December 2023

Dave:
Hey everyone, welcome to On The Market. I’m your host, Dave Meyer, and today we’re going to be talking about, God, the thing that we just keep talking about for the last three years straight. Is there going to be recession in 2024? Well, we’re just going to take the question out of it and pretend that there is going to be, and we’re going to give you some advice on how to recession proof your business in the case that there is a recession in 2024.
To help me with this, I have Henry Washington, Kathy Fettke and James Dainard joining me. Thank you three for joining us. I appreciate your time.

Kathy:
Thank you.

James:
I’m ready to talk about 2024. I’m done with 2023.

Dave:
You look tired, man. You look like 23 has worked a number on you.

James:
Yeah, the only good 23 is Michael Jordan. That’s about it.

Dave:
All right. Time to move on to 24.

Henry:
Kobe year.

Dave:
Yeah. Wait, was Kobe 24 first or was he eight first?

Henry:
He was eight first. Whoa. 2008 was the recession, so maybe Kobe 24 is the next recession. Boom!

Dave:
Oh, no. Well, I was just about to say that a bunch of economists have been saying that the chance of a recession in 2024 was less than 50%, but you know how there’s always those octopi that predict the Olympics better? So I think Henry’s random prediction about Kobe’s numbers is probably right. So anyway, the real predictions are something about 20% to 25% of a recession next year. That’s at least according to Treasury Secretary, Lawrence H. Summers, or former Treasury Secretary, or Yardeni Research, which is a real estate research company. They produce some really interesting data. They’re saying that there’s a 30% chance of a global recession, and so these people at least are not saying it’s the most probable outcome, but that is definitely more comfortable than most of us want to be.
And just for everyone to know, we talk about this a lot, but a recession doesn’t have any official meaning. I know a lot of people use the two consecutive quarters of GDP loss as the meaning, but it really is up to a bunch of academics and bureaucrats to decide whether or not a recession happens or not. So we don’t really know what’s going to happen and if it’s going to happen, but I think the important thing is that there’s risk in the market. There is a chance that there’s going to be a downturn in economic activity, and therefore we are going to discuss best practices for your business so that you can hopefully just be conservative and prepare in case something bad does happen. And if everything goes great, then you’re just in a better position anyway. So everyone has one piece of advice. James, Henry, Kathy, and I are each going to offer a piece of advice on how to recession proof your business. And Kathy, you have drawn the short straw and have to go first. So what do you got?

Kathy:
Well, I just first want to say that the economy is really pumping right now. It’s going to be a big GDP this quarter, so I’m not too worried about it happening right away, but there are some economists who think maybe mid next year, maybe in the fall. Either way, I look at my investments as if there’s going to be one. Why not? Be prepared for that, be prepared for if there’s not going to be one. And the way that I do that is either way, if there’s going to be a recession or not, I like to make sure I have plenty of cash reserves in place. Remember, I’m a buy and hold investor, which means that you buy it and then you have to hold it. There’s two pieces to the puzzle here. Right? And the way that people lose money in buy and hold, there’s several ways of course, but the big way, and certainly in 2008 is they couldn’t hold it. When those loans came due, they weren’t able to afford that payment.
That’s really not what people are facing today in buy and hold for the most part, at least in one to four, they’re mostly fixed rate loans. So just making sure you have plenty of cash reserves in case your tenant loses their job. Now, that can happen at any time because we’ve been living through a recession in certain industries. If you’re in real estate, if you’re a real estate agent or mortgage broker, you’ve been in a recession and there’s lots of them out there and they’re not making the money they used to make, generally.
So there’s always a risk that your tenant could lose their job, that they could get sick, that something could happen. And having that six months reserves, and what I mean by that is six months rent overhead. You just want to have that in a bank somewhere, so that that gives you plenty of time if your tenant loses their job and you need to cover the expenses. So that’s what I do anyway, and that makes me feel like I can walk into any economy and feel safe.

Dave:
Kathy, when you’re creating a cash reserve, do you basically just hold back cashflow until you have six months? Or what about people who might not have six months of cash reserves currently? Do you recommend they inject capital into an operating account, or how do they do that tactically?

Kathy:
Personally, what I advise people is have it at the outset. You know you’ve got it. Now, if you are just starting out and you don’t have that capital, then you would just keep all the cashflow, everything that comes in, it just goes into an account and you don’t touch it. And that’s your reserve account because remember, it’s buy an old real estate, people live in your property. If there’re going to be repairs, you need that reserve anyway. So just have it, six months reserves for rents and overhead, general overhead, but also a cushion for repairs. You should know your property well enough to know how old certain items are, have they been replaced? When will they need to be replaced? What’s the CapEx that you’re looking at? And have that set aside too.
Maybe you could put them in a two or three month CD or something, make a little money on it while it’s sitting there. It doesn’t have to sit in a non-interest bearing account, but just it needs to be somewhat accessible, especially if you’re in California or in a state where it’s harder to evict. Where we invest, if somebody loses their job and we have to evict, then it can be just a matter of weeks for that to happen. But in certain non-landlord friendly places like California, it could be six months, it could be a year. So anyway, yeah, if you’re in California, then maybe you want 12 months reserves.

Dave:
That’s a great point. I think it really does depend on the individual property and your individual circumstances. Six months is a rule of thumb, but if you know that your hot water heater’s rusting out and about to pop at any point, you might want that well, or if your tenants have a history of making late payments, you might want to consider that as well.

James:
Yeah, and it depends on what kind of assets that you’re in. I love what Kathy said because that’s that old mindset of that historical kind of metrics of keeping six months aside, and I love that. I think after 2008, I really learned that lesson and really started keeping. I call it my oh, curse word money. It’s got to be sitting over there. The thing is, with how things have moved over the last couple of years and how people have gotten into growth, it’s not just the traditional six months aside. You really got to get into the forecasting of what your businesses are and what they’re doing, and then make adjustments for what’s essential in today’s market. If you’re only looking at performers and P&Ls, it doesn’t tell you where your capital’s getting eroded.
And so you’ve got to spend a lot of time forecasting that cashflow out, putting it aside, making sure you have your reserves and then making your adjustments. Because as we go through transitions, you have to adjust those models.

Henry:
Yeah, I agree. James. One of the things we like to do is to have a set amount per number of doors. So meaning if you’ve got five doors, then maybe we’d like to have somewhere between 10 and 30 grand in an account. The most expensive thing typically from a maintenance perspective or CapEx perspective that we’d have to put on a house is probably a new roof. And so just making sure that if something happens, we’ve got to put a new roof on a property that the money’s there to be able to do that. And then as the portfolio grows, then that amount of savings needs to increase with it. And then as we spend that money, we’ve got to reduce cashflow spending and make sure that cashflow goes back into that account to make sure we just keep those amounts to make it just a little easier to manage. But first and foremost, Dave, if you’ve got a hot water heater that’s about to pop, just go ahead and replace that.

Dave:
Yeah, just replace it.

Henry:
Speaking from experience because I’m buying a house right now that the seller didn’t do that. The whole house flooded and now he’s stuck and then they found asbestos and now his house is down to the studs. So just go ahead and replace [inaudible 00:08:52].

