creating new roles they’d match really well. But none of that matters right now. Instead, see how they match up with your original spec.

“Compare the job description of a role I’m hiring for with the resume of the person I’m considering for the role. Conduct an assessment of how well their existing skills match the role and suggest 5 strengths and 5 areas that could require additional work, should they be successful in their application. Here’s the job description: [Paste job description] | Here’s the candidate’s resume: [Paste resume].”

Asses complimentary skills

Not only does the candidate need to match the role at hand, they need to work well in your team. Ask ChatGPT for help predicting just how much this person will gel. Using anonymized information, ask the large language model to find matches in the language of their resume compared to the people they’ll be working with. Assess the synergy and find any causes for concern before you take the leap and say yes.

“I want to make sure this person will work well in my team. They will be mainly working with [name or job title of people in their team]. Can you now compare the resume of this potential recruit with the resumes of the people currently in my team, and explain where they are likely to work together well and where they may require more training to collaborate effectively. My existing team members have strengths including: [describe the strengths of your current team] and their resumes are: [Paste resumes of existing team members.]

Expect the best

Use this prompt to paint a picture of the best case scenario that could possibly happen, then question whether or not you see this person making this impact. Do you believe they could be the best there is, or should you continue your search? ChatGPT will give you a grandiose picture of the future, so you can figure out if this person is a goer.

“If I hire this person, what’s the best case scenario? Explain how well their first few months in this role could go. Outline what they could achieve in their role if they were really good. Make an assessment on how likely this is based on their resume. What are the three biggest concerns you have about this person achieving that success?”

Plan for the worst

It’s easy to plan for the best. When sales are flowing, customers are happy and team members are doing what they were hired to do, even big problems seem somehow smaller. Using this prompt, get ChatGPT to explain some dire consequences. Think about what would happen should things take a turn, and assess how likely this person is to have this effect.

“Now the flipside. If I hire this person, what’s the worst case scenario? Explain how badly their first few months in this role could go. Outline what they could mess up in my business if they were really bad. Make an assessment on how likely this is based on their resume, including what I can do to prevent this happening.”

Consider the long term

Are they here for a few months or are they in for good? Ideally, you want people who will get stuck in and stick around. Who are open to a future with your company, and will keep progressing in their role. But how do you know? Conduct an assessment of their resume with longevity in mind. Set the foundation of your hire in the right way and build on this base for many years to come.

“My business’s long term goals are [describe your big business goals]. From this person’s qualifications and experience, how could they fit into the long term goals of my business? Which of their skills could align with our plans, and how do I best bring out these qualities and equip them to do their best work?”

Prepare for interview

Now ChatGPT has the information from this person’s resume, complementary skills and best and worst-case scenario, you have a clearer picture on how they might fit into your company. If you’re not sure, ask more questions. Get a list of potentials from ChatGPT, then shoot them over by email or book a second chat. Quiz the candidate some more before offering the role.

“Adopt the role of a recruitment and HR expert tasked with helping me make the best assessment of a potential recruit’s suitability for the role. Given what you know about the candidate and the role itself, suggest 10 possible interview questions, each with an explanation of why it helps make my decision.”

Make your next hiring decision with ChatGPT

Your hiring decisions can be easier with ChatGPT. With the right information and the right prompts, it can help you spot patterns and gaps and set up for success. Compare your favourite candidate with the job description, assess their skills with the team they’ll join, see how they match up and continue your questioning. Expect the best and plan for the worst, all with the long term in mind. Recruitment isn’t straightforward, so get help along the way and make the right decision.

Ashley:
This is Real Estate Rookie episode 330.

Serena:
I figured out right away that he just needed help keeping everything organized in his mind because he’s got so many projects going on. It’s like when you’re project managing and you don’t have systems going up, and so I just started recording as much as I could, information, recording where they’re at in the construction process, what they need to do, keep all the tasks organized, so that way, he’s on the road calling me, “Hey, run through the priorities right now.” So that was in the beginning where the value was, and then just continuing to organize from that so that we could be more effective and efficient.

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

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories that you really need to hear to kickstart your investing journey. If I look a little bit different, I’m actually sitting in a hotel room. I’ve been here since Sunday, and I didn’t even tell you this yet, Ash, but there’s this idea called a Think Week that Bill Gates used to do where he basically go into a cabin in the woods somewhere, and lock himself away for a week, and just read a bunch of stuff about whatever is pressing in his business. So I’ve been trying that out. I’ve been here since Sunday. I leave on Friday. So, really, just deep diving in a lot of different parts of our business, and it’s been incredibly helpful to have a week with nothing.

Ashley:
So are you shutting out everything else, like your normal daily activities, like you are actually on vacation? Yeah?

Tony:
Yeah. So, literally, I mean, outside of the podcast, I really haven’t had any meetings or calls this week at all, and I’ve even deleted social media from my phone just so I could really be focused in, and it’s been an incredibly productive week.

Ashley:
So that’s why you haven’t responded to the 5,000 memes and reels I sent you?

Tony:
That’s probably why.

Ashley:
I’m just kidding. But today, we have an incredible guest on today, one of my best friends that lives across the country from me, Serena Norris. So she is coming on today as an expert in systems and processes, and mostly, we’re really going to focus on project management of a rehab. So if you were doing any kind of rehab in a project, whether it’s for a BRRRR, you’re going to keep it as a rental property, or it’s going to be a house flip, or even it’s a short-term rental that maybe you want to furnish, we are going to go through systems and processes you should have in place, including the checklist, the templates, and the software.

Tony:
Yeah. Serena is just a wealth of knowledge, guys, and there’s some episodes where she’s like you’re going to have to go to and re-listen multiple times just to really soak up all the knowledge, and this is one of those episodes. So you guys are going to get so much from the next, I don’t know, 45, 50 minutes, however long this conversation is with Serena.

Ashley:
Yes, and get your pen and paper ready because towards the end, she goes through every template you should be creating to run your rehab projects, and I think that is so informational. Every time I talk to her about real estate, I learn something new.

Tony:
Learn something new. Yeah.

Ashley:
It’s like, “I need to be doing this.” So this is a great opportunity for us to get her on. She also works alongside Nate Robbins who was on episode 326. So they co-exist together making these flips happen that they’ve been working on.
Serena, welcome to the show. Thank you so much for coming on with us today.

Serena:
Thanks so much for having me.

Ashley:
So tell us a little bit about life before real estate.

Serena:
Oh, life before real estate. So I actually went to college for graphic design, marketing, and branding. Then, I did that for a few years in Beverly Hills for a really high-end men’s wear company on Rodeo Drive. After a few years there, I was in my early 20s, and I just realized that I wanted to work for myself, but I didn’t want to freelance graphic design, and I didn’t know yet what I wanted to do. The only thing holding me in LA was I had a country music/classic rock band that I was in, but I decided to move to Hawaii just for a couple months, and it ended up being a year and a half. When I was out there, I had a friend that made me read Rich Dad Poor Dad, and he plugged in my ear about buying a duplex and house hacking before house hacking was coined a term. I started really thinking about my childhood and my interest in real estate in general, and that’s when I really just started thinking.
I was literally obsessed with anything houses, any shows, remodel shows, HGTV, and my… thinking about it like it just runs in my family. My dad was a general contractor. My stepdad was a general contractor. Obviously, my mom had a type. My grandpa was a general contractor. My other grandpa was an architect. Ever since I was little, I was in and out of remodels from the time I could walk because that’s all my dad did, and we’d consult on floor plans. Even Sunday mornings, we’d open up the newspaper, and there’d be like Floor Plan of the Week, and he’d dissect it for me and tell me why the bathrooms all have to be on one side of the house, and this, and whatever.
So I then was like, “Oh, when I was little, I used to draw floor plans for fun, and I used to ride on my bike all through the neighborhoods. Anytime I saw a house for sale, I’d always pick up all the flyers, and I’d go home, and I’d spread them out, and I’d literally comp them without even comping them and trying to figure out why one was worth more than the other,” and I was like… I lived in the poor neighborhood behind a really, really nice neighborhood. It was one of the first dreams, and so all the houses were really awesome, which is probably why I wanted to look at the flyers. Then, even if there was an open house, I was a kid, and I’d put my bike to the side of the road and walk in. They’re like, “What is this kid doing in here?”
So I just realized I had an interest in real estate and that it fit how I wanted to make… had the opportunity of making passive income, working for myself, being self-employed, and so I just was like… At this point, I actually don’t know anyone else in construction or real estate. My dad had retired, and my grandparents had passed. So I just was like, “Okay. I’m going to go online, get my license, and move back to Washington where I know people, and start from there.” So, literally, three days after I moved back, I was at my cousin’s wedding, and I met my mentor, Tarl Yarber. Maybe you guys have heard of him. I actually sat across from him at the rehearsal dinner, and so it was one of those moments where right time, right place, and he was talking about how he flips houses, and I started getting really excited because I was like, “I don’t know anyone who flips houses, and here’s this guy right in front of me. This is what I want to do.”
So I played it cool for a while, for a couple days, the wedding, his destination wedding. Then, right as he was about to leave, I was like, “Hold on, hold on.” I was like, “Can I get your contact info?” He’s like, “Yeah. What’s up?” I was like, “I’m going to work for you. When can we meet next week?” So we ended up meeting next week at a Starbucks, and I was telling him what I want to do. I was like, “Hey, I’m not working. I can do this full-time with you, whatever you need.” So I just started assisting him because at that point, he was flipping 20 to 25 houses at a time just him, and so that was a lot. He was like, “You know what? I actually need some help,” and he really did. So I jumped in and just started helping with everything. A lot of it was choosing the finishes at first because he was really not design-oriented, and then we pretty much had no systems in place. We were writing scope of works on Word documents and really-

Ashley:
Wait, that’s not what you’re supposed to be doing.

Serena:
I mean, you can, but… I mean, not Word document.

Ashley:
Yeah. I know what you mean.

Serena:
Not pages on Word. I’m talking about one page Word doc for a whole house remodel, and the thing was it’s like it’s because at that point in the market, it wasn’t… Contractors weren’t really busy, and so he would leverage the contractor and the agent that was going to list the house and had them work together. He trusted both of them, and that ended up working for him. But as he got busier, and with more projects going on, and then how contractors were getting more busy as the market was getting… There was more demand for them. They weren’t going to take the time to go and plan the house. You need to tell them-

Tony:
You got to do that legwork for them, right?

Serena:
Yeah.

Tony:
This is so much good information, but I just want to pause for a second because there’s so much in this story that we got to circle back to. So I don’t know how many times you and I have talked, and I never knew that you were in a country/rock band, so that’s something we got to… We got to talk about that offline a little bit, but we also interviewed Nate Robbins. I can’t remember which episode he was, but if you guys just go back up… 326. All right. So you guys go back four episodes, you’ll hear Nate’s episode. You, Nate, and Tarl, this trifecta that manages this massive flipping business, and now events and all these other things together, but it all started by these just chance interactions.
If you guys go back to Nate’s episode, Nate was working in a bank, and Tarl walked in, and it was through that conversation that led to something. You and Tarl sat across from each other at a rehearsal dinner, and the relationship grew from there. The reason I bring that up is because I think for a lot of our rookies that are listening, you might oftentimes or every once in a while also find yourself in a position where you might be sitting across from someone that could potentially change your life, but you have to have the courage to take that opportunity when it’s presented to you. Certainly, you very much could have had that conversation with Tarl, let that weekend pass, and then never said anything to the guy, but you said, right before he walked off, “Hey, hey, hey, I’m going to work for you. Let’s figure this whole thing out.” I think that’s the level of courage should it takes. So my point to my rookies, if you’re listening, when that opportunity presents itself, you’ve got to have the courage to take it because it could pass you by.

Serena:
Yeah. No. Absolutely. I also want to note. I came from a place of… I’ll just jump in. “I don’t want to cause any more work for you. What can I do today that will just alleviate any stress for you?” Because a lot of times people would come to us once we were established and was like, “Hey, is there a position for me, or what can I do, and dah, dah, dah?” I was like, “If I have to think about this that hard, you’re actually adding work for me. I’m not ready to hire anyone.” So it’s like when you do find a mentor, and we can touch on this a little bit later, some advice on getting started, but let them know that you’re here and really be assertive, and going, and intuitive like what they need, and then try to fill that as soon as possible so they can see the value that you’re going to give them so that they want to invest in you.

Ashley:
What was that for Tarl, and how did you figure that out with him? Was it just picking up on things at the conversation at the wedding?

Serena:
Well, I think it started in our conversations, and then I went… We met at a Starbucks, but then we went and started walking properties, and I figured out right away that he just needed help keeping everything organized in his mind because he’s got so many projects going on. It’s like when you’re project managing and you don’t have systems going up, you’re really flying by the seat of your pants. When you don’t have other team members, you tend to keep all of the information in your head and not put it down. Well, now, you’re adding the second person that needs to have information, and so I just started recording as much as I could, information, and started organizing that for him. He would call me throughout every day and say, “All right. Run through what I need to do.”
So I was just like the sounding board where I was at the computer doing some tasks that he needed, started analyzing properties. I didn’t even have my license. I didn’t even have access to MLS. So I’m literally analyzing through the Zillow and whatever the best I can and at least giving him like sending him some sniff tests on deals, but I would be recording where they’re at in the construction process, what they need to do, keep all the tasks organized, so that way, he’s on the road calling me, “Hey, run through the priorities right now.” So that was, in the beginning, where the value was, and then just continuing to organize from that so that we could be more effective and efficient.

Tony:
One thing that makes me think of Serena, we recently had Mike Michalowicz in the podcast as well. Gosh, guys, I should be better with our episode numbers, but anyway, I’ll figure it out. I’ll say it, but Mike came on, and he talked about his book Clockwork. One of my favorite books that I’ve read in the last couple of years, but it ties into what Serena is talking about right now. She said that Tarl was managing 20 plus flips by himself, which is insane, but when you are by yourself, you don’t have to systematize everything because like you said, it’s all in your mind. But the second you want to bring somebody on, now you’ve got to go through this pain of taking all this tribal knowledge that you have and trying to download it into this new person. So, for all of our rookies that are listening… and believe me, I made the same mistake in my business as well. The lesson for all of our rookies that are listening is that even if you just have one property, if your plan is to scale up and to buy more, focus on those systems and processes on day one because it’s so much easier to build out SOPs. It’s so much easier to get your processes in place when you have one property than when you have 10, or 20, or 30, or 50.

Serena:
Absolutely, and when you get to that amount of properties, all of a sudden, you’re like, “I need someone now,” and then you have to pause, and then your projects delay, and then the training process. So, honestly, one of my biggest things that I tell new investors is just start recording information. The whole systems and processes label can sound really scary, and it’s super complex, but keep in mind the best systems are super simple to use. Right? One of the first systems that I put in place for Fixated, our company, was somewhere where we could all access the lockbox codes. It sounds so simple, but I would show up to a property, and then all of a sudden, the lockbox code had changed, and I’m trying to call Tarl, and then he’s not answering because he has a meeting, and I’m just sitting there for an hour. Right?
It’s just such a time wasted, same thing for him, and so I was like, “I’m going to find a centralized place online, so Google Sheets, Smartsheets, whatever it is, where we can put the address, the lockbox codes, the entity names, and who’s driving it that week.” That was one of the first systems we ever made, and it saved everyone so much time, and we just elaborated from there. So I’m really big on centralized information, and start that from day one. I hate doing something twice. So if you find yourself keep trying to look up information, it’s taking you a long time, then that’s your cue that you need to put a system in place.

Ashley:
Or relying on someone else to give you that information via text or whatever. Text messages go through so fast that something Tarl told you last week as with the code boxes, having to go through back text messages, scrolling, looking for that piece of information.

Serena:
Then, we added location of lockbox because that was a thing, too. It was like, “Cool. Lockbox. 1, 2, 3, 4,” but I’m walking around the whole house, and it’s on the neighbor’s fence on the right side like behind the bush. So, yeah. Like I said, really simple system. It saves a lot of time, and time is money.

Ashley:
So once you started putting this together for Tarl, what was your actual position with him? What did you bring to the team? What does your role look like now, and how long have you actually been doing this?

Serena:
Yeah. So I started with Tarl back April 2015, so over eight years ago. At that point, it was really just assisting him in anything he needed for the projects, learning… biting off more and more as I was learning, and then I became an agent. So then, I could help him analyze deals better by using the MLS, and I also split my time at that point actually becoming an agent full-time and then also helping him. I started putting finished packages together. So with the design, and the market increasing in demand, and housing prices increasing, and doing a little bit more higher-end stuff, we needed to be much better at picking the design, and the finishes, and the floor plans, and so I took over making the design packages, and then also driving the properties once a week, and reporting back anything for him, coordinating some of the finished stuff like cabinet people, and that’s where it started.
Then, as it evolved, I started taking on some of the project management, and then over the years, I pretty much ended where I’ve taken over all of the project management, managing all the contractors, making the scope of work, managing our coordinator and material orders, and just pretty much getting the property from A to Z. Also, I confirm the underwriting because I’m the part of the team that has to get the property from acquisition disposition and make the business plan work, and so I’d sign off on the underwriting for that because I was the one closest to the numbers. Construction costs are constantly changing, and I was the one that knew that the most, so Nate would send me over the projects and his underwriting, and I would do the stamp of approval. So then, we would go into construction, and then I’d list them on the backend and disposition, and get them sold so we can make some money.