Kathy:
Just get it done.

Dave:
Just go ahead and do it. That’s not cash reserve, that’s just repairs.

Kathy:
I like to buy stuff that is either new as you guys know or is repaired on the outset because then you can gauge your capital expense a little bit better. You know what you’re in for if everything’s fairly new.

Dave:
Henry, I was going to ask you, if you own a bunch of properties, do you have cash reserve on every property level or do you ever just do it as a portfolio level, sort of like the insurance model, the likelihood that you’re going to have an event in every property is low, so you can leave less total reserve as long as you’re thinking about the total portfolio?

Henry:
Yeah, we do it in buckets. So every five properties, we want to have X amount of X money in reserves. So if I have 10 properties and I know that’s X amount of dollars. If I have 11, we still keep it at that number, but once we get to 15, then we increase it again.

Dave:
Is that how you do it too, James?

James:
Yeah. Well, it depends on the business. Typically, with our portfolio, cashflow is pretty heavy right now. And so we don’t take a dollar from our cashflow throughout the year, and then at the end we then reallocate it out. So our portfolio really does pay for itself 3X over, but we had to get there. And so yes, right now we would put money aside and then it’s to cover, if we weren’t at our cash flows, we would have at minimum six months of payments. Plus, we like to have a maintenance account that’s typically going to be about 1% of our net cash flows.

Dave:
Well, Kathy, thank you. Very, very good advice just as reminders to build a cash reserve and really safeguard that cashflow. Henry, what’s your advice for recession proofing your business next year?

Henry:
So this is what helps people start to build that cash reserve, but I think we need to pay attention to what’s it costing us to operate our business? And this one is the hidden killer because these costs sometimes feel like they’re coming out of nowhere because you’re getting so many little onesie, twosie things that happen in your business that in the moment don’t seem like it’s a big deal. And then you look back at the end of the year or at the end of the month when you’re doing your bookkeeping and you’re like, “Holy crap, how much did I spend on X, Y, Z maintenance?” For me right now, I was getting eaten up by all of these little pieces of software that we need in different parts of our business.

Dave:
It’s like subscriptions.

Henry:
Yeah, subscriptions. But it’s like I’ve got a tool for this social media thing and I got a tool for this part of my business where we’re looking at offers and there’s all these little tools and subscriptions and you forget sometimes that you sign up for them and it’s just like people with their cable bills and all that. You’re looking at them, but you need to do that in your business too because as we’ve been growing, we find these tools, we use these tools and some of them are great, but now we’ve been spending a lot… I’ve been spending a lot of time looking at them, scaling them back and then consolidating them into one singular tool that does everything. And I’ve probably saved myself five grand a month just in the cost of some of these tools that we’re using elsewhere in our business.
So it’s about tracking your expenses and being more diligent about tracking expenses and understanding where you’re spending the money and do you need to continue spending that money? Can you consolidate some of these services? Can you hire someone to eliminate some of these things? A lot of the times it’s just… I guess the goal is you want to take a look at what are your expenses in your business? What are you truly spending money on every month? And making sure A, that you truly need to be spending that money or B, can you make a decision to bring somebody on or bring on a tool that eliminates you having to spend that money? Sometimes you can find a lot of your savings to help you save up for that cash reserve Kathy was talking about right now in what you’re currently spending in your business.

Kathy:
Oh my gosh, I agree so much. When times are good and when times are great like they have been the past 10 years, people are going hard, they’re going fast, they’re making a lot of money, they’re not really paying attention to expenses. A lot of times they’re just going and at times like this, you get to slow down and look at operations and really cut back because I think a lot of excess happens during the good years and it’s fun.
Anyway, so I know that with our team, it’s like everybody goes through, looks at the extra expenses that we maybe took on but don’t actually need. And sometimes, unfortunately, that can be personnel as well. If you had to hire extra people during the good times, they maybe have to go during the slower times, but this is the time to really just slow down and look at overall expenses and what’s truly needed and what could be cut.

James:
Yeah, it was funny. I was just talking to my wife the other day. I’m like, “Hey, we’re going to do a credit card, debit card purge. We’re going to cancel every debit card and credit card and then we’ll see what bills come in and go, ‘Hey, you need to renew or update your payment.’ If we don’t want it, we’re just going to cancel it right then because once it pings for the auto-renewal…” But yeah, these little costs can really erode your business and something else to think about that we’ve been really looking at is operational costs. For us as investors, I look at money as inventory for us. It’s inventory that we use to grow our business and our portfolio and buy new things and we have money sitting there, we want to deploy it and we want to get into the next deal.
But then sometimes as deal junkies and investors, you’re not thinking about, “Okay, well now I got to really secure this property. I got the dead time. I got insurance costs. I got these little creeping bills that don’t seem like much when you’re just racking deals,” but if you’ve got to pay four more insurance premiums, why it’s sitting and being turned, or you got to pay four more superintendents to manage your properties, why it’s being turned, those are the costs that are really eroding.
And so you have to work that all into that and go, “How do I reduce that and change that up in times when cash flows are lower?” Like for us, we got rid of some of our project managers because that’s a dead salary of a hundred grand a year. And it was not a dead salary, it’s to operate, but we have to pay for that. And we started structuring deals differently and bringing in partners and slicing in the deal to erode our monthly payment on that, and we’re still getting the projects done.
So it’s about looking at the business and go, “How do I reduce my costs?” And whether it’s through partnerships, cutting the cost, cutting waste, but we all have to do that right now. Cut the cost one way, shape or form and restructure it.

Dave:
Do you have Henry, any advice on how to go about doing this? Should you perhaps buy some new software subscription that will help you figure out what software subscriptions you don’t need?

Henry:
Yes, absolutely. In order to figure out how not to pay for stuff, you should go pay for something.

Dave:
You know there is actually a tool that you pay for that stops your subscription? It’s a subscription to stop your subscription.

Henry:
Yes.

Kathy:
It works. You sign up for things you forgot.

Dave:
That’s a good idea actually.

Henry:
First of all, within your business, you should be doing bookkeeping. And if you’re doing bookkeeping, you should already have an accounting of what you’re spending every month and on what those things are for. So really, it’s just diving into your monthly bookkeeping and seeing where your money is going and then get to that kind of micro level and then make decisions on, “Do I need to be spending this money on this thing right now or is this something that I can do either on my own?” Maybe it’s that you take a set of services that you’re paying for and then you hire a VA to take care of doing those tasks. And sometimes that VA cost will be a lot cheaper and more efficient than you paying for multiple different pieces of software that take care of those things.
So there’s tons of ways you can look at it, but I’d start with your bookkeeping. If you don’t have a bookkeeper, then A, you probably either need to go hire one or B, get one of these free tools that will categorize your expenses for you like I think Mint, but I think they just might’ve gone out of business, but there’s a few free tools that you can use.

Dave:
Yeah, yeah, there totally are. I think a lot of banks actually do it. I know Chase does it, and even if you do your bookkeeping yourself, like QuickBooks Online for example, they have some auto categorization features that you can use that are actually really helpful. It’s not perfect. It’s not the same as having a bookkeeper, but even just for most rental properties, I don’t know about you guys, but for an individual rental properties, there aren’t that many expenses. It doesn’t take that long to go through, especially the recurring ones, unless you’re doing a rehab or anything. The recurring ones, go see what’s on there. It’s not that hard to just even eyeball it.

Kathy:
You got to know your numbers, you got to know your numbers, especially at times like this and be looking at expenses every week at least, at least. What am I spending money on? Where is it coming from? Where is it going? And if you aren’t completely dialed in, then you’re either leaving money on the table, you’re just spending too much. It’s like that is the job of a business owner is to know your numbers inside and out.

Dave:
Well said. All right, James, for our third piece of advice for recession proofing your business, as a reminder, Kathy said to build cash reserve, safeguard your cashflow. Henry said to reduce and evaluate operating costs. James, what’s your advice?

James:
It’s all about having access to capital. As we’ve gone into a transitionary market, what’s happened is a lot of investors, including ourselves, you perform at a deal, the debt has changed and you’ve had to service that debt cost. And some of these projects that can take six, 12 months, 18 months, when your rate jumps from 9% to 11% or even 8% to 11%, it erodes your capital back. And so what we’ve had to do is we’ve had to really get comfortable with securing other types of backup slush fund credit, and that’s by working with banks and getting access to capital and working with banks to help you with these cashflow issues. Every deal that we’re looking at right now, we are talking to our lenders and going, “Hey, how do we get a 12 to 18 month interest reserve put in this deal?” And an interest reserve is where they finance in all of your carry costs so you can really function off the now and not worry about the debt cost creeping up on you on a 12 to 18 month period.
And so what we found is we wanted to build better relationships with banks so we can structure deals a little bit better. By us moving over deposits to a bank, they’re paying us a 4.5% return, which is great. It’s not what we make us as investors, but we’re moving our money over, which then by moving the money over, we’re making a 4.5% return. We’re borrowing the money then on a deal at 9%, 10%, but then they’ll factor in all of our cashflow needs, which is going to be those interest reserves that carry costs and stuff that you need to push through a flatter market.
And so by really working with banks and getting these lines together, it gives you these levers that you need to push you through a hump. Every time an investor buys a deal, it takes up capital. You got to put your down payment down, you got to service the debt, you got to service the people to facilitate the transaction, and that’s where you can get in trouble. And as investors, the thing with us, as soon as money comes back in our bank account, what do we want to do? We want to go do the next deal.
And so you get these wins, you race into the next deal, but then you’re not forecasting that hard six to 12 month cashflow. So by having your banks and your slush sum reserves, that’s what’s really going to push you through the humps. And that’s about getting personal line of credits. Having access to credit card debt, even though I don’t really believe in it, it’s way too expensive. I don’t think you should be doing deals if you’re going on credit cards right now, personally, but that’s just for me.
And then also moving your money to smaller portfolio banks that will look at you as far as a business, not just a client in the bank. When you meet with these portfolio banks, they look at your forecasting in your businesses and they’re going to structure your debt around that. They look at our performance, they look at our assets, they look how we’re going to stabilize things. If I go to one of the big banks, all it is, “How many deposits do you have? What’s your monthly expenses? We’re going to give you that leverage on that.” So by moving around to small business banks, it’s really helped give us access to debt, but they also understand the business for better terms.

Henry:
Yeah, I think this is fantastic because this is something I wholeheartedly agree with. I think what you want is access to capital in the event that you need it, right? Yes, recessions are difficult times, but recessions also create opportunities for investors and opportunities to buy, and access to money is just harder right now. And so you don’t want to miss out on an amazing opportunity because you haven’t prepared yourself on the front side to have access to capital to be able to jump on it. And so we’re not saying go rack up a bunch of debt for no reason. We’re saying prepare yourself, have access to capital and then use it strategically. And so being able to do something like… Everybody has a bank account. And so if you’ve got a bank account, even if it’s not at a small local bank, you can probably call your bank and see if they’ll just give you access to an unsecured line of credit. That’s kind of a cheat code nobody knows about.
So an unsecured line of credit is essentially a line of credit. So the bank will extend you a line of credit just based on they like you. It’s not secured by any asset. So secured lines of credit are things we’re all used to, like a home equity line of credit, that’s a line of credit that’s secured by a piece of property. You can secure loans with all types of collateral depending on how cool that bank wants to be with what they want to consider collateral. But mostly, you’re going to get a line of credit secured by a piece of property or you’re going to get a line of credit secured by your credit worthiness. And that’s all an unsecured line of credit is. It’s them saying, “We like you, we like your credit score. Here’s some money that we’ll allow you to use.”

Dave:
And if you’re unfamiliar with a line of credit in general, it’s basically just money that you can use but you don’t have to use. It’s similar to a credit card basically. It’s available to you. The bank issues you a credit limit and you can take out part of it, all of it. So if you had $100,000 as your line of credit, you could take out $10,000 and just pay on the $10,000. You’re not paying on the full amount of your credit limit.

Henry:
They already bank with you that you already got money in there in deposits. They have a relationship with you. You can call down there and say, “What would you give me an unsecured line of credit for?” And they may just turn around and give you access to some money that you can use for a down payment for the next good deal that comes your way. Now, you don’t want to over-leverage yourself and spend that on a bad deal, but just having that as a backup plan to be able to know, “Hey, if a good deal comes my way, I just got 20 grand on an unsecured line of credit with this bank.” And you don’t have to use the money. And if you don’t use the money, then you’re not paying any interest on it. So there’s lots of good little things you can do like that to be better prepared, better capitalized for opportunities coming your way through a recession.

Kathy:
Yeah, it’s a conundrum, right? At times like this, as the Federal Reserve is trying to pull money out of the system, they flooded the system with money over COVID. And the many years prior to that, it was easy to get access to money. And the process over the last 18 months is to pull that money back out. And during times like that, it’s harder to get money, but at the same time, that’s when the deals are there. So you’ve got to get good at finding money in any kind of market, but definitely in the coming market because it is harder to get, which means there’ll be less competition, which means there’ll be more deals and you’re the one who gets those deals if you can find the money. And there’s so many ways to do it. It doesn’t have to be just through a bank.

Dave:
Yeah, this makes so much sense right now. It always makes sense, but we’re in this weird scenario where prices might fall a little bit. We are seeing some downward pressure, but it’s also still very competitive to buy, which is just this confounding dynamic that doesn’t actually make any sense, but it’s reality. And so like Henry said, and like everyone said, you have to just be ready to jump on these opportunities because there are going to be ones, but they’re going to go really quickly. It’s not going to be the kind of recession, at least in my mind, where deals are sitting on the market for 180 days and you’re going to have your time. Things will come up and opportunities will arise, but people are going to be waiting and you should be one of them.

James:
And I think that’s why it’s so important to have your cashflow forecasted out in a six to 12 month period because you can get blinded by the good deal and just go get it, but then all of a sudden you’re in quicksand because you have to keep up with that debt. And so really forecast that cashflow out and know even if you have a good deal, sometimes the best deal you ever do is passing on that deal. And so forecast and make sure that you can keep up with it and have your slush fund because that’s where the quicksand starts.