Tony:
I was just going to say, Serena, so you mentioned… You’re throwing some phrases around. I just want to break them down for our audience here. Define acquisition and disposition for folks that aren’t super familiar with those phrases.

Serena:
Yeah. Acquisition, buying the property, and then disposition, selling the property. So we would do, mainly, fix and flips. We’ve done probably a quarter of the deals that we’ve done together, our BRRRRs. So we’d buy them, we’d rehab them, then we’d rent them out and refinance. So our “disposition” would be that we are now renting them out and turning them over to a property manager. But yeah, acquisition would be sourcing the deal, running the numbers, making it make sense, which is underwriting, and then acquiring it and putting it in our name.

Ashley:
So I want to go further more into your project management role such as how you’re estimating rehabs, how you’re hiring contractors, how you’re managing the contractors, how you’re managing the rehab. So let’s just start with the estimation and deciding what materials you’re going to use, and walk us through what is the best process that you have put together for this.

Tony:
If I can jump in before you answer that, Serena, I just want to let all of our rookies know. Ashley, Serena, and I spent a day together. Maybe that was a little over a year ago, and we got to walk with Serena through a few of her projects, and Serena is like a savant, like an encyclopedia of project management for flipping houses. I love James Dainard, and I feel like you and James, when it comes to managing a rehab, are neck and neck with each other, so you guys are-

Ashley:
Except Serena’s process is-

Serena:
God, I was like, “Wow, that’s the most complicated [inaudible 00:21:00].”

Ashley:
If you see the difference of their templates, and worksheets, and actual computer screens, Serena’s is way more detailed than James’ is.

Tony:
Yeah, yeah, but I think even for me, Serena, before we even get into that piece, I feel like people can sometimes feel overwhelmed, especially if this is your first time doing this. So if we can even just start there first, like how do you… I’ve got this old beat-up house my first time doing this. How do I even take that into like… How do I not get overwhelmed, I guess, by looking at the start of this big project?

Serena:
Yeah. The first thing that comes to mind with that, putting myself in their shoes, is rely on… Work backwards. Start with the comps. The comps are king. You have an example. So the comparable houses that you need to achieve, you’re after remodel value. That’s what you’re going to reference in a map of what to do with that property, and so when you are in the… Planning starts during acquisitions because you have to think, “Okay. What’s the strategy for this deal? Am I just putting new carpet in, and I can sell it that way, and that’s what makes me a good deal, or are we going all the way down to the studs, putting in all new electrical, plumbing, whatever?” It’s, “What value do I need that project or that property to get to in order to make sense for my deal?”
So if you’re feeling overwhelmed with the amount of rehab, then maybe that’s not the project you start with. But if you’re like, “Okay. I see the finished product of what it needs to be, and now the house is in this state right now. What’s the difference in that?” well, that’s your scope of work, and then anything that you need to fix to make it sellable. So, yeah. Comps are king. A lot of people will buy houses, and they’re like, “I want to make it so cute. I want to make it like HGTV. I want to…” They end up overdoing it, and it’s like you don’t have to. Don’t get emotional. Don’t get attached. Don’t worry. There’s going to be houses where you can get super excited about as you grow your business, and you invest more capital, and do higher-end deals if that’s what you want to do. But today, this is still a business, make sure that you’re not investing too much in it. So that’s my answer would be just comps are king. Always rely on those for your initial direction.

Ashley:
Now, you’re using a lot of the same materials for each flip. How are you tracking this? How are you deciding as to what material, what toilet you’re going to use, or what paint color you’re going to use? So you talked about looking at comps, but once you’ve decided what your ARV is, your after repair value, what’s the next step for you to actually build that scope of work to build that budget? Do you have information that you’re pulling from? How are you knowing what estimates are going to be, all of that? What’s your best advice for a rookie on how to do that?

Serena:
Yeah, so I would say… So building out a scope of work, really, the way that we structure it is we’re going to go… We have everything like exterior, interior, and we just label out a lot of it, like materials and labor for some of the things, but also… Honestly, if you’re just starting out and you really just don’t even know where to start, you’re like, “The fascia looks like it’s bad, but I don’t know,” one of the things that-

Ashley:
Wait. Can you explain what fascia is for anyone that might not know?

Serena:
Fascia. Sorry.

Ashley:
I mean, that’s one thing right there that… It was a long time before I even knew what that was.

Serena:
That’s true. Part of the siding. If you see part of the siding underneath the roof, side of the house, it looks like it’s rotting a little bit, but you’re like, “I don’t know. Is it okay if I just paint it? Do I have to replace it? I don’t know.” Honestly, one of the things that we used to do when we weren’t as knowledgeable about construction would we’d hire a home inspector. Yeah, it’ll cost us a couple hundred bucks, but we would ask them, “Hey, I don’t need a report. Can you just walk it with me, and I’ll make all the notes?” just so maybe they’ll give you a half price or something because they don’t have to spend time making a report.
Go through with them, and then they’ll point out all of the defects of the house like, “This…” Tell them your intention with this house, “I need to fix it up to be like this. Can you help me identify things that I must fix for this house?” Then, that should cover then some of the more structural items where then you can look at the comps, and then decide for the finish level and the design items. Right? If all of your comps have quartz, or granite, or stone countertops, and that’s the level of finish you need to get to to get the value that you need for the deal, then you’re going to put in… that’s what you have to put in.
The other thing is walking with a bunch of contractors and having them give you a line item estimate, and that’s also going to just give you more and more information. Ask questions. Contractors love to talk about construction, so you’re walking… and they love to show you that they know what they’re talking about. So if you walk with them and go… Trust me, you don’t need to know everything. I didn’t know everything by no means. Even though my dad was a contractor, I didn’t know a lot about construction. I didn’t know what fascia meant either, but I’d walk with them. A lot of times, they’re like, “Well, this needs fixing,” and I was like, “Oh, it does?” in my head. They’re like, “What do you want me to do with this?” and I go, “Well, what would you do?” Then, they’d answer, and then they’d give me a few options because they love to talk about what they love… They love to hear themselves talk, so I’m like… and then I go, “Okay. What’s the most cost-effective of those?” and they’d be like, “This.” “Is it going to look okay?” “Yeah.” “That’s what we’re going to do then.” Right?
So contractors will be your friend, for sure, and also, hiring the home inspectors or going to meetups, creating relationships with other investors. Maybe you trade off, “Hey, I’ll go walk your properties once a week, do reports for you, take pictures for you if maybe you can just walk a couple projects for me and help me build a scope of work or something.” Right? Our investor community, we found, in Seattle was so supportive. I know that’s not everywhere in the US, but we know how the world it is out there especially to learn, and no one got to where they were without the help of someone, and so there are people out there that are willing to help you and want to see you succeed.
So getting that information and like, “How do I even build a scope of work?” that’s going to be your starting point. Going back to the technical side of it is we used to… We started with Excel or I guess Word doc, and then Excel, and then we moved up to Smartsheets. From the first scope of work that you create, have that be your template. Start a template from day one. Right? So we’re going back to that whole don’t have the information in your head and keep it there or repeat the wheel over and over. Again, if you make a scope of work, use that as the foundation for a template and just continue to build on to that, so that way, when you go to make another scope of work, you’re not starting from zero. You’re going to save a lot of time.
The way that we ended up figuring it out was that we wanted to start with a template, scope of work, on anything that we’ve ever done on a project. Anything we could ever do with a project, even like removing a car, removing an RV, whatever it was, we made a massive list of whatever and built on it. Don’t get me wrong. We didn’t start that from day one. We built on it as we’re doing more projects, so that way, we could just take that list, and then delete what we don’t need from any new project so we didn’t miss things. The reason why we started doing that, which was years later, by the way, was because I can’t tell you how many times I forgot to have the contractor put in a dryer vent. So a dryer vent is where the dryer exhausts to the outside, and we don’t really put in a washer and dryer into our flips. We have the buyers buy them, but we at least put the hookups, obviously. But a lot of times, the dryer vent, that actually goes in the wall, but you don’t think about it until the end of the project, really, and so-

Tony:
So what you guys have to do, like cut the drywall?

Serena:
You have to cut in sheetrock. Yeah, we’d have to cut in drywall and put it in, and I can’t tell you like when… three or four times, and it’s at the end of the project, or it came up in inspection, “There’s no dryer vent.” I’m like, “Oh my God,” and then we look like idiots to the buyers, right?

Tony:
Yeah, but mistakes sometimes are the best teachers, right? We had a similar issue where we rehabbed a home, and our crew didn’t put a P-trap into the drain in the shower, and it was causing the smell to come back up out of the sewage. We were like, “What the heck is going on?” We had to send all these plumbers, and one plumber finally found the issue that it was a P-trap. So now we make sure. Anytime we’re doing a flip, we go, “Did you put the P-trap in there?” You know?

Serena:
Yeah.

Tony:
It’s those experiences that teach you that.

Serena:
Yeah, 100%, and I bet the plumbers go, “Well, duh, I put in a P-trap.” My answer to that is I never assume. Never assume. Also, the biggest tip here, never assume that something is going to be done. Always over-communicate. Even if it ticks off your contractors, you let them know, “I never assume. I just want to communicate with you.” Yeah, that’s how we started that process with the scope of work is we just started missing small things, and it’s like, “I’d rather start with something big, and then delete what we don’t need.” That would make creating scope of work so much faster too for us.

Tony:
[inaudible 00:31:48].

Ashley:
I want to tie that into how you were talking about getting a friend or another contractor to walk with you and help you out build that scope of work. I think one really big thing is don’t rely on that person to build the scope of work. Go and do it yourself, and have them look at it, and see if there was anything you missed as a second set of eyes. Don’t ask a friend from a meetup or somebody you met to help you on it and be like, “Can you build the whole scope of work? I have nothing.” Have something prepared for them to present to them to look through so it doesn’t take up a ton of their time. They can just maybe point out something you missed like a dryer vent. We had a project where a contractor used the old wax seal on the old toilet, put in a brand new toilet, put in brand new tile floor, but used the old wax seal, and we had the same thing. The smell was coming up, and it was because the old wax seal in there.

Serena:
Yeah. The other thing for scope of work that’s really, really important that we learned the hard way is that be very specific in your scope of work. So what we would do is we’d have one column for the label, like just drywall. But then, we’d have an information, description column next to it to say, “Replace drywall A, B, C areas,” or like, “Repair everything to this level of finish.” Right? Be really specific because if you just put “Repair drywall,” legally, that contractor would be like, “I repaired the drywall over here,” and they’re like, “Well, what about the drywall over here?” or, “Well, that didn’t look like it needed to be repaired.” So be really specific in your descriptions in your scope of work, so that way, if… You don’t want to assume every contractor is going to be a bad apple, but there are ones that will take advantage of you, and so you need to make sure that you protect yourself in that verbiage. Yeah.

Tony:
Let me ask one follow-up question on the scope of work. I want to get into the contract and the payment schedules. I guess this ties into it, but are you having… and Ash, I’m curious of you as well, but are you having your contractors sign the scope of work before the job starts? We’ve had some issues in the past with some contractors where once I asked them to sign the scope of work, they just ghosted me, which is probably a good sign that we didn’t work with them. But I guess what’s your process for holding contractually the contract, the scope of work?

Serena:
Yeah. Absolutely. So my process is I create the scope of work off my template that I’ve already used, I delete what they don’t need, I make sure that the descriptions match what’s actually needed on the project, and then I export that into an Excel, and I have them bid right off of that Excel.

Ashley:
So they’re going and filling in the line items for each amount?

Serena:
Yep.

Ashley:
Okay.

Serena:
Filling in the line items, and to be honest, the contractors love that because it saves their time. They don’t have to type up a scope of work on their estimate because you’re like, “I want a detailed line item estimate.” That creates so much work for them, and it might not be in the verbiage that you want. So we would control the verbiage, and then at that point, they’d give us the Excel sheet back with their numbers on it.

Ashley:
It’s so easy to compare then, too. Yeah.

Serena:
Then, I could compare apples to apples so I’d be able to make decisions quicker, or I’d go back, and then we’d talk about it. We’d negotiate. That would also help me. On that scope of work template sheet, I also had my unit costs so I could go and plug in quantities to create a detailed budget. I’d obviously delete that before I send it over to them, but that would also help me understand how to change those numbers if I needed needed to. If costs went up, labor went up, or something, then that makes me be able to revise the template. So, anyway. So I create the scope of work, export it to an Excel-

Ashley:
Hold on, Serena. Before you go on, I want to really highlight that as to how you are tracking what the going rate is for different labor in your area and in your market. I actually remember. Six months ago, a year, or whatever, you had told me that you were working on updating everything because everything had changed so much in the market [inaudible 00:36:08].

Serena:
Yeah, every three months. Yeah.

Ashley:
You’re like, “I’m spending my day going through and actually updating pricing for what the painter costs per square foot and all these different things.” I think that is something very simple, that information, to just start gathering as you’re getting contractor estimates in for each project and just slowly keeping that information together. It’s just going to help you become better and better at building more accurate estimates.

Serena:
Yeah. Absolutely, and I just want to note. Some of you might be thinking, “Oh, how do I budget a unit cost?” Right? Because carpet has a different unit than square footage for paint or however they’re going to… the contractor is going to bid it out. A great book to read is Estimating Rehab Costs by J. Scott. He lines that all out and how contractors do their estimates. Yeah. So that would really help is like I control the format of that, so that way, I can compare apples to apples and update my templates. So that way, when I’m going through and confirming during underwriting before we buy the property, I have the most accurate numbers that I can predict that I’m going to get when I finally get the estimate back from the contractors.
So then, at that point, contract related, I have the scope of work in the Excel format with their numbers, we’ve agreed on it, and I’ll save it as a PDF, and I’ll attach that to a contract that we have that lines out, “Here’s the property. Here’s the owner. Here’s the contractor that we’re going to use. Here’s the estimated… or Here’s the deadline date that they’re going to be finished with. Here’s the deposit amount they’re going to get, how they’re going to get draws.” Draws are partial payments towards the total payment, and what happens if we want to split ways, and then we’ll also do a penalty per diem, like $125 a day if they go over their completion date.
So all of that verbiage that we need. It’s just a couple pages long contract, and so I’d attach that PDF to that contract, and then I’d also attach our finished packet that I would create with all of the materials that we’re going to use and for them to order. Then, also, if we have floor plans as built, which is the existing floor plan, and then the proposed floor plan, and I’ll attach that all together in the same PDF, and I’ll have them sign the contract and initial each page of all of those pages, so that way, it’s binding.
The best part is that the scope of work is in our verbiage, so we control anything. If there’s any dispute on… There’s no miscommunication at that point. To be honest, what Tony said is he’s had contractors that haven’t wanted to sign that. Well, that’s a red flag because contractors should want to get into agreement where both parties are on the same page and they’re happy with what they’re signing and moving forward in a partnership.

Tony:
Yeah. Serena, so much gold there. Everyone that’s listening, you’re probably going to have to go back and replay this episode a few times because there’s so many nuggets in what Serena is saying here, but yeah, that last point you made about it being a red flag, 100%. Absolutely true. I guess one last question. So you’ve got that all laid out, but in terms of actually paying out the contractor, are you walking the property with them to say, “Hey, these milestones were met. I’m going to release this draw,” or how were you actually validating the work is done before paying them?

Serena:
Yeah. Absolutely. So different contractors require different deposits and payment schedules. So if you’re working with a general contractor, we typically wouldn’t give them more than 20% deposit, but that’s not a hard rule. If they have to purchase a lot of materials upfront and you can look at your scope of work to determine that, say, maybe they’re redoing all the siding that’s going to be heavy upfront cost to them, then we might increase that a bit, but we would do draws on completion. So we, our team, what our process was is we’d walk the property at least once a week, and we’d take full pictures, at least 100, 150 pictures, and then we’d upload them into Dropbox. You can also do Google Drive, and we’d review those pictures.
So whether it was me walking through and deciding the completion and feeling uncomfortable for them to request a draw payment, then I would allow that, or I would do it from all of the pictures, so from afar, and then confirm, “Okay. This completion seems about right,” and we would have them do equal draws for the remaining. Then, if we had permits on the property, and so we needed to have final inspections, typically, all the construction is going to be done, and then you have final inspections. The inspections might come back with corrections that are needed to be made. Even if the scope of work is technically done, we would withhold about 10% until everything was finalled, all the inspections were finalled. So that way, we still had leverage over them, something to use, because if you pay them too much too fast, then you have no leverage. They’ll just leave, right?
The other thing is that anytime that you have a contractor bidding, if you think that it’s too low, then really consider that as well because we’ve had contractors that they were good contractors, but they didn’t know how to estimate, and so sometimes we’d get things back and be like, “This just doesn’t seem right. This actually seems too low.” Instead of going, “Woo, we got a deal,” I just want to let you guys know that that can cause problems in the long run because they might run out of money halfway through your project, and if they run out of money, they’re going to have to go find other jobs and work on other jobs, and then let your job sit, and they may not even be able to ever come back. So just keep that in mind down the road.