Dave:
All right. So far, we have three excellent pieces of advice, which is to build your cash reserve, reduce and evaluate operating costs and secure financing before you need it. The last one I’ll bring, which I can feel you guys rolling your eyes already, which is to diversify your investments. I know none of the three of you diversify outside of real estates, but I do. I like to keep at least some of my net worth in stocks and bonds and bonds and money market accounts are doing pretty well right now. You can earn about 5%, 5.5%. And I think the real thing that I focus on in these types of markets is actually just trying to balance liquidity. It’s not even necessarily trying to get into multiple different types of assets, but it’s making sure that if I need a big amount of money that I can get it.
And real estate has many benefits. Liquidity is not necessarily one of them. If you’re unfamiliar with this term, liquidity is basically how quickly you can turn an asset, which is anything that has value, into cash, and it’s relative what you mean. I generally think it’s can you turn something to cash into a week, in two weeks, in three weeks? And so there’s this big spectrum. Cash is obviously the most valuable because you can use it and it’s the most liquid. On the far end of the spectrum, it’s like fine wines and art. And real estate is on the further end of that spectrum where it’s relatively illiquid, which is fine because most of us buy and hold for long periods of time. But during periods where there is a lot of volatility, particularly if your job or your income is volatile, I think it’s really important to balance your portfolio and your investments to make sure that you always have access to… You could sell something, you could sell your stocks, you can sell your bonds in case you needed to cover something in your real estate portfolio.
So generally, that’s just how I think about things. It’s just basically trying to make sure that I always have options to liquidate some part of my investment portfolio if an emergency occurs. Now, I choose to do that across different asset classes. I know you all don’t, but you can also diversify within real estate as well. So in addition to owning rental properties, for example, which typically have a very long hold period, you could also flip houses or you can wholesale or you can hotel because that you just have your money into those investments for less time. And so you have more frequent opportunities to reallocate your capital in these changing market conditions. What happens three or six months from now might be very different from what’s happening today. And so if you do a flip and you get your money out in six months, you have that chance to take advantage of whatever’s doing best then, whereas some of the longer term holds aren’t necessarily as good for that.
So that’s generally my advice is to try and make sure that you have liquidity across your entire portfolio. Now Kathy, I know you have almost all your money in real estate and you’re mostly a buy and hold investor. So how do you think about this? Do you have any more liquid assets in your portfolio?

Kathy:
Yeah, we invest in gold. Rich does play a little bit in the stock market mostly for fun and to learn it and cash. So yes, I’ll call that diversification.

Dave:
So mostly cash. Cash is the most liquid thing there is. It doesn’t take any time to turn cash to cash.

Kathy:
Yeah.

Dave:
Okay. So I like it. Okay. So Henry, I know you mostly invest in real estate and that’s totally fine. So within real estate, how do you think about how you allocate your money? Do you think that, “Oh, I’m going to do some long-term investments, some short-term investments,” or how do you manage your equity and your capital in a way to mitigate risk?

Henry:
Yeah, no, that’s a great question. So for me, obviously my main strategy is buy and hold. And so that is where obviously the bulk of the net worth comes in. But I like doing flips as a way to generate capital. And I will also look at my portfolio as a whole, as my rental portfolio as a whole and determine which of these rental properties can I monetize sooner than later when it’s financially beneficial to do so? Because markets are cyclical. So I may have properties that I bought as a buy and hold, but maybe that property is way more capital intensive because of the… Maybe it’s way more maintenance intensive than I was expecting or that I underwrote that deal for. And if the market is up, I can probably get paid a hefty premium for selling that property, eliminating the maintenance expense, which was eating away at the cashflow, and then make so much profit that it would’ve taken me a decade or two decades to generate that kind of cash from just the cashflow month over month, especially because the maintenance was eating away at it.
So I try to look at, A, evaluate my portfolio as a whole and see how I can monetize things differently in order to increase cash in my business. But yeah, I’m always looking at how can I generate capital on a short-term and then how can I offset those gains when you’re flipping through holding the real estate.

Dave:
Thank you. Yeah, that makes a ton of sense. Just trying to mix the different types of investments and the different kinds of wins. James, you talked a little bit about forecasting your cash flow. Is this something that you do as well, doing as many flips? How do you make sure that you’re scheduling your deals so that you get regular injections of capital back and you’re not having too much of your capital invested into long-term things?

James:
Yeah, and I love this topic. It’s funny, a lot of times people will talk to me and they say, “Hey, you’re not diversified, you’re only in real estate.” But I look at my portfolio as being a pie chart with diversification that we’re moving around at all given times. In today’s market, we know access to capital is essential. And so I have really allocated probably 50% of my cash into private lending where they’re on three to six nine month notes that pay me a much higher yield than when I have to pay for my bank financing all my other deals for. So I know that the cashflow for my private money lending is going to pay for any debt that I’m securing on any kind of short-term investment engine or rental property that’s on a negative to offset that. So I look at every market that I expand the pie charts.
Two years ago when rates were really low, I would say I had 50% of my capital in short-term high yield investments, which was fix and flip and development. And so as the market gets riskier and things get flatter, we just move things around. Like right now, I don’t want to trap any money in a deal that’s going to pay me an average return, even if it’s a great rental property. If I can structure it right with leverage to where I don’t have to leave much in, then I’ll look at that deal. But I don’t want to go leave 20% in to get a growth factor over a five to 10 year period because what we’ve referenced on the show is there is some amazing deals that pop up right now.
And so I like to have my cash in a high yield investment that I have access to liquidity for. I can make a move, buy that deal if I need to, but I’m going to be heavier on that passive income streams with access to capital. And I think that’s just important to move things around as you grow, but it also depends on where you’re at in your investing career. When I was newer in 2008, 2009 and 2010, we did not do that. It was about pushing through and growing. And so depending on where you want to be, you want to look at where’s the portfolio, what are my goals? And then set your pie chart.
It’s no different than those financial planners. I have a pie chart for my liquidity and my investments, where’s it going to allocate? And based on my goals, it’s going to tell me what to do in my pie chart. So I’m not in as high growth factors as I used to be, so I’m going to be a little bit lower returns with more cash accessible. If I’m making 12% of my money with private money, that’s making about one third of what I would make flipping a house on a return basis, but it gives me access to capital, it pays for other debts and it allows things to move things around. So we’re constantly, every year I’m reshaping my pie chart, but this year I moved a lot into private. I wanted high yield cash accessible investments.

Dave:
That makes a lot of sense. And yeah, I just think this whole concept of what James is talking about, like reallocating capital within your portfolio is something not talked about enough in real estate. I think there’s some mantras where it’s like just buy and hold on forever, but even if you’re a buy and hold investor, you should still be thinking about selling properties and buying new buy and hold properties just and optimizing, as you said James, your pie chart based on current market conditions and what else you can get out there. So in addition to diversification, just thinking about reallocating your capital to maybe safer investments is another… Maybe that’s the bonus tip for recession proofing your business right now is consider reallocating some capital into something safer.
All right, well, thank you guys so much. This was great help. I also want to recommend that if anyone wants additional advice on top of what James, Henry, Kathy, and I said today, BiggerPockets has a great book. It is called Recession-Proof Real Estate Investing. It’s written by J. Scott, my co-author of one of the books I wrote, and just a great real estate investor in general. It is full of really helpful practical tips on how to navigate any type of recession or economic downturn as a real estate investor. It’s really actually quite easy to read. I’ve read it like three, four different times and you can get through it in like two or three hours. Highly recommend.
All right, well, that’s it. Well, Kathy, James, Henry, thank you for joining us and thank you all for listening. We’ll see you for the next episode of On The Market. On The Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kailyn 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.

You may not be familiar with modern portfolio theory, but you probably know its core tenet: Investors should diversify among uncorrelated assets to maximize returns while minimizing risk. 

Soren Godbersen at EquityMultiple makes a strong case that if you subscribe to modern portfolio theory, private equity real estate belongs in your portfolio. In fact, he points to data that shows it actually boosts your risk-adjusted returns. 

I couldn’t agree more—which is why I invest in private real estate through many channels and along many timelines. 

These investments serve different purposes in my portfolio. Some generate instant and ongoing income, others offer liquidity, and still others offer high long-term growth. The equity investments also provide me with tax deductions and depreciation. 

Short-Term Real Estate Investments

Contrary to popular belief, you do have options for short-term real estate investments beyond public REITs. These investment choices don’t come with the same volatility or correlation to stock markets. 

The following real estate investments typically let you access your money within a year. Use them for immediate income, liquidity (in some cases), and diversification.

Real estate notes

Some real estate-related notes repay in a year or sooner. EquityMultiple offers some, as do 7e Investments, Norada Capital, and others. They may or may not allow non-accredited investors or be backed by real estate deeds or liens, but you have plenty of options. 

Earlier this year, in fact, our Co-Investing Club invested in a nine-month note with Norada at 15% interest. So far, it’s paid us monthly interest like clockwork (not that I’m endorsing any specific investment; just sharing our experience). 

But you don’t have to go through a company. If you know any real estate investors personally, you can always offer to lend them private notes as well. 

Groundfloor notes

Groundfloor deserves its own subsection, given how accessible it is. It allows non-accredited investors to participate, and many of their notes allow a relatively low minimum of $1,000. Note terms range from one month to two years. 

I’ve personally invested in Groundfloor notes, and they’ve always repaid my interest and principal on time. 

Concreit fund

Concreit follows a similar model, letting you invest in a pooled fund of secured property notes. 

The difference? You can invest as little as $1, and you can withdraw your money at any time. 

Those advantages come with an equal and opposite downside: Concreit pays lower interest than the other options outlined here, currently 6.5%. If you withdraw funds in under a year, they also ding your earned interest by 20% but don’t penalize your principal. 

I like using Concreit as a high-yield holding account for funds slated for longer-term real estate investments. For example, if I know I want to invest $5,000 in a real estate syndication through our investment club but don’t know when I’ll need it, I might stash it in Concreit and earn interest on it in the meantime. 

Concreit also adds another layer to my emergency fund. I can’t access it as quickly as a savings account, but it still offers fast access in a pinch. 

Ark7 property shares

While smaller than its competitors, Ark7 offers something those bigger competitors don’t: a secondary market for selling fractional property shares at any time. 

Well, almost any time. They do impose a one-year hold period. But that still qualifies as a short-term investment. You can buy shares in a single-family rental property without the long-term commitment, enjoy the rental cash flow, and sell any time after the first year. 

Medium-Term Real Estate Investments

Investors have fewer options for medium-term investments between one and three years, but they let you plan for the not-too-distant future without locking your money up indefinitely. 

All the short-term investments mentioned here can, of course, be held longer than a year. That goes for Ark7 property shares and Concreit fund shares, and of course, some real estate notes offer terms in the one-to-three-year range. 

Consider these options if you don’t want to lock up your money into the mists of time but don’t mind committing to a couple of years. With these medium-term investments, you can start taking advantage of equity tax benefits, infinite returns, faster velocity of money, and, of course, cash flow. 

Shorter real estate syndications

Most real estate syndications make it very clear that you should expect to leave your money locked up for five years or longer. That’s most—but not all. 

Some sponsors plan on faster turnaround times, perhaps because their business plan doesn’t require as much value add, or they have teams that can move fast. In some cases, they might be stepping into a deal midway through unit renovations and simply need to complete an existing business plan.

We invested in such a deal not long ago in our Co-Investing Club. The seller was in their 90s and had been renovating units and successfully turning them for high markups. But their health gave way before they could finish executing the plan. 

The new sponsor stepped in to finish the job and plans to sell the property within 18 months. In the meantime, the property cash flows well and will pay distributions. 

Another sponsor our club just invested with told me candidly: “We underwrote this deal conservatively, telling everyone we plan to refinance and return capital in three years. But we actually expect that to happen between 18 and 24 months from now. We know we can finish the value-add before then because we’ve already done it at two similar properties down the street. We just haven’t marketed the deal that way because no one would believe us.”

Groundfloor LROs

Groundfloor made its name letting retail investors put money toward individual hard money loans. They call these LROs, short for limited recourse obligations.

These loans sit in first lien position, and if the borrower defaults, Groundfloor forecloses to recover your money. While many of these repay in four to 12 months, you don’t control when you get your money back—it’s based on when the borrower repays the debt. So you have to accept that some of these may not repay you for a year or two. 

Over the course of Groundfloor’s history, these have performed with remarkable consistency, averaging 9.5% to 10% per year. I invest $10 to $30 apiece in these, spreading my money among thousands of loans. Some repay on time. Some repay in full but late, and others default and repay later with some loss of principal. Averaged together, I still come out in that 9% to 10% range of returns. 

I’ve now invested in so many that every week, some of these repay for consistent passive income. I consider these an income and diversification play. 

Long-Term Real Estate Investments

Real estate is a notoriously illiquid investment, which makes most real estate investments long-term. 

I used to buy rental properties directly, and they certainly qualify as long-term investments. It costs thousands of dollars to buy and tens of thousands to sell even a modest property, and it takes years of appreciation to break even. 

Today, I only invest passively in real estate. I don’t have the free time or patience to put up with landlord headaches. 

Real estate syndications

Instead of rental properties, I primarily invest in real estate syndications. I buy a fractional interest in a large property rather than the entire ownership of a small one. 

That leaves someone else to hassle with lenders, contractors, tenants, property managers, city inspectors, and the like. I just sit back and collect the cash flow, appreciation, and tax benefits. 

In our Co-Investing Club, we typically review deals targeting 15% to 30% annual returns. Some are more income-oriented, paying high distributions almost immediately. Others are more growth-oriented, with big payouts slated at the sale or refinance. 

By investing as a group, we can each invest small amounts, and sometimes we can negotiate higher return splits than solo investors get. I might only invest $5,000 personally, but I get the preferential returns of a $500,000 minimum investment. 