Ashley:
So you’ve mentioned a lot of things that you’re doing to track this rehab for each project. Can you go through like, “Here’s the different templates I have,” and the different softwares you’re using? What are the things that rookies should be creating? You mentioned scope of work. What are some other types of templates they should be creating and use to work from for every single rehab from start to finish?

Serena:
Yeah. So I’ll go through our platforms first. So we always use Dropbox for our file storage. So what we would do is… and everything is a template. The second that we’re purchasing a property, we would go into Dropbox, create a folder for that project, and then have these same uniform folders for everything. We’d have our Analysis folder, which all of our acquisitions, our P&L sheet, anything having to do with the deal, the comps. Right? Comps, P&L, anything that has to do with the deal. Then we’d have the purchase docs. We’d have our Rehab folder. So all of our contracts are going to go in there, our bids that we’re going to collect, invoices, whatever.
Then, we have our Rehab Pics, and in that folder, we would label each time that we would drive the property and upload pictures. We’d label it the date, who took the pictures, and the status of construction that it was in. So it’d be like, “April 1st, this date, Serena took the pictures, and electrical rough-in completed.” So, at that point, we could go back and go, “All right. I’m trying to find… I need to see in the walls. We’re at the end of the project. I need to go find where an outlet is because it’s hidden in the drywall.” So now I know instead of sifting through hundreds of folders of dates and stuff, I know, “Oh, electrical rough-in. Right there.” That wasn’t perfect from day one. I did that a lot until I realized, “Maybe I should label these folders in the order of construction.”

Tony:
Some organization, right? Let me ask. Just out of curiosity, is there a reason you went with Dropbox versus Google Drive?

Serena:
Honestly, Google Drive wasn’t a big thing eight years ago, so it was like-

Tony:
Yeah, that’s true.

Serena:
Because we started that process way back in the day, and so Google Drive works just as well. So we’d have Dropbox. That’s where… all of our file storage. Anytime I got a bid, whether we used it or not, I put it in the Bids folder. Every invoice, we put it in the Invoice folder. Then, we’d have also our plans. So that’s where we’d keep our floor plans, finished packet, our safe scope of work. So that’s one platform we’d use for our file storage, and all of our team members had access to it.
The other one is we use Smartsheets. So Smartsheets can be a bit pricey, but if you plan on doing multiple projects, it’s something to invest in. That’s where we’d build our scope of work and budget template. So, we had that. For those of you that don’t know Smartsheets, it’s pretty much just a really high-tech Excel. So we’d have our scope of work and budget template within that. Then, we’d also have this sheet called Our Accounting Hard Costs, and that was pretty much it, just an ongoing… any expenses for that one property. The second you purchase something, the second that anything is paid, it just goes in there, and so-

Ashley:
Was this something that was then sent to a bookkeeper who actually formally entered it into QuickBooks or something?

Serena:
Yeah.

Ashley:
Okay.

Serena:
Exactly. So our bookkeeper had access to that sheet, and she would audit the accounts to make sure there wasn’t any fraudulent activity, and making sure it was all balanced, and then she would then input that into QuickBooks.

Tony:
Gotcha.

Serena:
Yeah.

Tony:
So she was using that spreadsheet to reconcile against the bank statements or whatever to make sure there weren’t any transactions missing or anything like that?

Serena:
100%, and then at that point, our whole team at any point could be like, “Hey, was this contractor paid?” I don’t need to go and call Nate/Tarl for that or my assistant for that. I can just look it up and see if it’s paid. Right? So a lot of these systems that we’ve created, these centralized information places that, that’s what I like to call it, limits the amount of time I have to communicate with my team members because the more time we have to pick up the phone, and call, and we’re waiting for information ever… It just takes so much time.

Ashley:
I never want to talk to Nate and Tarl either. I totally get it.

Serena:
Honestly, at the end, people are like, “Do you talk to Tarl all day every day?” I’m like, “I haven’t talked to him in a week.” We just wouldn’t talk and we… So, yeah. So we have our scope of work and budget sheet, we have the accounting hard cost sheet, and then I also have a finish package template. So the finishes are going to be the types of doors, the door hardware, the countertop cabinet, tile design, whatever, and the same process as the scope of work. I just started as, “I need to make a template. Okay. I’m going to start with this project, and I’m going to put, okay, what it is. Exterior door, what the description is, where to get it, and a picture of it, and then I’m just going to… Anytime we have a project, I’m just going to add this in to the template.”
So, eventually, I just built this massive template of all of these materials, and I could just go shopping. A lot of times, we would redo the same finishes on each house. So when I’m in the planning phase, and I figured out what a scope of work is going to be, I’ve looked at the comps, I figured out the level of finish that we need to… what type of materials we have to put into it, I’d pull up that sheet, and I would just select what I wanted, “going shopping,” and then I would export it into a PDF. That’s something that my team could reference, the contractors can reference, I can reference, and that would be something that we’d also attach to that scope of work within the contract.

Ashley:
Serena, I’ve heard you talk about this sheet a ton of times, so Daryl and I actually built this out, the materials list. One thing we did is that we would just link the actual product in there. So we did flooring, here’s the types of flooring, we’d link it in there, then we actually hired a virtual assistant to actually take the data from the link and actually fill out the other six columns or how many there were, and that was so much faster.

Serena:
Look at you. You’re better than me. I didn’t have that. I still do it myself.

Ashley:
At first, I was like, “I cannot sit here and do this. This is getting so much data.” I’m like, “This is awful. My fingers are…” So then, we just did that, and it was so cost-effective, and somebody could do it way faster than me that has a better attention span, I guess. Yeah. You just go to Upwork and search, “This is what I need done.” You’d show a screenshot of your template, and do a Loom video of exactly how to pull the information, what information you want from each link, and have it all filled out. Yeah.

Serena:
I also like keeping… Now that I’m thinking about it, I actually should have had the link. I’m going to add the links to the product within that PDF because I used to put the pricing down in for each line item, and then I’d give it to the contractor. But if I didn’t have that pricing updated, and they estimated right off that, and they’re responsible for buying the material, but then they go to Home Depot, and now it’s gone up $10 per door hardware, they come back to me, and they’re like, “I need more money.” Now, I’m like, “Well, shoot. That wasn’t what was in the projection.” So I said, “I’m going to delete all the pricing,” and they’re going to have to just be responsible for looking it up. If I put the link in it, they could just click it and do their own quicker research, but yeah, that was a thing. It’s like don’t put the pricing.

Ashley:
That’s one piece, too, yeah, that we struggled with this. If it changes, it goes on sale, or whatever, even like it’s discontinued is having to go. So maybe that’s something, even like hiring a VA every quarter to go in or whatever, and just all you have to do is make sure these links are updated.

Serena:
Yeah, that was one thing we would do periodically every couple months is I’d have my assistant go through and make sure everything was updated on the scope of work, prices. So I wouldn’t put the prices on the finish packet because that’s what the contractor is referencing when they’re estimating, but at least for… If there’s a door unit cost on our scope of work budget and they’ve gone from $260 to $350, I want to know that. So I’d have her do that.

Tony:
Serena, one question I want to ask was you’ve got these systems dialed in to really high level of detail, and I think one belief, maybe a limiting belief that a lot of people have when it comes to flipping homes is that you got to be there to walk the properties, you got to be there to shake the contractor’s hands, and make sure that you’re checking on their work. Is that true, or is it possible to do this remotely as well?

Serena:
It’s totally possible to do it remotely as long as you have boots on the ground that are driving the properties at least once a week. So even if nothing changes in the rehab, say, it’s sitting there, we’re waiting for permits to get processed, we will still drive it every week because you never know if squatters are going to show up. All of a sudden, a pipe is going to burst. Whatever. You want to make sure that you also have pictures if anything happens that you need to go to court for. Not to scare you guys, but if someone breaks in, and you need to file an insurance claim or something like that, you now have a record trail.
So the blessing, the biggest blessing for being efficient in our business was the fact that both Tarl and I lived over an hour away from all of the projects that we did. So there was no way we’re going to drive two, maybe three hours in traffic to and from those projects every day or every other day. So we created these systems to be able to manage them afar. We’ll go down once a week, and we’ll take pictures once a week. Then, we trained our contractors that if they had a question, they text us a few pictures, they send us a video, or we FaceTime them, and we’ll get them the information that they need. Then, we also made sure that we had boots on the ground in that area, networking maybe newer investors that wanted to learn where if we really needed something, then they would help us out because we’re also contributing and helping them grow their business.
The other thing is we’d also have a handyman on-call where… Say a basement all of a sudden starts flooding and our contractor can’t get there that’s on the job or it’s not part of his scope, we need it clean up something after hours, and they’re just going to be too expensive to do it, they’ll go, and put bags, and check it out, or something like that. So in the beginning when we didn’t have systems set up, I was working six and a half days a week. Long, long fricking days, but mainly on the computer. I’d only drive the properties once a week. As you start setting up these systems, these templates, and getting really good at the planning in the beginning to get the contractors, all of the information that they need upfront, then you’re really just monitoring the construction as it goes along and problem-solving little things that come up that were unforeseen in the beginning. So, within the last few years, I’ve gone to South Africa for two months at a time while I have seven projects going on, for example, or I travel a ton at least once a month, and so-

Ashley:
You’re not even home right now as you’re doing this podcast.

Serena:
I’m not home right now. Yeah. Exactly, and having that freedom. Honestly, that’s why we got into real estate, right? So start today and building those systems, building those templates, and it’s… Like I said, they’re not scary. Just start putting information down on paper, and then figuring out how you want to organize that. If you’re not the best at that, then hire a VA that is good at organization, and then eventually lead up to hiring a team member that is. Then, I did realize that we didn’t cover another platform that we use that’s really important. Should I touch on that?
So we have Dropbox for our file storage, and we have Smartsheet for all of our data, like scope of work, costs, finishes, whatever. But then, we use a project management tool, like communication. We use Asana. So you can also use… I know Ashley use Monday.com, right? But very similar platforms, and we would create, again, a template, surprise, for all of our projects. So when we’d acquire a property even… Actually, there was a template for acquisitions too, making sure like, “You need A, B, C, D. Purchase things,” just to keep you organized. It’s exactly what you need, right?

Ashley:
Like you have insurance in place. You’ve got the electric meter, you know who the electric company is. Yeah. Account number.

Serena:
100%.

Ashley:
Yeah.

Serena:
So we just created a template for project management. So did we transfer the utilities in our name? Have we requested a bid from the general contractor? Have we done the floor plans? Have we done this or whatever? So that way, nothing goes missed, and then we’d also use Asana to communicate with each other. So instead of emails, texts, whatever, we would try our best to actually communicate with each other in that task that’s related to that item, and that worked really well for us. That’s also where we would manage our schedule of construction. Again, build it to however works for you and your team, and if you… The way that we laid it out is in the order of construction, chronological, how things needed, and that’s how it stayed organized for us. Yeah. I think that’s pretty much all of our platforms. I mean, QuickBooks for the accounting.

Ashley:
What about for the rental properties that you guys keep? What software are you using for that?

Serena:
I’ll try to elaborate on that. I honestly don’t do any of the property management at all, but I do think-

Ashley:
Is it AppFolio?

Serena:
AppFolio? I’m not sure. Actually, for acquisitions, Nate, he would use Podio as a CRM, but I was never in there. Yeah. I’m not sure actually what we use for our property management because I don’t want anything to do with that, so.

Ashley:
I guess before we wrap up, there’s one last question we want to ask you, and that’s, if you have to start all over, what would be some of the first things that you would do today starting completely over?

Serena:
I know. This is a tough one. I think [inaudible 00:58:21].

Ashley:
Start a new band?

Serena:
Yes. Start a new band. Honestly, if you’re out there really deciding like, “Okay. What asset class should I go into? Should I flip houses? Should I do short-term rentals? Should I do commercial, or what should I do first?” at first, consider the lifestyle that you eventually want. In the beginning, you’re going to work your butt off wherever you go, but imagine down the road the lifestyle that you want. What’s the liquidity that you need? Right? Do you need cash now consistently, or are you able to keep your equity in like you just want a longer-term hold?
I get really clear on that because wherever you go, whatever you decide to do, you should put your all into it to become the best at that before you pivot to something else, and then you could also help to become clear of what you need for other people in your community, so really defining… Just like you would define a buy box for a project, a property that you want to flip, become branded of like, “This is what I’m after.” So that way, people know how to help you so that when… and then also, the type of mentor that you’re looking for.
Like I said, no one got to where they got in this business without a mentor, and people do want to help you. It’s just that… Come to them. First, go to meetups, and the simplest thing that comes to my mind is if you want to get into house-flipping, but you’re like, “I just need to see to learn, and I’ll feel more comfortable,” just say, “Hey, how many properties you got going? Oh, cool. You’ve got eight projects going on. That’s amazing. Would it be helpful for you if I drove your properties once a week, took pictures in an organized way, I’ll take at least 150 pictures for you every week, upload them in the way that you want to be uploaded, so that way, you have them, you can reference them, and I maybe can take a drive off your plate?” Then, they’re probably like, “Yeah. Why not? Okay.” Right? But then go, “Then, would it be okay… If you’re going to meet a contractor there, can I just come along? I’ll be a fly on the wall. Can I just shadow you, see what you guys talk about, or whatever?”
Real estate isn’t hard, right? It’s not rocket science. The hardest thing is having the courage, the grit, the compassion to do it. Right? So by learning through familiarity, you’re going to feel so much more comfortable in it and realizing this isn’t actually rocket science. You see that needs to be fixed, you write down that needs to be fixed, you have someone give you an estimate of what that’s going to be fixed, and then you decide yes or no. Right?
So that’s where I started. Also, create systems from day one, so that way, when you do end up amping up and you need to add team members, the information is there, and it’s not all in your head, and then if… I would put healthy contingency margins. If you’re not really confident on your rehab costs and your analysis, just make sure you put some contingency in there so you’re not eating into your margin, and always follow the comps. Don’t get emotional or attached.

Ashley:
So where can people find a consultant?

Serena:
Huh.

Ashley:
But really, Serena, thank you so much for coming on and taking the time today to teach us all about this, your process.

Tony:
Yeah. It’s fantastic.

Ashley:
I know. I was writing notes. I could see Tony taking down notes too because anytime we talk to you about this stuff, I always learn so much information. So I’m sure every single listener has at least five takeaways that they can put into action today. So where can everyone reach out to you and find out some more information about you?

Serena:
Yeah. So, on Instagram, my handle is @serena.claire. So S-E-R-E-N-A-.-C-L-A-I-R-E. Also, you can email me, [email protected]. I love helping new flippers and people in real estate find their way. Yeah, that’s where you can find me.

Ashley:
Thank you so much for joining us. I’m Ashley at Welcome Rentals, and he’s Tony, @tonyjrobinson on Instagram, and we will be back on Wednesday with another guest. We’ll see you guys then.

Israel experienced the biggest act of terror that has ever occurred in the country’s history last Saturday, when more than 1,000 civilians massacred, thousands wounded, and over 130 kidnapped.

“If you look at this in proportion to the size of Israel’s population, this is the equivalent of ten 9/11’s. That’s how big and how devastating this attack has been,” U.S. Secretary of State Anthony Blinken said in a press conference in Israel this week.

Israel is a small country with 9.5 million people. The magnitude of the losses is huge, and everyone knows someone who was killed, kidnapped, or injured. What would you do in a situation like this? Because this is exactly what Israel should be, and is, doing right now.

The Israeli government, army, and civilians were not ready, and I’m pretty sure that down the road there will be an investigation about how exactly that happened, and how to prevent a future attack. But before anything else, you must understand the magnitude of this attack and the vast implications, some of which are too soon to determine.

Israel has one huge strength – its people. No matter what happens, they will recover and grow even stronger than before.

Right now, the Israeli hi-tech ecosystem, with my startups included, is focusing on helping the survivors and the injured, the soldiers, and civilians that are still under attack, while more than three thousand rockets were and, at the time of writing, are still fired toward the most densely populated areas in Israel.

This week will be hard and challenging in Israel, but later – it will be better. The hi-tech sector will end up stronger than before. Let me explain why. This is also the explanation for why Israel is considered a world leader in building startups:

The Four Cornerstones That Will Help Israeli’s Tech Ecosystem Overcome the War

In general, there are four cornerstones for any startup ecosystem, and the same goes for Israel as a country. Though in Israel there is also a fifth element.