Today, it’s the bread and butter of how I invest in real estate, which is my core strategy for reaching financial independence within the next few years. 

Fundrise

The last year has not been kind to Fundrise investments, but then again, it hasn’t been kind to many real estate investments. 

I have some money invested in Fundrise for diversification. But I no longer invest new money with them, as I feel more confident in the other real estate investments outlined here. I also don’t like that they penalize you if you withdraw money in under five years, although it’s a lower penalty than most of their competitors. 

Arrived property shares

I’ve bought shares in a handful of properties on Arrived, mostly as an experiment. I like the low minimum investment per property ($100), but I don’t like the lack of liquidity and long time horizon (five to seven years). 

To be fair, Arrived just launched a fund with the same minimum investment and a redemption option to sell shares. It comes with a minimum six-month holding period, a 2% penalty for selling between six and 12 months of buying, and a 1% penalty for selling between one and five years of buying. 

Again, I no longer actively buy property shares on Arrived, but that’s simply because I’d rather invest in syndications for my long-term investments. 

A Portfolio for Financial Independence

I invest in stocks for long-term growth, liquidity, and ease of diversification. Plus, stocks offer easy investing in tax-advantaged accounts such as IRAs without needing to hassle or pay for a self-directed IRA custodian. 

I invest in real estate for both income and longer-term growth. Real estate also comes with enormous tax advantages baked in without needing help from tax-sheltered accounts. Best of all, it achieves all this while reducing risk in my portfolio, as real estate has less volatility than stocks and adds the diversification of a low-correlation asset class. 

If you wanted to, you could invest only in short- and/or medium-term real estate investments. And if you’re new to real estate investing and cautious about it, start small with short-term investments. 

I don’t worry about the lack of liquidity in my medium- and long-term investments because I can access my short-term investments in a pinch. Each of these investments I’ve discussed plays a role, whether it’s the liquidity of Concreit, or the income of my note investments, or the growth and tax benefits of my private equity real estate investments. 

As a small business owner, my active income fluctuates wildly. The passive income and growth of my investments help stabilize my finances and provide peace of mind. I can sleep at night knowing that every month brings me closer to financial independence, regardless of the monthly income from my business. 

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David:
This is the BiggerPockets Podcast show 856. What’s going on everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast. Join today with my co-host, Ashley Kehr, and boy, have we got a show for you. If you have been struggling to figure out how to make real estate investing work in this challenging market, or asking the question of well, what would work for me? Today’s show is for you.
Our guest, Hunter Lawler, has an incredible story where he blazed his own path and then left breadcrumbs so me, Ashley, and you can follow in his footsteps. Hunter has an incredible story where he started off dropping out of college to start a business, put that money into a double-wide … Yes, double-wide mobile home right out of the bayous of Louisiana, scaled that into a portfolio of 15 properties, got into self-storage, and did a whole bunch of other stuff all while working a W-2 job. I love this story, I love the example that’s being set, and I love today’s podcast. Ashley, welcome to the show. What are some things that people should keep an eye out for that really crushed it in today’s show?

Ashley:
Well, thank you so much for having me as your co-host. I know that you personally selected me and it is very much appreciated. With Hunter, first of all, I got to say you are a very vivid storyteller. I’m more to the facts. And I’m just going to say that we are having two master classes today, and one is going to be on screening a tenant and the other one is going to be on sheriff sale. David and I don’t have any experience in this so this was a whole learning process for us too.

David:
Absolutely. You get a ton of information at a very fast clip in an incredibly entertaining fashion. All right, let’s bring him in. Hunter Lawler, welcome to the BiggerPockets Podcast, how are you today?

Hunter:
Doing well, David, thanks for having me.

David:
First off, your name sounds like you should be in the WWE. Has anyone ever told you that you sound like a professional wrestler?

Hunter:
No, but the last name usually triggers it quite a bit.

David:
And the first name. Like you’re hunting and you’re a Lawler, you’re made for this. But that’s not what you do, you’re actually a real estate investor with an incredible story. So why don’t you start off letting us know how you got started in work and in real estate?

Hunter:
I really can’t talk about my real estate journey without giving credit to a side hustle that I started while I was in college. I was working Monday, Wednesday, Friday for a family-owned construction company and going to school on Tuesdays and Thursdays. And I could see the writing on the wall very early on that I would need another source of income to keep up with a high cost of living so I started thinking of ways to make some extra money. And I thought everybody in Louisiana likes crawfish so I decided to open up a crawfish business, bought a catering trailer from a guy in my hometown. The crawfish business ended up being very successful. It got to the point where I got so busy with the crawfish that I started failing in college because I couldn’t go to class.
A little side story with that. One day I was walking in to take an exam, it was about 9:00 AM, and I got a call from one of my best customers and he says, “Hey, Hunter, can you bring 400 pounds of crawfish and have them ready on an oilfield location by 4:00 PM?” And I was like oh man, that sounds like a good job. And in my head I was thinking, I can make $2,000 off this job, profit. But at the same time, I was walking in and taking an exam. And I was like man, if I miss this test I fail this class. Needless to say, I took the $2,000 and went and fired up the pot. As I was driving to this job I was weighing out did I make the right decision. I could either make this $2,000 and fail this test or pass the test and lose this customer. I had learned more in the two to three months of owning my own business than two years of college had taught me.
I don’t want the listener to take away like hey, you need to drop out of college and go make $35,000 a year selling crawfish. What I do want you to take away is knowing that experience is a way better teacher than the classroom. Whenever I bought that trailer it was December and I knew that I had to be up and running by February. Due to that pressure of pulling the trigger … Keep in mind I knew nothing about cooking crawfish at this point, I knew nothing about running a business. I didn’t know what an LLC was, I didn’t know what type of insurance I needed. But because I pulled the trigger on it it forced me to get creative and figure out what the next steps were in order to make it successful.

David:
I got to say, you’re sounding like the backstory of a WWE wrestler being from Louisiana selling crawfish.

Ashley:
Well, we haven’t even got to the end of the story. Maybe he ends the episode with he actually is a WWE wrestler.

Hunter:
That’s a side note. Absolutely. Well, no, if you saw my stature you’d be like oh, that little guy’s not in the WWE.

David:
So you were in the position where you had to decide am I going to stick with school or am I going to start a business? Ultimately, you followed the money and the education experience that comes from that. What ended up happening with school? Did you retake that class or did you drop out?

Hunter:
It was a wrap after that. And like I said, I knew I was going to get into the construction industry. You don’t need a degree to be a contractor, all you need to do is go pass a test with the state of Louisiana and pretty much they give you a license and they say, “Good luck, don’t go broke.”

Ashley:
What was the point where you decided to learn about real estate? So you have this business going on, you’ve decided to not go back to school. Are you still continuing this crawfish business? What happened?

Hunter:
No. I sold the crawfish business and ended up buying … Using that cash from selling the business to buy my first rental property. My first rental property cost me $42,500, it was a double-wide on an acre of land. This wasn’t in a trailer park it was just double-wide on the outskirts of town, came with an acre land. This seemed like a good deal, it didn’t look like too much was wrong with it. I know I said that I paid cash 42,500 for it. And I know there’s probably some listeners thinking right now like you idiot, why’d you spend all your money on the house, why didn’t you leverage the bank’s money? Dude, at that time I didn’t know. I must’ve been on a Dave Ramsey kick or something like that didn’t want any debt.
So that being said, I did spend all my money on the purchase so I really didn’t have any money to hire a contractor on the rehab so that’s whenever I got my crash course in sweat equity. Me and a buddy of mine pretty much just spent weekends over there, on YouTube a lot, figuring out how to build a frame for a bathtub, painting, putting up trim. That being said, since we did most of the work I was only into repairs maybe two to $3,000 before we had it finished up.

David:
Hunter, the DIY destroyer, Lawler crawls out of the bayous of Louisiana, starts a crawfish business, saves up his money, keeps it all, drops out of school, uses that money to pay cash for yes, a double-wide. You heard that right. Then fixes it all up himself to save even more. This incredible origin story is yours BiggerPockets, your welcome. We’re going to be going to a quick break and when we come back we will hear what the next phase of this superhero’s journey was really like. All right, welcome back. Everybody has been waiting with bated breath to hear about the next phase of this journey of yours. I’m trying to figure out what more Louisiana stereotypes we could possibly work in to this thing. Was Theo Von one of your first sponsors on this deal? Did Gambit from the X-Men show up and throw some assistance in this? What did you do once you had this property? You’ve now framed out a bathtub, you’ve done all the work yourself. It is a double-wide. By the way, are double-wide literally twice as wide as single wides or are they just wider?

Hunter:
Good question, but I’m pretty sure it’s twice, exactly.

David:
So they’re accurately named.

Hunter:
Absolutely.

David:
Well, thank you because we don’t get to talk about this very often on the podcast. But something tells me you’re going to see more and more people taking the same journey that you took. Because as margins get smaller we have to get more creative. How did that deal end up and then what was your next one?

Hunter:
Like I said, I ended up renting the house out not long after we finished the rehab. After listening to BiggerPockets, I’m figuring out what’s the best way to tap into the equity of this home. I reached out to a local lender and he recommended that I set up a commercial line of credit which would allow me to tap into 70% of the home’s equity.

Ashley:
Hunter, real quick, can you explain what the difference between a commercial line of credit compared to just what a regular line of credit is?

Hunter:
That is a good question. The only line of credits I can think about are commercial line and a HELOC. A HELOC is basically a home equity line of credit and you use your personal residence to use the equity in your personal residence to set up a line of credit. In this commercial line, basically, the house that I’m collateralizing is my rent house is that-

Ashley:
Yeah. And you’re going on the commercial side of lending too.

Hunter:
Yes.

Ashley:
You’re talking to a different loan officer than you would if it was your primary residence.

Hunter:
Yes, great point, great point. I guess I already had that relationship.

Ashley:
And usually not as great of an interest rate either too.

Hunter:
No, absolutely not. And it is definitely not good right now. Absolutely. It’s a little steeper than a residential.

Ashley:
You were at that 70%. What did that end up being of the value?

Hunter:
I was thinking probably around 65 to $70,000 what it would appraise for. And man, the house ended up appraising for $100,000. I’m like oh man, this is great I got $70,000 to play with now I can find another house. I ended up finding another house very quickly, not too far away from the double-wide that I bought. And it happened to be, you guessed it, another double-wide, $38,000 this time. Anyway. So I bought the second house for $38,000. This was a complete disaster. I ended up selling it for a loss maybe within a little over a year after I bought it, and that was due to bad tenant screening.
I had a bad tenant in there. It got to the point where he was making rent on time for about eight months, and then by the ninth month I had to call him. I was like “Look man, you got to pay on time.” And after that, it was pretty much he just ghosted me, vacated the house without telling me. If you had every intention of destroying that home in one year, I don’t see how he did it. It took a lot of effort to get that house as out of shape as it was after he moved out. I say that to say, I really didn’t put the right tenant in place.
Back then my pre-screening process looked like … I would post a for rent sign in the yard with my cell phone number. Tenants would call me, ask me any questions about the property, and I would answer the same questions over and over. How many bedrooms? How many bathrooms? Are pets allowed, yada yada? I would, after that, meet people to show them the home. If they would even show up I would figure out they don’t have a job. Or “Hey, can you waive the first two months rent?” I’m like “No, absolutely not.” Why didn’t you ask me this on the phone? But back then I had a very strict list of tenant qualifications and they were number one, do you have a pulse? And number two, do you have the deposit and the first month’s rent? If yes, here’s a lease, sign it, and move in tomorrow.

Ashley:
Hunter, before we go any further I have to ask, what would you do different today?

Hunter:
Yes. Today I would use my current pre-screening process which looks like number one, advertise the property on Facebook, Zillow, or Realtor.com. Typically, in my area, whenever I do this within the first day I’ll have 50 to 100 people inquiring about the property. And instead of writing them all back individually I create this generic basically response that covers all the details about the property. Number of bedrooms, number of baths, square footage, are pets allowed, yes or no, and then I provide them my minimal rental qualifications. In doing that I also paste a link that allows them to pre-qualify through RentRedi. Shout out RentRedi if you all are still partners. So anyway. It leads them to RentRedi where they can pre-qualify. Typically, by the time they pre-qualify I’m down 10 to 20% of the original applicants. So after they pre-qualify I’ll run through all of them and make sure they meet our minimal qualification standards which are now they must exceed three times the monthly rent, their income, and the tenant must have good references, the tenant has to have no prior evictions, have a credit score of 600, and must pass a background check.
And after going through all this I’ll email them either an acceptance letter with an opportunity to schedule a viewing or a denial letter which basically shows which one of the qualification standards that they failed to meet. And now after this we’re down to three to 5% of the original inquiries. Once I have a pool of pre-qualified applicants I’ll schedule maybe one or two showing blocks and I call these a landlord open house. That’s when multiple people come look at the house at the same time. And I think that showing the house, while other applicants are there, creates a sense of urgency to make them respond faster. If they like the home I send them a final application. And at this point, I’m usually down to one to three, the most qualified candidates that I can choose from.

David:
Well, that’s fantastic. Hunter, in the beginning, what do you think was driving you to skip the steps? Was it just a belief that human beings were inherently good? Did you not understand the consequences of picking a bad tenant? Because clearly once you got this down you did it well. Why do you think you skipped those initial steps in the beginning?

Hunter:
I think in the beginning, obviously, you’re putting so much money into these homes, time and effort, and you just want to get it rented as fast as possible. I think it takes the experience to shift your mindset of well, I don’t want to do that again. I don’t want to go there and somebody stand me up on meeting. Or, meet somebody all the way over there for them just to tell me they lost their job. Weed everything out, and filter them, and pick the most qualified candidate.

David:
All right. So it was just if they had a pulse you’d put them in there. Now basically you’re putting a lot of information in the showing itself. And then as they’re applying I think you mentioned … What was the next step that you said that you’re weeding out to get to Only 5% of the people sticking with it?