1. Entrepreneurship spirit – this widespread Israeli characteristic relies on a minimal “fear of failure” culture.

At the end of the day, people will embark on the entrepreneurial journey when their passion is way higher than the combination of fear of failure + alternative cost. If you lower the fear of failure, you will end up with more startups.

2. Investors, in particular international ones, which we are blessed with in Israel.

The current government, with its plans to change the judicial system, has hurt the hi-tech ecosystem. A terror attack won’t, at least not for the long term. We might see a slowdown in the investment flow in the short term, but not in the long run.

3. Engineers – the good news is that Israel has a great number of engineers and very good ones that can, and will, continue to drive the hi-tech ecosystem forward.

4. Experience – a second-time entrepreneur has a much higher chance of being successful, regardless of what happened the first time. There are more and more second/third/fourth/multiple times entrepreneurs in the Israeli ecosystem today than ever before.

These four cornerstones are not unique to Israel, they are the same in San Francisco, Boston, London, or Berlin. But Israel has something rare, the fifth element, mandatory military service.

The Fifth Element – Mandatory Military Service

Now, everyone understands why this is needed and I would like to quote Israel’s former prime minister, Golda Meir, who said 50 years ago: “If they would put down their weapons – there will be no more war. If Israel puts down its weapon – there will be no more Israel.”

This mandatory military service has generated strong, resilient, and better-skilled people where it matters. People with perseverance, in leadership positions, ready to work in teams, and with extreme loyalty.

While acting under pressure like in the recent events, the fifth element becomes much stronger, and the result is that we can expect many, many good years for the Israeli ecosystem. Israel will come out of this crisis stronger.

One parting thought from me; tough times create stronger people, strong people create easy times, easy times create soft people, soft people create tough times. Now is a tough time for Israel.

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer. Joined today by Kathy Feki, Henry Washington, and James Daner. Good to have all three of you here. Appreciate you joining us. Coming back from some very fun sounding trips that you were all on. Henry, I thought we lost you to Hawaii permanently.

Henry:
Yeah, I did. I did I think of taking up permanent residence in Hawaii. But, I would just get Allen fever, man. That flight’s a long flight to get out of there. But, we love being there.

Dave:
I feel like there’s this thing with real estate investors, specifically in the BiggerPockets community that they all just wound up in Maui at some point. They all just find themselves there.

Henry:
I obviously went to hang out with Brandon. But then, realized Josh Dorkin lived down the street, walking distance. And then, every night, just random real estate investors show up at Brandon’s house, and then just food shows up and people sit around until one in the morning. That’s just a thing there. I had no clue.

Dave:
Really?

Henry:
Yeah.

Dave:
James, is that on your list of places you’re going to move? Maui?

James:
Absolutely not.

Henry:
Why?

James:
I would go so stir-crazy if I was stuck on an island.

Henry:
That makes sense.

James:
I got to move. I need to be able to move around. But I do enjoy visiting.

Dave:
Kathy, did you do the same thing when you were out there? Did you stay up to one in the morning talking to Brandon about real estate?

Kathy:
Yes. No, probably three in the morning. But yeah, we had a great time.

Dave:
I guess, Kathy’s more interesting than you Henry.

Henry:
It’s not a surprise.

Dave:
Well, we do have a great show for everyone today. We are doing a headline show. We’re going to talk about some of the most important and interesting things happening in real estate today. So, what we’re going to cover today is an update on the major lawsuits that are potentially going to be impacting how agents are compensated and could have all these cascading ripple effects throughout the industry. We have a big update there. We’ll talk about construction trends, which I think, is particularly interesting given how important they are for inventory these days. We’ll also talk about a new type of home called a passive home. And lastly, we will visit our friend, Dave Ramsey, and hear about some advice that he has been giving young landlords, and I want to see if the three of you agree with what advice Dave Ramsey is giving. So, that’s what we’re getting into today. It’s going to be a great conversation. We will take a quick break, and then we’ll jump into it.
The first headline today is that RE/MAX, one of the biggest brokerages in the country has settled in the two lawsuits that have been ongoing and allege that some of the NAR rules and some of the rules instituted by brokers around how, in some ways, or this is what they allege, sellers are forced to pay the buyer’s commission, and how that is not legal or violates antitrust rules. RE/MAX has decided to settle this lawsuit for 55 million. And if anyone is not familiar with these lawsuits, it does have this huge potential to change the industry. It’s too much for us to get into fully here, but we did do an episode with James Rodriguez on this a couple of weeks ago. It was called New Agent Lawsuits Could Have Profound Effects on Buying and Selling Homes. So you can go check that out On the Market feed if you want to learn more.
But basically, it sounded like, these lawsuits are trying to get agents and brokerages to change the way they do business and not force sellers to pay the broker commission. So I’m a little confused by the settlement here, right? Because, RE/MAX, it says, they will “change some of their business practices,” which hopefully they will. But it doesn’t really sound like it’s changing all that much. So, Kathy, let’s start with you. What do you make of this settlement?

Kathy:
Oh, wow. Well, a settlement is a way of saying, “I don’t really want to go to court on this. And I don’t want a jury to decide, so let’s just settle.” It doesn’t necessarily mean there’s any court order for them to change things. But, the question is, will this affect real estate? I guess, for me, the biggest issue is, it is still the buyer at the end of the day, who’s paying for it, right? What could hurt the buyer is if they can’t finance those fees. So, in other words, if now the seller no longer pays for the buyer’s fee in the price of the home, and the buyer has to come out of pocket, could that still go on the closing cost? Could it still be covered in the loan? Because if they have to come out pocket, that hurts to me, in my opinion, the buyer the most.
Also, changes are happening, right? And technology is changing a lot of things. And I think a lot of people thought that realtors would see their fees go down anyway now that people could go find their own property, and go to the open house, and all they really need is some guidance through the contract process. And, anyway, change is coming. It just is actually surprising to me how long it’s taking.

Dave:
Yeah. This seemed like it was going to be one of the more successful, or at least interesting lawsuits or challenges to the status quo. And now, I’m curious if maybe it was overblown and it was just more, yeah, posturing or a cash grab. But, James, you are the most active agent among us, so what do you make of all this?

James:
I mean, as far as I have felt that these lawsuits and threaten of lawsuits, they have made zero impact. Everybody’s still advertising, at least in the Pacific Northwest, the average commission is 5 to 6%, 3% to the buyer, 3% to the seller, and it’s paid by the seller. What Kathy brought up is a good point. I do think it won’t really matter and the financing would change. But yeah, it could have impact on especially that first time home buyer that’s putting down 3%. Now, all of a sudden, if they have to pay another 3%, that’s 100% more they got to come with on a down payment. But I think, this whole thing, all it does is add another level of complexity to a complex deal in general.
In real estate, there’s all these negotiations going on, and now there’s just an extra thing of negotiations where buyers are going to go out, and they’re going to shop, and price out their brokers. And, what it’s going to come down to is the brokers that are going to charge 3%, or what has historically been the average, they’re going to provide a very good service. And the ones that aren’t providing the good service are probably going to need to charge less. And, I mean, I have no problem with that. I just feel like now it’s this open negotiation before you even go into a negotiation. So it’s just another thing that you have to talk to your client about.

Dave:
Well, yeah, I think it could end up that way. But just want to be clear that this settlement doesn’t make that necessary. We don’t know yet if that’s going to necessarily happen. But, I at least thought James, that that was the intention of these lawsuits, is that, that’s what the plaintiffs wanted is for you to be able to negotiate more easily.

Henry:
They wanted money.

Dave:
The plaintiffs, yeah. They just wanted to see if they could get someone to settle.

Kathy:
And they got it.

Dave:
Yeah. Is that all you make of this, Henry? You think it’s going to be over?

Henry:
I mean, based on this settlement, I don’t think anything’s going to change. I mean, they don’t have to change anything. Why would they want to? They’re not incentivized to change. I don’t think anything seriously around the laws is going to. Now should it change? I think there should be some change. I think it’s silly that one side pays for both agents commissions. Yes, and I think that could cause a problem for these buyers who have to go out and find their own agents, right? But, down payments are expensive, closing costs are expensive, and because they’re so costly, there have been programs and things that provide assistance for those as well as you’re able to finance some of those things into the loan. I just think this will be another one of those things where some assistance will be provided to those who need it, or will be able to finance it into the loan.
Now, will it hurt some people? I think, yeah. I mean, any law change, there’s going to be people that it benefits and people that it hurts. I think the issue is people think agents are just opening doors and pushing papers, until you get into a situation or a negotiation where that agent actual skillset is truly needed. And then, they are a lifesaver. Right? And then, you’re so glad you got a good agent and the right representation for that deal. Now, what percentage of deals get done or just pushing papers and opening doors versus the percentage of deals where you really need your agent to act like your advocate and rockstar for you? I don’t have those numbers. But I know I’ve been in deals where I sure I was glad that I had the right representation and would’ve gladly paid 3%, 4%, 5%.

Dave:
No, totally.

Henry:
In that situation. And so, do I think this needs to be looked at and potentially some change needs to happen? I think so. Does it need to happen the way that they’re indicating it needs to happen? I’m not sure. I don’t have the answers for that. But, I do think it’s silly that one side pays for both agents, and I can understand why that’s frustrating.

Dave:
Yeah, I tend to agree with you, Henry. I think, it doesn’t seem like an optimized system for anyone. And I totally agree that agents deserve to make a fair commission off of these things. They’re extremely valuable. It does just seem like overly complicated and this strange weird thing, and some re-imagining probably could happen to benefit everyone involved. I just don’t know what that is. But I will say that I doubt anything’s going to change. NAR is a professional lawsuit destroyer, that’s all they do. They just have so much money.

Kathy:
That’s their expertise.

Dave:
Yeah, it’s literally their whole job is just squashing lawsuits. So I think that they are probably going to succeed at squashing this one too.

Henry:
And, I advocated for agents. And so now, I’m going to play the other side. I think part of the problem is there’s too many agents, there’s way more agents than there are homes available On the Market for sale. It’s too easy to be a bad agent and make a little bit of money here and there. Right? I think, no matter what rules change, the agents who are good, and are doing the right things, and taking care of their clients in the right ways, and great at showing their value will continue to make money. And those that suck, and are just in there to pick up a commission here or there, and don’t really work that hard, and want to pick up all the easy dollars off the ground.

Dave:
Like James.

Henry:
They’re going to struggle.

Kathy:
Yeah, it’s not like one side is paying, it’s the buyer who’s paying. The buyer’s paying for the cost of the sale, right? At the end of the day, it’s in the price of the property. So, it’s not like the seller is coming out of pocket. It’s the buyer at the end of the day who’s paying all the fees and commissions. So, I don’t really care how that’s done. But to me, if it’s lumped into the price of the property, then that’s easier, because it can be financed. But, back to your guys’ point, a good realtor is worth every bit of it. A bad one is a bad one no matter what and is going to screw up your deal.
I just saw that happen recently, where somebody hired their buyer’s agent who’s not from the area, it was just a friend. Please don’t do that. This isn’t a friend industry. Hire someone local who has done a ton of business in your neighborhood, because they’re going to know… In our case, we’re on septic systems. The person that was representing this guy who lost out on the deal didn’t know anything about septic systems. So if you used a local agent, they would know everything about the soil, about the area, the problems that have existed over the past 10 or 20 years that they’ve been helping people in the market. So, to buyers out there, get someone local and experienced who’s done a ton of deals directly in the area where you’re buying.

Dave:
Well, to James’s point, I feel like that’s the fear, is that, if buyers are shopping around for the cheapest available agent, then many of them not knowing the difference between a 1% or a 3% agent will choose the cheaper option, and ultimately, wind up with someone who either doesn’t have their best interest or is not capable of providing the level of service that a home buyer, but particularly, an investor who has their own set of needs is going to need in a transaction.

James:
We do a lot of transactions in the Pacific Northwest. Typically, we’re doing about 250 to 300 transactions a year. When we have to work with discount brokers, and there’s nothing wrong with a discount broker, but I will say, we have more contract issues with all those files, because they’re not properly explaining the contracts to people. People are going for a discount, they’re looking for their kickback, and they think it’s just simple, and then they come back, and they’re upset about something later. It’s like, “Well, read the contract.” That’s the job of the broker is to properly explain the contract and what the client is getting into. And because there’s discounts out there, they’re not getting explained, and then people are upset at the end. So, I will say, it’s going to get transactions a little bit more messier if we start just cutting costs everywhere. But, I mean, hopefully people realize that a costly mistake will cost them way more than 1% on a purchase.

Dave:
Yeah, it’s like the saying, you think a $200 an hour plumber’s expensive, try $20 an hour plumber. You’re better off just paying upfront. But yeah, I digress. All right. Well, we all agree that the importance of agents, if you do want to meet a trusted investor, friendly agent, BiggerPockets can match you with one completely for free. Just go to biggerpockets.com/agents. You put in a couple of stats, information about yourself, and you can get matched with someone who can help you and represent your best interests. With that, let’s move on to our second headline, which is that U.S. housing starts dropped to the lowest level since June of 2020. Basically, from July to August, construction of new homes fell about 11%, to the point where at an annualized rate it would be about just under 1.3 million. And, that is probably not what people want to hear, given that there is such low inventory right now. James, you’re pretty involved in the construction and you do a little bit of that yourself. What do you make of this, I found it, surprising decline in home starts?

James:
I’m actually not surprised about the home starts, because right now, [inaudible 00:15:17] call also did references, permits for single family homes rose by 2%. And so, it was back on the rise again. But what happened is when the interest rates really jumped, builders locked up immediately. And rates started increasing, what, about 13, 14 months ago? Builders froze for a minute, at least in the Pacific Northwest, where our transactions on dirt probably went down by 95%. Builders were walking away from sites. They were very nervous that the market was going to crash. And what it did is it created this big lull in the permits. And so, we’re actually seeing more permits starting to roll out of Seattle right now, because there was just this backlog of permitting, in addition to builders, because cost of money’s gone up, and that cost of construction is still elevated and now pricing is more flat. They’re having to buy this land cheaper and it’s taking a minute for the seller’s mindsets to reset on the new basis of what the land can be sold for.
And so, we had this six month stalemate in the market between sellers and builders too. And now, what we’re seeing is builders are now transacting a lot more, because the values have just compressed and they can work inside their margins. So, I do think permits are going to increase over the next 6 to 12 months. But, there was this weird lull and anytime builders stop buying, a lot of times, the permits aren’t issued for 6 to 12 months. And so, there’s this delay going on.

Kathy:
And, in addition to that, when you really dive into the article, the construction pace of single family homes fell by only 4.3%, but it was a apartment building construction that fell by 26%. And that’s obvious with apartments with higher rates, it is so hard for these builders to be able to sell for what they thought they were going to be able to sell for, and they’re just giving up, they’re like, “Forget about it.” So there were all these headlines about all this new supply that was going to be coming in with apartments, and a lot of that is slowing down or not going to happen for a while, at least until rates come down. So, that’s part of the issue. Single family falling a little bit because rates are a problem. But single family home builders can buy down the rate. And so, they’re still able to keep it going. But with apartments, not the case. If they’re building to sell, they’re not going to be able to sell for what it’s costing them to build. So they’re just pausing.

James:
Yeah. And on that new construction apartments, those sites, they take a lot longer to permit typically too.

Kathy:
Mm-hmm.

James:
And so, what happened is that these builders, they perform at cheaper money, cheaper bill costs, and now they finally got their permits two to three years later and their costs have exploded. And, we bought in two sites, one recently, when there was a 50 unit permitted apartment building, it took them four years to get them to that completion. He marketed it to try to sell it, no one would buy it, because costs are well out of whack. And we just bought it for… I think the seller lost about a million dollars after a four-year project. And we are scrapping his whole permit and we’re building 22 town homes there instead. And so, I think, the multifamily, the math won’t work at all. Those permits are going to continue to decline and not be built out right now.

Henry:
Yeah, I’m seeing similar here in our local market. I’d say, about two years ago, all you saw was new construction apartment buildings going up everywhere. And now, you’re starting to see that slow down quite a bit. And the ones that are up, man, they’ll change hands two or three times before the project is even complete. People are getting into the project, and then realizing it’s not going to work out, and then they’ll get out of the project and somebody else will get into it. And, even on my own projects, I’ve got a multifamily deal that I was building. We were going to build eight units ground up. And, from when I bought the land to now, when I’m at the point where we’re going to construct, the cost to build has gone up so tremendously, and the cost of money has gone up tremendously. I can’t make the numbers work. I can’t make the numbers work if I want to keep it, if I want to sell it.
And so, that’s why we’re actually just selling the land to a developer who can probably build it deeper than I can build it. And then, they can monetize it differently than I can. A, I’m not built for that. But B, when I bought it, the numbers made great sense. Interest rates were half of what they were now. The cost to build was down, it was less than it is now. And, I don’t see how the numbers are making sense. So, I can understand why multifamily is trending down. But, single family construction around here, crazy. There’s new developments going in all over the place. And A, it’s needed. And B, so I was surprised when I saw this article, and then once I dug into it, I can see how multifamily is doing a little worse.

Dave:
Yeah, absolutely. There’s just a huge glut of oversupply in multifamily. No one wants to add on top of that and get into be the last in an already oversupplied market right now. But, single family as everyone knows, undersupplied. So, I think builders are very happy. There’s no inventory. I think we’ve talked about this on the show, but in a typical times, new construction makes up about 10, 11% of all home sales. Now it’s about 30%, just because the existing home market has completely dried up. So, this is an interesting headline. But I think, the more interesting thing is what you all were talking about, keep an eye on single family construction, because I think that is, in my mind, probably going to keep going up.
All right, for our third headline, we are talking about a brand new type of home design. It is called a passive home. It comes from Rode Architects and Passive Home Construction, they created their first passive homes in Boston. Basically, the idea is that these homes are sustainable. They feature airtight designs, I guess, like a spaceship. And they include solar panels and shading to maintain internal temperatures. The idea here is that although it is more expensive to build, they claim 5 to 15% more than a traditional home, that it will save home owners on utility costs in the long run. Henry, I just would love to hear your thoughts about this concept.

Kathy:
It sounds like you have an opinion.

Dave:
I just feel like Henry has something to say here.

Henry:
Yes, look, I get it. I understand that you’re saving on utility costs. But, the cost to build these, I think, are drastically more. We talked about these homes and we looked at some of the architecture. And it’s cool, they do really make the homes essentially airtight, so that you don’t have to have a traditional HVAC system that’s running all the time to keep your home temperature regulated. And, that savings along with the seller savings allows you to… Essentially, these people are making money on their utilities. There was one story of a guy who, he had so much energy store that he was able to give that to his parents and his parents would be able to pay for their utility bills through the savings he was creating through his passive home. And that’s a cool story.
But you think about it, these people could afford probably more home than they purchased. They’re not looking to save money on energy, they’re buying it because it looks pretty, and it was a unique design, and I’m sure that there was some pride element in that. But, the people who need the energy savings aren’t going to be able to afford to build them. So I don’t know how realistic this is.

Dave:
Yeah, I know.

Henry:
For the people who really need it, I don’t know how realistic it is for them to be able to get into it.

Dave:
This reminds me, I don’t know if you guys have heard, it’s used a lot in the tech industry, this concept of crossing the chasm or jumping the chasm, where it’s just basically, anytime there’s a new technology, the way it gets off the ground is by real enthusiasts, like what you’re saying, Henry, which is people who don’t do it for the cost saving, they do it because they’re interested in sustainability, or they like the architecture, they like the design. Basically, probably people who live in Kathy’s community. I don’t know. But, it’s people who are going to support the industry before the efficiencies of scale come in and make it affordable to everyone else. And I feel like, this is just, that’s where this industry is right now. It’s extremely expensive. It’s a proof of concept stage. But, it’s way too inefficient to actually become cost-effective.

Kathy:
Yeah, that’s exactly what I was going to say, is I was nominated or I won the award of top 100 most intriguing entrepreneurs by Goldman Sachs in 2012. And, it was a really cool thing. I got to meet Elon Musk.

Dave:
Cool.

Kathy:
Yeah, it was really cool. And, he had just come out with the really expensive Tesla, the first one. And that’s exactly what he said. He way overpriced them intentionally to help cover the cost of the innovation of it. And, those wealthy people who bought them, first of all, got to have the ego about that, to be one of the first to have it. It’s a beautiful car, and it was original, and I knew lots of people… I mean, yeah, you’re right. I live in an area where everywhere you looked, they had them. And it was a big deal. I remember the doors would go up and the car would dance and all that stuff. So, there’s plenty of people who are willing to pay for that innovation. And the way Elon explained it to us was, “This is what’s going to allow me to give it to everybody.” And he said, “Someday, we’re going to be able to come out with the $30,000 one.” Which is the one I bought.
So, when people put up their nose to me that I drive a Tesla. It’s like, “Yeah, but I paid less for my Tesla than you might’ve paid for your car because of those people.” So I see it the same way. There’s enough people who don’t blink about it. What they’re really looking at is more of a climate change. It’s more of a passion project, and they’re happy to put down the money. I think it’s really cool. And, we bought a lot years ago that was super cheap, believe it or not, people don’t believe it, but lots in Malibu are actually pretty cheap. This one was $99,000. We saw it. And so, we have had this lot and we been looking at all the different ways to put something on there that would be unique and different. But the key is affordable. And we haven’t been able to find the affordable one yet, but we’re waiting, because maybe like Elon Musk, it will come down in price eventually.

Dave:
James, you think you could build this for 5 to 15% over normal build costs?

James:
Absolutely not. There’s no off on the cost. I mean, just your core things. Your heat system typically is radiant versus HVAC, that costs you three to four times as much. Your installation is triple. Your window package is 5X more expensive. Then you have an airtight house. And not only do you have to spend four times as much on your radiant heat system, then you have to buy an ERV system, which is three times more expensive than an HVAC system to recirculate the air. It is so expensive to build these houses. And your premium you get on the backside is not really there. And then, the buyer who’s paying that premium, it usually takes them 10 to 15 years just to get their energy savings back. And right now, they’re buying it with a 7% rate.
And so, they’re essentially just financing their savings down the road. It just doesn’t make sense. We tried this when the built green energy started becoming a big trend in 2010, 11, and 12, we started doing four to five star renovations, where we were putting in triple pane windows, upgrading these things, and we thought we were going to get this huge premium. It was a net loss every time. As far as an investment goes, it just doesn’t make sense to build it.

Dave:
Yeah, I mean, I think we see this all across real estate. This is clearly one focused on energy reduction. But, you look at 3D printed homes, the idea is that eventually they will be cost-effective. But, right now, they’re not particularly cost-effective. But, I’m all for construction innovation, wherever it comes. I feel like, I wouldn’t buy one of these right now. But, I think, the more innovation we see in the construction industry, the better. It’s still pretty antiquated, low-tech industry. And, the more people taking on these projects, the better in my mind. All right, for our last headline, we’re going to be talking about good old Dave Ramsey. So the headline here is Tired of the Crazy Train, Dave Ramsey tells Frustrated Young Landlord to Ditch the Duplex and go get a House. Basically, what happens is a young Michigan landlord named Joe called into the Ramsey show for advice about what to do with the duplex he no longer cares for.
I should probably explain if anyone doesn’t know who Dave Ramsey is, he is a talk show host, personal finance person who gives advice. It’s a talk radio. Obviously, it’s not just on the radio anymore. But, that’s what it is. But basically, he called into the Dave Ramsey Show with a duplex. He bought it with his girlfriend in the fall of 2020, around 164 grand. Lived in it, basically they house hacked it, did some renovations, think they could sell it for a pretty nice about 20, 30% profit. But he’s tired of having tenants and living underneath his tenants. He’s unsure how to handle his investment. Dave Ramsey responded, “I would sell the crap out of this thing.” So, Dave Ramsey suggested, end the house hack, sell your duplex, and invest in a home yourself. Henry, I know you’re a big house hacking advocate. Is this the advice you would give?

Henry:
I would’ve just said, move into the top unit.

Kathy:
You’re the freaking landlord. Do what you want.

Henry:
It’s yours.

Dave:
That is a very simple solution. Yeah.

Henry:
Don’t live under your tenant then.

Kathy:
That’s hilarious.

Henry:
But, look, yeah, I’m a big advocate of house hacking. I did it. It changed my life. But I will say, it wasn’t comfortable. I don’t know that anybody says it’s supposed to be comfortable. I think there are ways that you can do it that are more comfortable than others. But I think the general gist is it’s going to be uncomfortable. Wealth isn’t built within a comfort zone. That’s not how it works. Nobody wealthy got wealthy by being comfortable. Unless your wealth was inherited, then you got really uncomfortable at some point in order to build wealth.
And so, if the goal for this young person was to house hack their way into building wealth, I think it’s a huge first step. If their goal was just, “I don’t really feel like paying a mortgage for a little while, so I’m going to house hack.” Then, you probably accomplish that, sell it, and move on. It depends on what your goal is. Just because they house hack doesn’t mean they want it to be real estate investors for life. That may not have been their goal. But, for me, house hacking was a way for me to take a giant leap towards financial freedom. And, it was an uncomfortable leap. But, Lord, I’m glad I did it.

Kathy:
I’m so with you. I’m so with you, Henry.

Henry:
I had so many problems in my house hack. It was on a septic system, and the septic system just started backing up sewage into my tenant’s place, and then into my place. And so, we had to deal with that issue. I mean, we had all kinds of issues. It was in no way, shape, form, or fashion comfortable. But, Lord, did it give me a giant leap towards financial freedom. So I think it’s silly advice on a financial show to tell someone to sell something that’s probably going to get them to the financial freedom they’re looking for a lot faster than just the savings route that he’s probably preaching to them to do.

Kathy:
Well, Henry, he missed a huge point, and that is, okay, they paid $164,000 for this duplex. If they put 3% down, what was that? The $5,000 that they put down, and they made 35,000. What is that? A 5X on their money? So, that little part was left out of the comment. If they put 20% down, which they didn’t have to, if it was their first property, then they still doubled their money. So, there’s that.

Henry:
Pretty sound financial advice.

Kathy:
So, I agree. And Henry, when I house hacked, we lived on the top floor, and we had to wear socks, and slide across the floor. So, no, it wasn’t comfortable. But it also helped us build wealth. We took that money we made, and we’re able to buy investment property. So, yeah. You know what? You got to be uncomfortable when you’re starting out. If you’re somebody who has a bunch of money when you’re starting out, then maybe you don’t have to be. But that’s not the case for most of us. Most of us have to house hack your way up. So, anyway, at this point, if they’re wealthy enough, yeah, sure, go buy your own home. But I would still put a ADU on it.

Dave:
Or buy a home and just keep the duplex and hire a property manager, and not do the management. There’s plenty of other ways that you could sustain this investment without selling it and going to buy another house.

Kathy:
Yeah.

James:
Yeah, I think Dave missed the biggest concept of that whole house hacking first time home buyer program you can use. You can go buy a house, live there for 12 months, and then you can go do it again, and lock it into finance. It’s the best way to grow your portfolio with the least amount of money. And, they just did a great job. They got the right price. Yeah, you shouldn’t have to live there either. Just go find the next one. And then, make sure it’s a side-by-side duplex next time. That also makes it a lot better.

Kathy:
And they’re probably locked into a really low rate if they bought in 2020. I mean, why would you walk?

Dave:
Can I tell you guys a funny story about house hack?

Henry:
I would love to hear that.

Dave:
So, just this last weekend, I was at a wedding in Portugal. And, it was a friend of mine from Amsterdam, but used to live in Denver where I invest. And, I was talking to this guy. Something came up and I was talking about, “Oh, I own this triplex in Cap Hill.” And he was like, “Oh, where is it?” And I told him the cross sheets. He’s like, “Oh yeah, I used to party around there quite a lot.” And I was like, “Oh, where?” And he gave the address. And I was like, “That’s my house.” And, I was like, “When were you partying there?” And he gave me the years. And I was like, “Yeah, I lived upstairs above that party house.” Because I lived in the 600 square foot, one bedroom, it was a nice place. But, I gave up. It’s this beautiful five bedroom old Victorian in Denver. And he was like, “Oh, man. I feel so bad. We were always just partying until three in the morning. Oh, that’s so terrible.” I was like, “Yeah.”
It was mostly fine, except one time, it was 4:30 in the morning and I had something to do and I faked a police call. I called the tenant and I was like, “Hey, I’m cool. I don’t mind. But the police just called and said that they had a noise complaint.” But it was completely fake. I just made it up. And they were like, “Oh my God, I’m so sorry.” And they wounded up shutting down the party. So, I got to go to sleep. But, they were actually great tenants, but it was so funny, it’s just so random.

Kathy:
Oh my gosh.

Dave:
Yeah.

Kathy:
Why weren’t you at the party, Dave?

Dave:
We used to a little bit. Out in the back porch, we used to all hang out together. But, I tried to keep my distance a little bit. All right. Well, that’s what we got for our show today. Thank you all so much for joining us. As a reminder, let us know where people can find you, Henry. Where should people check you out if they want to learn more?

Henry:
Yeah, best place to find me is on Instagram. I’m @thehenrywashington.com. Or you can check me out online at Www.seeyouattheclosingtable.com.

Dave:
All right, James.

James:
Our easiest way is on Instagram @jdaneflips, or you can check it out on jamesdaner.com.

Dave:
Kathy?

Henry:
Realwealth.com or on Instagram @kathyfeki.

Dave:
All right. And I am @thedaviddeli on Instagram. Or, you can always find me on BiggerPockets. I am quite responsive on both platforms. Thank you all so much for listening. We’ll see you for the next episode of On the Market. On the Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content. And we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

The open letter published on Thursday is the latest effort by startup investors to provide support for the state of Israel and its tech community, with 221 firms signed on.

Over 220 venture capital firms have signed a joint statement expressing support for Israel and calling for the global investor community to support the tech ecosystem in the country, which accounts for nearly 20% of its gross domestic product.

VC firms such as Bain Capital Ventures, Bessemer Venture Partners, GGV Capital and 8VC were among those that had signed by Thursday morning, joining a group of early contributors including Aliavia Ventures and irrvrntVC.

In the letter, the firms, mostly based in the U.S., agreed to “stand united” in support of Israel, its people and tech community, which it noted had long been a partner to the global “innovation ecosystem.” It condemned “senseless and barbaric acts of terrorism,” saying the signatories “bear witness to the devastation they’ve wrought” and deploring the loss of innocent lives. The statement went on to call for the return of hostages and normalcy for Israel’s startup community.

The joint statement comes amid a nearly weeklong stretch of historic violence that saw more than 1,200 Israelis killed in terror attacks perpetrated by Hamas, thousands of others displaced, and dozens reportedly held hostage in Gaza. Another reported 1,100 Palestinians have been killed in retaliatory strikes there so far.

“In the spirit of peace and unity, we encourage the global venture community to support and engage with Israeli startups, entrepreneurs and investors as they navigate through these challenging times,” the statement said. “We believe in a brighter and more prosperous future for the region. Will continue to enable the talented entrepreneurs and startups in Israel and abroad to continue their vital work in shaping a better future for all.”

The signatories are far from an exhaustive list of U.S. firms that spoke out publicly on the tragic recent events in Israel. Earlier this week, Insight Partners pledged to donate $1 million to humanitarian aid, while General Catalyst pledged $250,000 and the partners at First Round announced they had personally contributed $500,000, among others. Others set up public fundraisers, such as a page by Vine Ventures (which also signed the statement) that had raised nearly $200,000 as Thursday, or co-hosted fundraising events.

Local Israel-based investors and firms, meanwhile, have participated in recent events first-hand. Aleph partner Michael Eisenberg, a Midas List Europe fixture, posted on X, formerly known as Twitter, about working the phone despite the Sabbath in his role as chairman of civic organization Shomer Hachadash, which organized veterans to drive south to protect farms from further attacks; more recently, Eisenberg said he was leading fundraising efforts while helping to bury a cousin killed in duty in the week’s fighting. About 15% of startup staff across 1,000 companies surveyed by local firm Entrée Capital are currently serving or volunteering full-time, said fellow Midas Lister Avi Eyal — including investors, who have also been called up. “There are countless examples,” he said. “There’s an almost unstated commitment to help out.”

By comparison, a public statement might not seem as directly impactful. Israel-based investors told Forbes they welcomed their U.S. peers speaking up if it meant they continued to do business in the country as usual. (Some Israel-based firms, or firms with presences in the country, were among the signatories.) Ultimately, they said, the most important thing for local startups and the country’s economy is that global VCs keep doing deals in Israel — and the joint statement seems a positive indicator. “Just from a psychological perspective, I think it helps to see the reaction,” said Yuval Ariav, managing partner at Symbol.

The letter’s origins date to Monday night, when Harry Valner, cofounder of U.S. venture firm Seaside Ventures and an active participant in a WhatsApp group of several hundred Jewish venture capitalists, felt inspired to rally other investors behind a collective statement, he said in an interview from Los Angeles. Many firms that spoke up had already been compiled in a Notion document maintained by that startup’s Tel Aviv-based head of community, Ben Lang — but Valner believed that a co-signed open letter similar to one published during the Silicon Valley Bank crisis might help more firms participate. Back in March, nearly 700 firms eventually signed that statement of support organized by the venture firm General Catalyst.

By Tuesday, Valner shared a letter building on the SVB statement template with a small number of other investors, who began circulating a corresponding signature form obtained by Forbes on Wednesday. The number of signatures reached 107 firms by midnight ET, and 221 by noon on Thursday just twelve hours later, when the group went public.

“At the end of the day, the goal is to drive awareness,” said Valner, who added he and others were disturbed by their sense of rising global anti-semitism. “There’s a very special group of funds globally who realize this and are willing to speak up, because it’s not okay.”

In an unstable and rapidly shifting situation, during one of the largest military mobilizations in Israel’s history, signatures and social media posts may only go so far. In addition to the SVB crisis, VC firms and corporations have posted in the past about a number of subjects, from the war in Ukraine to the Black Lives Matter movement, with uncertain lasting results. At irrvrntVC, partner Andrew Gluck said he remembered watching businesses decide how to comment on those protests that followed the murder of George Floyd in 2020, and wondering his place to comment as a white, Jewish man. He spoke to others in his network who felt more personally connected to understand how best to support, he said.

Now, he hoped that more firms would continue to sign the statement in support of Israel in upcoming days, without feeling pressured or shamed. “I think we are inviting whoever feels comfortable to sign this,” Gluck added.

David:
This is the BiggerPockets Podcast show, 830.

David Lecko:
I actually started in 2016 when I worked for somebody who had five rental properties, and I was like, “Why do you have this?” He said, “Well, unlike the stock market that can go up and down, if you get rentals and you buy them right and manage them well, they’ll always make money.” That’s what motivated me to go looking for some of these real estate deals. There weren’t any, nothing was going to cash flow until I found out about going off market and then providing value to somebody, getting a discounted property, fixing it up. That’s actually led me to 2 million in rentals that I have today with a million-dollar equity position.

David:
What’s up 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. Every week we bring you stories, how-tos and the answers that you need to make smart real estate decisions now in this current market that is ever-changing. We have a great story for you today. Joining me is my overly eccentric co-host, Rob Abasolo, who is either being a mime or doing ASL for those who are watching on YouTube. Rob, how are you today?

Rob:
Oh, my gosh. Dude, I got home at 4:00 AM last night. Now, I feel like I’m on vacation. Now, I feel like I’m on vacation, because being on a plane with a two and a three-year-old for 12 hours? Hmm.

David:
Today we’re about to speak with David Lecko. He’s going to be describing the strategy that he’s used to build a $2 million portfolio with $72,000 a year in cashflow that he started with only $4,000.

Rob:
It’s crazy, man. On top of that little fun fact, he’s also the founder of DealMachine, which we didn’t really talk about in the podcast today. He’s got a really cool story and really breaks down, I mean, really everything from the beginning, I think it’s going to be encouraging for a lot of people to hear his story.

David:
Absolutely. Today’s quick tip is going to be brought to you by Rob, who actually has some advice to share that came out of today’s show.

Rob:
Hey, when you see an opportunity, take action. You’re going to hear why today at the very end of the podcast. We talk about a deal that I just did because the moment I saw the opportunity, I made the phone call and got stuff done.

David:
There you go. Strike when the iron is hot because it doesn’t stay hot forever. As we know, decisions are made based on emotions and emotions change. When you’ve got the right opportunity, don’t waste your shot. Much like Eminem said, you may never get it again. All right, let’s bring in David. David Lecko, welcome to the BiggerPockets podcast. How are you today?

David Lecko:
I’m great, thank you so much.

David:
Nice, man. Can you give our listeners a quick rundown of who you are, where you invest, and how long you’ve been investing for?

David Lecko:
I actually started in 2016 when I worked for somebody who had five rental properties and I was like, “Why do you have this?” He said, “Well, unlike the stock market that can go up and down, if you get rentals and you buy them right and manage them well, they’ll always make money.” We know Warren Buffet says the rule is don’t lose money, never lose money. That’s what motivated me to go looking for some of these real estate deals, but there weren’t any, nothing was going to cashflow until I found out about going off market and then providing value to somebody, getting a discounted property, fixing it up. That’s actually led me to 2 million in rentals that I have today with a million-dollar equity position and about $95,000 in net cashflow expected this year. Last year was 72, but I did a couple of acquisitions this year. Those properties were acquired over about a two-and-a-half-year period from 2017 to ’19. Then I chilled out for quite a while. I had a lot of appreciation. I’m now re-motivated to go acquire some more rental properties.

David:
All right, I want to ask you, Rob, a quick question. How long do you think we’ll still hear stories about people who heard about real estate from a human? Because now with YouTube and social media, it’s bombarded by real estate. I just realized, that’s how people used to say it. Like, I met a guy in a restaurant one day, mysterious man smelled of rich mahogany and leather-bound books. He told me he had rental properties, and I was so fascinated. Versus what it’s like now. I’m just curious, Rob, what your perspective. Do you think that anyone will ever hear about real estate from a human from this point forward?

Rob:
That’s very funny. I was legitimately just thinking about this because everyone that I follow on Instagram, they are all real estate people. It’s all like, “Here’s five rental strategies you need to perfect in 2022. Here’s how to make $10,000 cashflow.” That’s all my Instagram is. I’m like, man, the entire Instagram landscape has really changed for the real estate industry, but that is really a big part of how people even find out about real estate. I don’t know. I think the days of the coffee shop, meeting with an older real estate vet and they teach you everything and take you under their wing, I feel like those, yeah, it’s getting a little bit more rare these days.

David:
That’s true. Also, I feel like when you talk to someone before they tell you what they actually had versus when you hear something online, now it might be someone with a house they live in and one investment property, but they’re talking about it as if they have 50 rentals. That’s a little different too. It’s easier to find out about it, but you got to dig a little bit deeper to figure out what’s really going on, and that’s what we’re going to do today. David, we’re going to hear all about your expertise in a second here, but give me an idea on what strategy or tactic is working for you right now.

David Lecko:
I’m doing two things right now. I’m paying a driver to look for rundown properties. I’m sending marketing and I’m getting calls back answered by a call center, and then I follow up and do a virtual appointment. The other thing I’m doing now that’s new for this year that I’ve had a couple successes with so far, is actually making offers on properties in the MLS in my market that are over 45 days old and I’m sending 70% offers to those properties. I’ve sent about 500 of those offers and done about three deals, in the last three months I would say.

David:
You’re taking steps just to get the ball rolling. You’re trying to get the conversation going, just get that first date and then see where things go.

David Lecko:
Actually, the on-market listings that I’m giving it 70% off, they’re actually just receiving offers. 70% off as is, and you never know what they’ll accept unless they have a low offer in their hand. That’s actually, I mean they’re signing it and I’m like, “Oh, wow. I have a property on your contract.”

Rob:
I have a question about that. You’re making these offers, presumably if they’ve been on the market for 45 days. We’re getting towards the point where that listing is going to expire. That agent is probably going to lose the contract, is my guess. When you make an offer, how are you actually doing that? Do you have a realtor representing you making that offer, or are you just making that offer to the listing agent and asking them to represent both of you?

David Lecko:
It’s through an agent and I use a software that connects to her email and uses her contract and fills in the DocuSign details. I have a slider that says what percentage do I want to send out all my offers. I usually do 35 per week because she’ll get an influx of emails and texts and she does respond to those. Some of those end up being a counter. That’s how I get the ball rolling. It doesn’t take her time, but we have a process and a tool that we use that allows me to send those offers like that.

Rob:
Hold on. That sounds like the most system and process-oriented way of doing this. I just thought you were calling, “Hey, make this offer.” You actually have this, I don’t want to say automated, but really efficiently laid out to where if you’re going to make 35 offers, are you actually examining all of those properties running the numbers on them, or you’re just like, all right, hey, if it’s 70% and they accept, I’ll then run my numbers?

David Lecko:
The second thing. I’m doing a little bit of filtering, I just want a three-bedroom, two-bath house with a certain square footage. I’m not doing these offers on commercial buildings or I’m not doing it on a two-bedroom, one-bathroom house because I just do want it to actually be a property that I’d probably buy.

David:
We’re going to get into those details a little bit later. Before we move on to the show, just remind me, which area are you buying these in?

David Lecko:
Indianapolis, Indiana.

David:
We’re going to talk about the Indianapolis market as well. We’ll ask you some tough questions, so get yourself prepared for that. Hopefully, it gives you an opportunity to shine. Let’s start with a story. Tell me about a moment before you found real estate, when you knew things had to change?

David Lecko:
Man, my life was actually horrible. I’m working for this company for two years on a product that I actually built before I ever worked there, and I sold it for $10,000 now as a recruitment tool in another industry. The reason why I bought it is because there’s advice from Gary Vaynerchuk, for example, that says, you shouldn’t take the most expensive, the highest-paying job, you should actually go work for somebody that you want to emulate. That’s exactly what I did. I sold this tool I built and it was a low cost, and I was getting paid $55,000. On the first day, the CEO says, “Hey, David. Please don’t share what you make with anyone else on this team because nobody else makes that much.” I was like, “Man, I don’t even feel like that’s that much.”
I took a $20,000 pay cut to get here, and I did though really working a ton and I’m working a ton. I’m the software developer, I’m the tech support, I’m the trainer. When there’s a problem, I’m not actually having anyone else be able to do those things, so there’s no backup. I’m actually the most knowledgeable person that they have. This culminated over two years. I’m learning a lot. There was always these times where I take my computer to the bar with me if I was going to go out with friends, because something’s going to come up, I want to be able to fix it instead of have to drive home and come back. Finally, I’m at my best friend’s wedding and I’m actually in the wedding party. I leave the reception because I got the call, something is wrong and I’m out in my Honda Accord, 10-year-old Honda Accord with my hotspot and I’m fixing this tool.
I was like, man, he was upset, his wife was upset. I felt terrible because I’m missing the reception. I knew that something had to change. I knew that the owner of this company of mine had these rental properties, and so I knew I needed to start taking action towards making a change, towards finding an off-market deal. At the time he said, well, he bought these properties in 2009, which was a great buying opportunity, and I was a little bit discouraged by that. It wasn’t his intention, but I looked at the market and I couldn’t find anything that would cashflow. Thankfully, I went to a meetup and found people that were doing deals all the time. That’s when I realized you can’t just time the market. You’ve got to find deals in whatever market condition exists. You’ve got to figure out how to find good deals in all those conditions.

Rob:
You went to a meetup and you said people are doing deals. As someone that didn’t know anything about real estate or not all that much, you go to a real estate meetup and you find out that people are doing all these things. What kind of deals were they doing and then were they all doing so many types of real estate that it was overwhelming? What was that first experience even like?

David Lecko:
Well, it was pretty awesome, because they actually had a prize that was a random drawing for all the attendees, and I won the prize. It was an iPad, and I thought, “This has got to be a sign.” I’m not super spiritual, but this definitely doesn’t feel bad. This is great. I won this iPad and I immediately sold it for 500 bucks and I used that to start sending postcards to distress properties. I remember, there were people doing a lot of stuff, but the prevailing theme was wholesaling.

David:
I love this. What you’re saying is if somebody’s having a hard time getting started, they need to go to events, win prizes, and then pawn off the prize to get the capital C to get started. Correct?

David Lecko:
Yeah, exactly.

Rob:
I love it. I love it because instead of just having an iPad where you could log into Netflix and hang out and do nothing, you’re like, all right, look, I could have this iPad or I mean, it’s basically a free $500 that I can use to experiment and just do random things with in the real estate world and see what sticks. Somehow you land into the postcard world. How did you even learn about that?

David Lecko:
There was definitely a blog post on BiggerPockets that I saw on driving for dollars. The unique aspect of it was this person was putting the photo of the house on the envelope. That was something that they said gave them a better chance, a better response rate. From this day forward, every piece of mail that I’ve sent has the photo of the house on the property. Not the Google photo, like an actual photo that he took. People called back, still to this day, they’re like, “I got a few pieces of mail, but I called yours because it looked like you put a lot of time in it.” Or, “I could tell you’re really here. I could tell you were local.”

Rob:
That’s cool. You went to BiggerPockets, you figured out the idea of driving for dollars. You’ve unlocked a really great entry point into your real estate career and it seems like it’s working. How did that feel emotionally for you for it to start clicking really, I mean it seems like it’s relatively soon into your career?

David Lecko:
Well, there was a period of time where I was just looking for the rundown properties and I wasn’t sending out the mail yet. I was prepared for it. I had the money set aside for it. What I was focused on was finding the properties. It was so much fun driving up and down and just picturing myself buying this property. It felt really awesome. Two months into that, I had a nice list on a tablet of paper, but my stomach sank to the floor when I saw one of these properties had started construction. I went home, looked up. Sure enough, this property actually recently sold and I looked up the price. I wasn’t an expert on numbers, but I felt like it was way lower than what I would’ve even felt comfortable offering. I knew that could have worked for me. I had this terrible feeling that I didn’t even reach out yet, spent so much time just thinking about these homes that I wasn’t following up.
I realized humans have a lot of follow-up issues in general, and I needed to start nipping that in the bud and doing something. I went to go put those letters together with the photos, and that’s when I realized putting letters takes a long time, and at the time, you couldn’t send out mail one at a time. You had to buy a minimum of 200 with some mail house. That’s what left me doing them myself in my basement, which took quite a bit of time. That was the next struggle for me. I’m glad I did it because I didn’t have a ton of money and I heard over and over the driving for dollars is the best list.

Rob:
Well, there’s something ironic about the fact that you were making this list on a tablet of paper instead of an iPad, an electronic tablet. That’s pretty funny. You find this house, you find out it’s the one that got away, but not really, because you never even tried to get it to begin with. Then you get into this time suck. At this point in your journey, was time something that was very important to you or was that the beginning of your journey where time is all you had? Tell us about the emotions of that time in your real estate career.

David Lecko:
Well, as you know, I was working a job that was time-consuming. I don’t know the exact hours. It had some flexibility during the day, but it required lots of stuff at night and random times when people were using the software and I would need to go and fix it. I was feeling quite burnt out. I did enjoy driving around, but when it came time and I realized how time-consuming this was, it just didn’t feel like I had time. Working 9:00 to 5:00, couple of random things for work in the evenings. Now, I have to not only go out and look for properties, but I got to put them together and there’s not enough time left to go hang out with friends, to go eat dinner or anything else like that that I needed to. I was definitely feeling like the candle was burning at both ends.

Rob:
For sure. I think a lot of people feel that way, especially at the beginning of the real estate career. If you’re working a 9:00 to 5:00 or if you’re working any kind of job, and then when it’s over, you still have to do the real estate stuff to get that going as well. At this point in your career, did you have a very clear why defined, like your mission statement? Did you know what you wanted? I know that you missed some important moments in the best friend’s wedding and everything like that. Had you already defined what your why was?

David Lecko:
I had missed some important moments. I also noticed the owner of the company I was working for and learning so much about, didn’t put in the hours that I was. Now, I got the sense he did at the beginning, but I wanted that. I didn’t want to have to work so much for a small salary that I couldn’t even talk about. I wanted something more. It was definitely, I wanted time freedom, but it probably even goes back to high school where I saw some kids had these really cool cars and I wanted that. I wanted more than what I had growing up. I was driven by those two things.

David:
David, when you look at why you were driven for time freedom, can you trace it down to a specific event that happened in your life, an experience you went through, something you witnessed? I think a lot of us would like to have time freedom. We would rather not have to work for somebody else. If you’re lacking the motivation to get out there and make it happen, because it comes at a price. As you well know, you give up a lot of security, you maybe work more hours in the beginning when you’re trying to build that. What do you think about your story specifically led to you having that fire that you were able to use to get over the hump?

David Lecko:
My dad worked at a telecom company. He had a friend that was a contractor. I didn’t really know what that meant. They were buddies. That friend was not only a contractor himself, but he owned a contracting business. He would place people in different companies like this telecom company, and he would make a portion of their earnings as well. I met him at a breakfast with my dad. He gave me a book called The 4-Hour Workweek. That book taught me that you could build a business so you can earn income that’s not limited by how much time you put into it as long as you’re the one who’s actually setting up the business in the right way. That has to be my moment where I knew there was a better path than what I had been exposed to in the just W2 world.

David:
What about that quest for time freedom led you into our world of real estate?

David Lecko:
Well, it seemed like rental properties were pretty stable. If they were never going to lose money, if they were always going to appreciate as long as you manage well, it seemed like the more rental properties I get, the more secure salary I can have, where a business might have fluctuations, that was intimidating to me. A rental properties is physically, you could touch it, you could see it, you can rent it out for a certain price. Then when I went to the Federal Reserve graph on rent rates, I saw that it never went down. Even in 2008, it stayed constant for a year and it kept climbing up. That’s what seemed like it would give me the security the most secure way.

David:
It wasn’t that you heard someone else talking about it or you heard it on a podcast or a YouTube channel. Was there a certain influencer that caught your attention or did you just sit down and logically think through real estate makes the most sense?

David Lecko:
The time when I figured out real estate would make the most sense was the boss that I had at the final job that I had, had five rental properties. I asked him, I said, “I put my money in a 401k, why do you invest in real estate?” He told me it’s because you’ll never lose money as long as you buy them right and you manage them well. I had seen my 401k go up and down and felt like I had no control, and the feeling of control is just such a good thing. I knew that, that was something I wanted to go after at that point.

Rob:
Yeah, man. Let’s fast-forward a little bit. You go to this meetup, you sell the iPad, you get your postcards out. One of your dream deal gets away and you realize I got to take action. Where did that actually culminate into your first deal? Tell us about how that first deal actually took place.

David Lecko:
I got a phone call and he says, “Hey, I’d like to get an offer on my property.” I just knew after putting in 300 properties over the course of six months that it must be this small house, I remember with a blue tarp over the entire roof. I just knew that was probably it. When I looked it up, sure enough, it was. I didn’t know what to actually say next because I had never done this before, Rob. I just said, “Well, how about I meet you at 6:00?” I got off the phone as soon as possible, and once again, when I met him at 6:00, I didn’t know what to say. I didn’t know what to ask. I said, “Well, let me just take some pictures and I’ll just ask you about things that I see while you’re walking me through the house.”
Then it wasn’t a very big house, it was 600 square feet. I took the photos and then he said, “How much will you offer?” Again, I didn’t know, so I was like, “I’m going to get back to you 24 hours. I’ll have an offer in front of you.” I went home and I was going to offer $10,000 for this house. Now, it was in rough shape. I found out later that he thought I was just going to demolish it, but I ended up repairing it. I’ll tell you that I actually remembered this episode on the BiggerPockets Podcast where they said, “If you don’t feel like you’re uncomfortable making this offer, if you don’t feel like you might be offending them, you’re not offering lower enough. Because there’s going to be problems you’re going to encounter, and if you don’t leave yourself the profit margin, you’re going to find yourself in a bad place where you own this deal that you’re upside-down in.”
Instead of offering $10,000, I remembered that and I offered $4,782. Now, it was specific because I felt like that would help him see I approached this in an analytical way. I actually looked at some of the comparable sales by square foot, and then I subtracted the cost of everything that I knew I needed to do in that house, which was pretty much everything. Then I did subtract $10,000 for my profit, or in case something unexpected came up. I showed him that transparently. I said, “This is how I got to your offer price. I can make you this cash.” Because I actually had $4,000 and he waited a day. I got nervous, but he just said, ultimately, in a super calm voice, “I’ll accept it. Let’s go forward with it.” That’s how we ended up doing my first deal.

Rob:
I just want to make sure I got these numbers right. You offered $4,750 for an entire house?

David Lecko:
It’s 600 square feet. It was the smallest house in the neighborhood. There wasn’t even really a true exact comp because all the other houses were 1200 square feet. That’s right. 4,000 bucks.

Rob:
That’s great. You ended up renovating it yourself or is that what happened next?

David Lecko:
Good thing to know here is in the Midwest, Rob, as you know, there’s these neighborhoods that a house in perfect condition may only be worth 50 grand. You can get in trouble investing in these neighborhoods because you buy a house for 4,000 and you put 45 into it. It’s like, you don’t have a deal. That’s just a house. A lot of times it takes more than 45 grand to repair one of these crazy things. I thought this one could be worth a hundred grand. My plan was get four no interest credit cards. I applied it all on the same day because I was like, let me do it all at the same time. Maybe I could trick the credit bureau so they don’t know I have all these other cards. I did $65,000 renovation and then I rented it out for 99. It’s rented for 1200 now, but that’s how I ended up doing it. I still own the property to this day.

Rob:
Cool. When you took out the credit cards, I mean it’s not like you can just swipe your card to pay for vendors and stuff. Were you doing a cash advance? Did they send you a check that you could deposit into your account or what?

David Lecko:
I think those are really good. I didn’t know about those. The contractor that I found would actually let me swipe a credit card, yes, on his square account that he could use to receive payments. Now, he did charge me the extra 3% fee, but that was the only option I had.

Rob:
Well, you’d probably pay that regardless, even on a cash advance anyways. You buy this property, you rehab it, and that’s it. You were financially free, right?

David Lecko:
No, I didn’t know how to pay off those credit cards.

Rob:
Tell us about some of the lessons from that deal.

David Lecko:
I thought I could get a mortgage because on my account it appreciated for $100,000. Even though it was rented out for a 1% rural property, about 900 or a thousand bucks a month, the mortgage companies didn’t value the property like I did because there was no other house with that small of a square footage, and so I couldn’t get it to appraise, so I was stuck. It’s a good thing that my job actually picked up, my business for my primary income picked up. I ended up using that to pay down the credit cards. If I hadn’t done that, I would’ve been stuck. I would’ve had to go to a private lender or to sell the house or to get some type of bridge funding. That’s ultimately how I got unstuck, was I was able to ultimately pay those off. Another lesson that I learned was working with a contractor. A great way to find a contractor, the way I found him was I asked another real estate investor that I knew from one of those meetups who I should use, so he gave me his name.
Now, he didn’t have a crew ready, but he put one together. AKA, a group of people he hadn’t worked with before. Ultimately, after a month in, I was like, “Yo, what’s going on?” He’s like, “Well, they’re just doing this or that. They’ll start back in a week.” I got that about four or five times. I had a hard conversation with him. I was like, “Look, we’ve got to cut ties. Obviously, this isn’t going to work out.” I had paid him too much. I had paid him 50% of the project’s value. He had not done 50% of the work. I needed a refund if we were to part ways. We met in person. I think if you’re going to have a hard conversation with somebody, having it in person goes such a long way. It shows that you care and you can really read each other’s body language that way. That’s what we did. He ended up giving me a refund on one of those credit cards, and I started searching around for somebody else that could solve the problem.
The lesson there was actually don’t give huge chunks of payments, but do smaller increments. The other lesson was let him pick a due date himself at the beginning, then maybe add on a couple extra weeks and say, “All right, if you want this project, commit to this date. I’ll give you a couple extra weeks of padding. If it’s late, $50 per day from you that it is late.” Those are how I operate now with renovation projects. Two lessons there. Then the third one was I had to ask around for somebody who could bail me out of this project that was halfway complete that had a budget that wasn’t going to work anymore. Sometimes real estate investors have a special guy that can bail you out. When you need help, start talking with other people instead of just trying to figure it out yourself. Those are three lessons from that first deal.

Rob:
Going back to that second one about the timing. David, you have a trick of the trade here. I don’t know if you still do this, but didn’t you used to bonus your contractors based on if they hit their deadline? You would say, if you hit this deadline and you actually get done in time, I’m going to give you 1% more or something like that, or did you fall out of that strategy?

David:
How could you possibly know that since you never read any of my books? This is impressive.

Rob:
Well, I read the one book. I read Burr and I am in the first chapter of Pillars, which is not out yet, but it will be.

David:
Right on, man. Yeah, that’s exactly what I would do.

Rob:
David, I like that way more.

David:
You like what way more?

Rob:
I like the bonus for completing it on time, and I think people would be really motivated by that.

David:
Here’s what I would do. I realized there was a bit of a power struggle going on, and when I say that, I don’t mean in an unhealthy way, just human beings have different incentives. When we are an investor, our incentive is to get the work done as fast as possible, as cheap as possible, and as well done as needs to be done. The contractor’s job is to get as much money as they can, take on as many other jobs at the same time as they can and be held the least amount of accountable. They’re going to take on all these different jobs, they’re going to spread their crews thin. What you get is this clashing of, you said you were going to be done by X and them not wanting to tell you, well, I didn’t bid this right or I didn’t know the details, or the guy that was supposed to be working on it didn’t show up to work, or he ended up sucking. Or I had to put them on another job because we didn’t do that one right so yours fell behind. You never get the truth.
What I figured was I just want to fight my way to the top of the funnel of priorities in their head. When we were discussing the scope of work, I would say, look, this is going to be a contract, which you should be familiar with because you are a contractor. As a contractor, how long will it take you to do this job? They would give me a timeframe, say eight weeks. I’d say, okay, what if I give you nine? Oh, yeah. That should be no problem at all. Well, yeah, it definitely shouldn’t be because you told me eight. Here’s the deal. If you get this done in nine weeks, I will pay you what we agreed upon and I gave you an extra week of some grace. If you get it done less than that for every day that it’s early, I’ll give you a bonus of this much money. If it’s late, this is how much is going to come off the last draw. If they’re like, whoa, whoa, whoa, I can’t guarantee it’s going to be eight weeks.
Well, now you know the truth. You just do a little bit of digging and the truth will come out. If they go, yeah, no problem at all. Now, they’re incentivized to keep your job as the priority because they want to make all the money they were supposed to get and they hopefully want to make more money, which makes you a more important customer than the person who’s complaining that they left some paint on the cabinets or one of the tiles wasn’t laid correctly and they got to send someone back. They’re going to make that person wait five weeks. They’re not going to make me wait five weeks, and if somebody with paint on their cabinets has to wait five weeks, I’m okay with that. I’m not okay with it when it’s me when I got a 12% hard money loan and the market is shifting all the time, and if they don’t fix this thing, then the next thing can’t get done. We all know how the domino effect works.

David Lecko:
I think that’s really smart. Now I’m going to have to read that book to figure out the percentage that you pay as a bonus because I want to start doing that.

Rob:
Yeah, man. It sounds like you guys had similar strategies except David does actually do a percentage of money or whatever. You do this deal and it seems like it’s going pretty well. You’re obviously starting to move into your real estate business here and you talked about driving for dollars. Now, a lot of people can be a little wary about driving for dollars as extremely time-consuming and sometimes not worth the time. What would you say to that? Because I know you’ve built your business effectively on this model.

David Lecko:
Definitely. The advice I was hearing from everyone at that meetup was to go Drive for Dollars. At my time, there wasn’t really another option because just the group that I was with, they were saying that, that’s what I need to do. Then I totally get though that it can be time-consuming. If you’re a doctor, this may not be the strategy for you. It’s great if you have more time than you have money. Because the list is so good, these big real estate investors don’t typically do it because they’re buying these lists that are easy to get and they’re just spending more mail, spending more money on more marketing to those bigger lists, which is required because they’re competitive and they’re bigger lists and they’re less niche.
The driving for dollars list is a list that nobody else has. You’re the one who drove around and found those rundown properties. Plus, if a tree fell on a house that was vacant, that’s not going to show up on any list. You can’t buy that list. It’s hard to get. If you put in the time to do it, you can actually get a deal for smaller amount of money, because there’s less properties you have to market to, and there’s less people that are marketing to that homeowner. Therefore, you’re not going to have as much competitiveness in terms of them trying to shop around and get the best price. That’s why I like driving for dollars and why it’s been a really great business

Rob:
Actually, can you just run us through what is driving for dollars? I want to make sure that everyone at home is on the same page as us because we’re going to be talking about this a little bit more.

David Lecko:
Driving for dollars is a strategy to find a real estate investment by looking around for a rundown property. Then you look up who owns it and send the owner a letter asking if they want a cash offer on their house, and if they do, they call you back. That’s what driving for dollars is. The reason why it works is because that house is run down. They probably can’t sell it on the market. If something happens in their life, they might not have the cash to deal with a medical expense or deal with something that would cause them to have to move. They need to unload that property. Like a pawn shop. When you take somebody to the pawn shop, you’re not getting the top dollar, but you do want to take it there because it’s the easiest thing to do, it’s the quickest way to get cash and move on to the next thing in your life. People do that with their house. People need that service with their house and driving for dollars is a great way to identify those types of properties.

David:
Can I tell you why I like that strategy? Because it’s very difficult to do, which means nobody else wants to do it. There is a trend in our country, in our culture of how do I automate, delegate, systemize? I wanted to do a thing that makes me a bunch of money on its own and I just show up to the money tree and I pull the dollar bill out of the business, but I don’t want to have to pull the weeds, water the tree, shelter the tree, check the pH balance of the soil. I don’t want to do the work of a farmer. I just want it to grow and give me money. There’s become an obsession with that and there’s little tiny ways this will work for a short period of time. We saw it with crypto, we saw it with NFTs. Drop shipping at one point was like, it was like you struck oil and there was all this gold, and then everyone rushes into it, it dries up. It’s not a sustainable thing. You just might get lucky.
The popular way that most people are running businesses like you, David, is they’re trying to automate a system that sends letters that look like they’re handwritten, that hires somebody else in another country to oversee the job, that leverages out the answering of the phone and tries to qualify the leads and then sends somebody else to the house to go negotiate with the person. When it becomes easy like that, it just means everyone else can do it and someone with more money, more experience, more resources than you will just do it better. You end up chasing the same deals that everybody else is chasing, asking how come these strategies that I heard people talk about on the podcast don’t work? Driving for dollars cannot be leveraged. You can’t pay somebody to go out there and just drive around and look for the right homes, at least not effectively.
You have to go do it. When you do that, you find the property that’s not getting bombarded by other people. You find the lead that you actually have a chance to nail down and you get to make the connection with that person. You get to go talk with them, build rapport, use all the skills that you’ve built. Not some employee that is like, I only want to do the bare minimum and I only want to get under contract if it’s easy. They can hit the layups, but they miss the tough shots. That’s what I love about what you’re saying. This is the strategy and I see you smiling because it sounds like this is landing with what you’ve recognized in your business that our listeners can go apply because it’s real and it’s honest and it works. It’s not looking for a cheat code that everybody else has already found. What do you think about that perspective?

David Lecko:
I think it’s absolutely true. I think that’s why it works so well, is because the easy way to do it is to go buy a list of absentee owners or go buy a list of high equity. It’s just the easiest thing to do. People do that. Seeing the property, laying eyes on the property is something that is harder to do, and I think that’s why it’s such a better list.

Rob:
I think there’s always going to be growing pains with really any model if you want to achieve automation or anything at the largest scale, I mean you do. I think that’s always really tough to do. I’m curious, David, obviously you were the one driving around doing a lot of your own deals when you were doing this. How did you actually scale out of that? Because I know you said that time was so important to you, and this sounds like, I know you said it doesn’t necessarily have to be a time-consuming strategy, but when you were starting out, I’m sure you hadn’t figured that out. How did you actually scale in a way that was effective when it came to driving for dollars”

David Lecko:
I just kept doing it and I kept doing deals. As soon as I had done maybe $200,000 of, I did a couple of bird deals where I got the cash out and I could recycle that money. That’s when I realized, all right, maybe my job is worth what you can actually hire somebody to do this for, which might be $20 an hour looking at Amazon driver salaries. We can get into that, but that’s whenever I figured out maybe I shouldn’t be the one driving anymore. That was a couple of years into it after I had done several deals and after I learned a lot of the neighborhoods that I wanted to buy in, knew those by heart already.

Rob:
We’ve actually heard a couple of interesting strategies on BiggerPockets of how people, I don’t want to say automate, but increase their deal flow. We had someone on the podcast said that they give flyers to pizza delivery people and they say, “Hey, anytime you see a distressed property or if you’re delivering to a distressed property, leave this on the pizza box or leave it on the door or whatever.” I’ve also heard of people doing that with UPS drivers and all that type of stuff. It seems like you can get creative with ways of increasing your deal flow. Did you ever go down that route or did you just go straight to hiring somebody?

David Lecko:
I never did the pizza delivery thing. There’s basically three ways that you could hire a driver, and most of them are tricky if you don’t know exactly what you’re doing, which is still what makes driving for dollars great because it’s difficult to scale. Here’s the three payment strategies that people use. They either do per hour or they do per deal added or they do, you get a bonus when I close a deal, like to the pizza guys. People have made it work. I have not. One thing I’ve observed is that if you’re going to give a bonus when you close a deal, that could take three months. These houses have been distressed for a long time, so they’re not going to sell right whenever they get a postcard from you. You need to keep sending postcards. Every basic marketing advice says it takes 10 to 13 touchpoints before somebody responds to your marketing.
You’ve got to catch them at the right time. By the time that happens, the person you trained what properties to look for, they probably have moved on because they have bills to pay, they need to live their lives. Unless it’s like your mom, your spouse, somebody that loves and caress about you and can stick with you for three months without payment, I don’t know that I’d spend time training anyone for this model where you pay a fee just when you close a deal. The other one is per property added. Some people might pay 25 cents to $2 for each property that looks distress that they add. You could do that. It has worked. All three of these have worked, but I don’t like that one because people like security of knowing how much they’re going to make, and we think about jobs in terms of hourly payment.
That’s why the hourly payment is actually the best when you’re going to recruit somebody reliable and you want them reliable. If you’re going to spend time training them, you don’t want to train them and have them go away. I posted a job on Indeed for hourly, and I got a bunch of people responding. I set up five interviews on a Saturday and every person actually did not come to the interview. I texted them, I was like, “What happened?” One person even said, “I moved to Florida.” It’s like, I felt so disrespected, it was a huge waste of time. I knew I needed to change something. I incorporated a test project. Now, I posted the job again. When they applied, I said, “Please send me a two-minute video. Download this app that I use to look for rundown properties. It’s free, no cost. Just add three properties. Text me when you do that. I’ll Venmo you 10 bucks.”
That really weeded out people. If they did that, I knew they were tech-savvy. I knew that they had read my instructions instead of blindly apply. I knew they were serious. Then I pretty much had a 100% show up rate when I scheduled an interview. Finding them, I would incorporate a test project like that. Then $5 more than what Amazon drivers make is fair because the driver that works for you is they’re going to actually be using their own car and paying for their own gas. They will want to work for you because they love seeing that money that’s a little bit more than what they could make at Amazon. It’s a good deal for you as well because they’re paying for the car and the gas. If I were to say a couple of more pitfalls, have a weekly meeting with this person to review the properties they added and make sure that they feel like they’re a part of the team as well. That’ll keep them going week after week and stick with you for a long time.

David:
We’ve covered the bottom of the funnel, the hiring and the delegation of how you’re going to spread out some of the workload. What about the top of the funnel? How are you going to build this list of potential opportunities to pursue?

David Lecko:
I actually was given the advice that if you find a hundred rundown properties, that’s about what it takes to get a deal. Now, as time goes on, I’ve had the fortune of working with a lot of people who scale their Driving for Dollars teams, and I noticed that it depends on your market. If you’re in a lower-cost market, I’d recommend four to 500 rundown properties marketed six times each. If you actually are in the more expensive markets like Seattle, Los Angeles, somewhere in New York State, you may need to add as many as 1500 to 2000 rundown properties before you get a deal. Now, if you’re wholesaling, typically you’re going to get 15% of that value of the property as an assignment fee. You’ll notice that even though you spend more time and money to get a deal in a high price market, you’re going to make a bigger profit. It’s easier to get started in a Midwest market that’s lower cost. You’ll make a smaller profit, but it’s easier to get started.

David:
Why is that? Is that because most people are attracted to the higher profit market, so you’re just competing with a lot more people?

David Lecko:
Wish I had the answer, I just know what I observed.

David:
This is a principle that runs throughout business, that’s pretty good for us to talk about it. I talk to my team about this constantly. This will apply to many things in life, but definitely to business. What I say is, it’s easy in, hard out, hard in, easy out. When you buy an online lead for a real estate team, like the David Greene team, and we go to Zillow and we say, “Hey, we want to buy a Zillow lead.” They’re very easy to get what we call leads. People will say, “Hey, I want to know about this house on Main Street.” They’ll ask a question, but they’re not reaching out to you because they want you to be their agent. They just wanted to know about a house and they were forced to go through these hoops they had to jump through. They’re very hard to close. You got to get a lot of them and put a lot of work in to close anything, but they were easy to get.
When you go to an open house and you meet a person organically and they’re motivated to look for a home and they’re out on their weekend trying to find one and they haven’t found a good agent, you build a stronger relationship with them, way easier to put those people into contract. This happens with a lot of things. The toughest markets to get your foot in the door in will make you the most money over the long term. The easiest markets to get into are easy for a reason. There’s not as much competition, there’s not as much demand or there’s a whole lot of supply. You will make less money later. It’s just this idea of delayed gratification. It’s not that one way is better than the other, it’s just know what you’re getting into. What’s your experience like David, with running the business when it comes to the things that are easier to get the phone to ring? Do they tend to have the smaller amount of margin in them?

David Lecko:
Yeah. I would say definitely the things that are easier to get the phone to ring have a smaller amount of margin in them. The easiest thing that I’ve ever done is pull a list of high equity properties to have 35% or more equity. Then also, they actually expired on the MLS. You can pull that list straight out of a tool and you could start sending postcards or calling them. Of course, they want to sell their house. They listed it and it failed. Everyone else is calling those people. The fact that you’re going to try to approach them, how do you make your deal sound sweeter than the rest? You compete on price and then the margin shrinks. Exactly what you’re saying.

Rob:
I have a question. I guess I don’t really understand how this part works. You said that you’re looking for something that has higher equity, so that means that the owner has a lot of equity in the house? Meaning, in your mind, if they’re a distressed seller, theoretically, there’s more wiggle room for them to come down? How do you even figure out how much equity someone has in their property? It seems like that’s private info now.

David Lecko:
I use DealMachine to go look for these rundown properties. It has public info. It also estimates the equity they have on there. Just to be clear, when I’m driving for dollars, I don’t even look if it’s absentee owner, owner occupied. I don’t look at anything. I just look if it’s distress, I send the letter. When David was talking about do easy things have smaller margin? I was using that as an example, because separate from driving for dollars, I’ve pulled a list of just properties that expired on the MLS with decent equity, and it turns out a lot of other people pull that list too so that the margins are smaller there.

Rob:
Sure. Okay, cool. If you’re driving for dollars, I know that at this point you have a whole system for getting everything out automated offers made, but do you have a target profit or assignment fee or ROI that you’re looking for on a specific property?

David Lecko:
I’m looking for something in the range of perfect condition, $200,000. I want to either do a Burr deal where I put in 75% and that way I can refinance out and have no money in it at all. The Burr strategy, read David’s book, or I actually just want to analyze the rental. Say, well, could this cashflow at least 500 bucks at that price point? Meaning, the difference between what my mortgage payment will be and what I can rent it for would be 500 bucks. Those are two analysis that I look at to see if I want to actually do a deal.

David:
Question for each of you. If you had an opportunity to be all in for zero money on a Burr and you’re still having 25% equity, so houses were 200 grand, you’re all in for 150, $50,000 of equity, but none of your own cash is left, you got it all out. However, it loses $150 a month in negative cash flow in the first year. Is this a bad deal or a good deal and why? Let’s start with you, David.

Rob:
It loses how much? You said $250?

David:
150 a month.

David Lecko:
I’ll say this, I wouldn’t keep it. If it was worth 200 and I’m 150 in, got all my money back out, I would sell it. I would never keep a property that loses money for myself.

David:
Great point. You would just basically take that 50,000 of equity and you’d sell it. Same for you, Rob?

Rob:
I don’t want to keep it. I was just negotiating a seller finance deal last week or two weeks ago, and I laid out the numbers. I said, “Hey, man. Look, this is going to lose on a long-term rental, 200 bucks a month.” He’s like, “Well, the thing about rental properties is other people are paying your mortgage, and so sometimes you got to take a small loss. At the end of the day, the appreciation and the location is all that matters.” I was like, “Look, I understand what you’re saying. I don’t go into any deal where I lose money.” We renegotiated the terms, at least break even.

David Lecko:
Some people will do that deal. I know I could be able to sell it because if you own a rental property in San Francisco, a $3 million house may be only rented for $5,000. That doesn’t even cover the mortgage payment. Could barely even cover the taxes, but people buy them, just not me.

David:
Same question, but now the house is in a prime market in the country, it’s worth 800,000. You’re all in for whatever, 75% of that is, very nice location, but it’s still losing $150 a month in cashflow. However, when you look at the principal pay down, you’re paying off much more than the 150 a month. The appreciation is all but guaranteed and you know that rents are going to be going up pretty significantly in the future because it’s such a gray area with less supply. What’s your answer now on that same scenario, David?

David Lecko:
I still wouldn’t do it because I don’t want to have to babysit a property. I don’t want to have to calculate how much of my active income I have to suck away to actually keep that property afloat. I want to scale properties and the only way to do that is to make sure they all positive cashflow. I think I learned this from the cashflow game that goes along with the Rich Dad Poor Dad book is you can’t get out of the rat race if you have negative cash flowing properties. Now, sometimes randomly you could get the appreciation and sell it, but you’re still not out of the rat race yet until you actually buy cash flowing rental properties that are positive. Again, I would sell that deal, use the cash to buy some cash flowing properties.

Rob:
I really don’t like to lose money on a monthly basis just because I’ve worked so hard to get my cashflow where it is. With that said, I feel like you want me to say I would buy it, so I’m going to say yes. No, I’m just kidding.

David:
I see that there’s a lot more hesitation in each of your answers though. There was like, hmm. It moves the needle a little bit, right?

Rob:
Of course. I guess the caveat to that is like, I would take a deal that loses money if there’s a clear path to not lose money. Let’s say that I’m inheriting a tenant that’s under market like you said, and as soon as they move out, I can increase rents to not lose the money, and that’s going to happen within a year, no problem. I can do that. If it’s like I’m inheriting a three-year lease where I’m losing 500 bucks a month, no, I would never do that. If it’s going to turn pretty quickly, then yeah, sure.

David:
What if this property that we just mentioned at $800,000 can have a cost stake study done and the bonus depreciation is going to save you 50 grand that year?

Rob:
Yes. You see? Now you’re asking a good question.

David:
I guess here’s what I’m getting at, are you losing money if you’re only looking at the monthly income versus expenses or are there other factors at play in the overall investment of real estate?

David Lecko:
Yes, 100%. That’s a very fair point because yes, I think if you knew that you were going to, like you’re talking about Burr, flip it, get out of it in the next three years and you’ve got a ton of equity in there and you’re only going to lose, let’s say 10 or $15,000 in rents, but you’re going to make $200,000 from that flip or something. Totally, I think at that point, it would make sense.

David:
What about you, David?

David Lecko:
I would flip it. I would make the quick cash. Unless it’s making me money $500 per month, I’m not going to keep it myself. I still might do the deal if I was going to go ahead and sell it.

David:
What I hear you saying is that you would create energy through capital gains of a flip and then read or invests that energy into the cash flowing real estate that you know can find somewhere else, right?

David Lecko:
That’s right.

David:
I like it. Great stuff.

Rob:
Is this a preview? Is this the Blinkist of Pillars of Wealth?

David:
Wow. Dude, you’re getting good. This is scary good. I think I picked the right co-host. Look at this, man. That was really, really good. The book that’s going to follow it is just an understanding that most people were taught how to buy real estate using a training wheels model, which was just cash in cash out every month. That cashflow was the only thing that we were trained to look at. Once you get into real estate investing, Rob, like you were just mentioning, you own quite a few properties now, you start to see that it’s not quite that simple. That there’s energy that’s flowing in and out of these assets in many different ways. It could come in through equity that you bought at below market value. Equity where you forced equity. The cashflow doesn’t stay the same every year.
Rents go up in some areas or you can add units to properties to make them worth more. Certain areas tend to appreciate more than others. There’s tax benefits owning real estate. Then I think things also change if let’s say that David’s business that he’s running is bringing in 50 grand a month in profit, well now that $150 a month he might be losing isn’t as significant as when it’s like, dude, I’m on a tight budget. I got to get out of the rat race. For the people listening, we’re not all in the same position and the part you start at is not going to be the part you end up with. It’s okay if your model and your blueprint doesn’t look exactly like everybody else’s. David, for the person who’s starting off here, the real estate investor, who’s the ideal avatar that should consider driving for dollars?

David Lecko:
I think somebody who’s not got a lot of extra cash that they’re willing to invest in marketing. I think that if you haven’t done a deal before, it’s a great way to learn your neighborhood. The combination of those two things would be what I would recommend who should drive for dollars.

David:
What do you think, Rob?

Rob:
I think this is going to make the most sense for the newbie. I think obviously, anybody can enter this, but a lot of the times, people who are already relatively established already have their deal flow established. They’ve already got their deal flow going from people that are driving for dollars. It does seem a little bit more of an entry point for most people. With all that said, I just locked down a seller finance property, driving for dollars as well, like a week ago. Accidentally driving for dollars, I was driving in my neighborhood and there’s a for sale sign with the flag on top of it that said seller finance, and I was like, well, hey, I’m driving and I’m going to make the call and I made the offer.

David:
What a smart marketing strategy for that seller. That’s a smart agent or whoever put that together. That’s a great idea.

Rob:
Dude, it was a dream. It was a dream. 3% interest, 10% down. I mean, 30-year maturity. He just doesn’t want to pay the capital gains. Here’s the best part, everybody, he has 150 units in Houston multifamily, and he is like, “I’m wanting to get rid of them all over the next couple of years.” Guess who’s going to be first in line? This guy right here.

David:
I mean, you never know when you’re doing the right actions and you’re taking the right steps, what that’s going to turn into. I think that’s awesome. Now, David, these days you’re cash-flowing about 72 grand a year and you’ve got more coming. You’re helping other people find and close deals all over the country. Do you have the time freedom now that you were looking for in the beginning?

David Lecko:
100%. I could live off 72 grand if I wanted to. Now, I do spend a little bit more from other active income, but I’ve got the time freedom. What I love doing is getting up at 4:00 and going wake surfing three times a week. That’s something that’s not super cheap, but I’ve got the time freedom and the disposable income to be able to do that. That’s one way I love spending my time freedom.

David:
What kind of a sentence starts off with what I love doing is waking up at 4:00?

David Lecko:
It’s 4:00 PM. I get up. No, I don’t wake up at 4:00 AM, I get up from my desk at 4:00 PM.

David:
Okay, all right. That might make a little bit more sense to me than I love waking up at 4:00 in the morning. Rob’s been spending the last three months dragging himself through broken glass, trying to get to the gym, waking up early and letting us all know the whole time how terrible it is. Then David walks in and says, “My favorite thing to do is wake up at 4:00 in the morning. That’s what I use my time freedom for.” You’ve been able to experience a life you wouldn’t have been without real estate. You’re doing the things you love. They keep you charged up. You’re getting your wake surfing done, you’re experimenting with different barbers. You found the perfect wave to your hair, which I don’t think should be lost on our audience since you do love wake surfing. I wonder what Rob’s equivalent would be. Maybe mountain climbing. The quaff kind of looks like a bit of a, have you tried that yet before, Rob? Since his hair looks like a wave and he likes to wake surf?

Rob:
I feel like mine does also kind of look like in this particular moment, it’s got this bottom cloth and then there’s another cloth on top of it. I woke up like this. I got in at 4:00 AM last night.

David Lecko:
That’s when I was waking up.

David:
That’s funny, David, when it comes to landing these deals that you find the opportunity, you go talk to the seller. What we didn’t talk about are some of the psychological tools, scripts, whatever. What advice do you have for the person who thinks that they found an opportunity, they want to go open a conversation with the seller? Obviously, with your experience, you can write a person off who’s not serious, not motivated. You can also navigate the conversation when it’s a little more complex, but just for the person who’s like, man, I want to go talk to him, but I don’t know what I’m supposed to say. Are there books? Are there podcasts? Are there influencers? Who do you recommend that people listen to, to get better at having those uncomfortable conversations?

David Lecko:
I think Brent Daniels’ Talk to People would be a great person to follow and check out his Cold Calling Scripts on how to talk to people and have those conversations. Because ultimately, there’s only two things that give you money in this business, it’s finding distressed properties and communicating with the owners.

Rob:
I actually did a podcast with Brent not too long ago. Very nice guy. Love the philosophy. Seems very successful. Talking to people, what a novel concept, right?

David:
Right. I think for people that are good at talking to people, the assumption is why is this so hard? For people that are bad at talking to people, it’s like up there with public speaking. What I don’t want is for the people that are nervous about it, they don’t have a natural skill with other human beings conversating, but maybe they’re great at analysis or they have a great work ethic. I don’t want them to be afraid to go initiate contact. It is a skill that can be improved. I think when I read Pitch Anything by Oren Klaff, we had him on the show to talk about him. That was one of the takeaways I had is, there’s an actual science to communication. If you could get this down, people will listen to what you have to say and they will see your perspective and it will greatly increase somebody’s confidence with communication, which is what I teach to the people in my company.

David Lecko:
Communication is the foundation of life. I just started taking a storytelling class for the very same reason. It doesn’t matter if you’re trying to sell something, if you’re trying to entertain friends. The ability to communicate in a way that inspires people to listen and stay with you all the way to the end is the foundation of every relationship or every transaction. It’s just so important to life and I believe that.

David:
Awesome, man. That’s a great, great story and you did a great job of communicating today, so thank you for that. For people that want to communicate with you more, where can they find out more about you?

David Lecko:
You guys can follow me, dlecko on Instagram or if you want to check out DealMachine, get a seven-day free trial. We help people find distressed off market properties and make sure they’re communicating with those owners, which is so important. One of our top customers, and I host the DealMachine Real Estate Investing podcast where we interview people who’ve done their first wholesale deals.

Rob:
Love it. What about you, David?

David:
You can find me at davidgreene24 or davidgreene24.com to see what I got going on and how I can help people build their wealth. Rob, how about you?

Rob:
You can find me on YouTube over at robuilt where I talk about real estate, short-term rentals and life, liberty and the pursuit of happiness, and on Instagram too. All of it. If you want the goofy videos, go to Instagram.

David:
If you’ve got something off this episode and you want to keep learning more, check out BiggerPockets Podcast, episode number 781, where we have a round table discussion with Rob, Henry and I on the beginner’s guide to finding undervalued off-market deals in any market. Episode 731 with Brent Daniels or the Rookie Podcast, episode 241, where Sahleem Lee was interviewed, who went from being a line cook to a long-term investor with 32 wholesale deals. David, thanks for being here, man. Really appreciate you sharing your story as well as the details that you did. We will have to have you on again and follow up with how things are going. This is David Greene for Rob reading his second book Abasolo, signing off.