Hunter:
You give them all these steps that they have to go through to actually pre-qualify. And then once they pre-qualify I will either send them an acceptance or a denial letter. Pretty much I get it from 10% to 5% because they didn’t even read the pre-qualification standards. Number one, they showed me their monthly income and it wasn’t exceeding three times the monthly rent.

Ashley:
Or they have a dog-

Hunter:
Exactly.

Ashley:
And it says no pets.

Hunter:
Exactly, exactly. They have to see it three or four times and then they still don’t know and I still have to tell them “Hey, you’re denied based upon this.”

David:
Okay. So now would you feel like screening tenants is actually a strength of yours where at one time it was clearly a weakness?

Hunter:
Absolutely. Since I’ve implemented this strategy I can honestly say that I have not had one person move out. If they have moved out of one of my houses it is … You can probably eat off the floor by the time it’s ready to rent somebody else.

Ashley:
You had mentioned RentRedi. Is there any other tools or software that you’re using to do this whole listing, and showing, and move-in process?

Hunter:
No. RentRedi pretty much provides everything that I need. The only other thing that I use is QuickBooks, obviously, for accounting purposes. No, it’s strictly RentRedi.

David:
All right. You’re rocking and rolling making some momentum, solving for your mistakes probably feeling pretty good about yourself, and then COVID hits. Tell us what happened there.

Hunter:
Up until COVID hit my target market was bank-owned or real estate-owned properties. These are properties that have already been foreclosed on, went to the sheriff’s sale, and the bank ended up buying them back. And once the bank buys these properties back they make very minor repairs to the properties. That’s usually just enough to either winterize them and make them safe enough to put on the market. Well, during COVID there was a foreclosure moratorium which provided relief for federally backed loans and this caused a drastic decrease in the supply of real estate-owned properties on the market.
Here I was faced with a choice. Do I say, “Oh, well. I guess I’ll start investing again when the market corrects. Or, do I dig one step deeper into the foreclosure process and try to catch these things at the sheriff’s sale? The cool thing about sheriff sales is that instead of waiting for these properties to hit the market and basically be open to every investor that has access to the MLS, the only competitors you have are the 10 to 20 people that show up at the courthouse that day to bid on these properties. Also, another pro is you can typically buy these houses for 20 to 50% less than if you were to wait for them to hit the market.
But anyway. There is cons to the sheriff’s sales, and one of them is that you cannot physically enter the property because that is trespassing so you’re pretty much buying these things sight unseen. Also, another con to it, you have to show up with a cashier’s certified check within four hours after the conclusion of the sale. So there’s no saying, “Yes, I want to buy this property,” bid on it, and then go get a loan, and then come back to give them the money, it just doesn’t work like that, you have to be very liquid. And also, there’s a good chance that a tenant could still be living in the property or the previous owner could still be living in the property. And if that’s the case you have to go through your local eviction process to get them out.

David:
I think, Hunter, you come crawling out of the Louisiana swamp dripping wet looking for the sheriff’s sale like I’m hunting deals, my name’s Hunter. I think that’s for sure the shtick.

Ashley:
On that note, Hunter, how do you find these sheriff sales? I have no experience in this. Where do you even go to find out about these auctions?

Hunter:
I think every county does it a little bit different. In Louisiana we have parishes for some odd reason. Here in Caddo Parish they advertise the sales on their website which used to be strictly in the newspaper but now they advertise them on the website. And what it looks like when they advertise them on the website … It’s very unclear because all they provide is a suit number, who the plaintiff is, who the defendant is, and a legal description of the property. If you can’t take that legal description and go to the assessor site and figure out the address yourself you’re not even going to know the address to this place. Which I love because it pretty much takes out a lot of the competition because a lot of people are pretty timid to try to figure it out themselves.
That being said, whenever you walk into the sales it can be very intimidating as a rookie. Whenever you walk in all the veterans, all the guys that have been doing it for a long time they look at you like you strictly came there to take money out of their wallet. And I know that now because now that I’m experienced in it, whenever I see a new face I’m like dadgummit somebody else that I got to compete against. When the sale starts it’s like this perfect storm of nervousness and excitement.
And at 10:00 on the dot bullets are flying so you better be locked in. The lady up front will read off the suit description in the most softest, quietest yet talking as fast as a rapper. She’s like suit number 632756, yada, yada, yada, yada, yada, yada, yada. A lot of times you can’t even hear what she said. She’ll ask if the plaintiff would like the place a bid. Plaintiff usually raises his hand, “I’d like to place a bid for $5,000.” And the plaintiff who’s representing the bank will go back and forth with a third party until there’s a winner. Typically, the bank will give the plaintiff a top dollar that they’ll take for the property. And after they get past that it’s a third party just a third party.
The cool thing about it is there’s an art to it. The more you go the more you recognize tendencies that these other bidders have. So if you come in there like a rookie like me and your voice starts to crack just a little bit, that’s like a shark smelling blood to some of those older guys, they just know that they’re about to get you. If my top dollar’s $70,000 and we’re getting up to … I’m like 68,000, they know that they’ve got it in the bag.

Ashley:
They just have to go a little bit higher. And they’ve gotten you beat.

Hunter:
Yes, exactly. It’s very intimidating because if you’re bidding against somebody else and they’re just like … You can’t even get the words $68,000 out of your mouth and then they’re already like 69, 60, 75. They’ll try to big wig you and go like $5,000 ahead and you’re like okay, this guy’s serious.

David:
Is there a strategy that you’ve come up with when it comes to the bidding where you know, all right, if I go up 1,000 they’ll go up 1,000, the other guy will now feel emboldened so he’ll go up 1,000? But if you go up 6,000 in one moment, psychologically it causes pause and they’re not quite ready to make the decision to go up higher. Do you think about that or is it just something you feel in the moment?

Hunter:
It’s something you feel in the moment. At the same time, you don’t want to be silly about it because you know that if their last number was … If their top dollar was $70,000, and then you just said $75,000, and then they didn’t bid again you’re like I just lost $5,000 for trying to be a big dog here.

David:
I mean, it’s similar with the MLS listings where a buyer wants to be the highest bid but they don’t want to be higher than they had to be to be the highest bid. So there’s always this awkwardness where the buyers will ask the seller, “Where do we have to be?” And the seller will come back and say, “Well, write your highest and best.” And then the buyer will tell their agent, “I don’t want to” … “Well, how high do I have to go?” And there’s an awkwardness. That’s probably just amplified even more in the auctions. Do you just walk in there with a number and you say, “This is the highest I’m going to go and then this is a number where I would like to be at” and take it from there?

Hunter:
Yes. I’m glad you asked me that because yes, there is a number that I walk in there with. And I will say that I have went over that number every single time I’ve bought a house just because the excitement of going along with it. And you’re like I know that guy I don’t want him to get this house. There’s a lot of high stakes, high emotion. It’s very important that if you do go to these sales that you do stick to your top dollar. I’m a sucker for it.

Ashley:
How many of these deals have you actually purchased from the auction?

Hunter:
I have bought eight houses from sheriff sales.

Ashley:
And what has that time span been over? So you started this in 2020, is that when you bought your first one?

Hunter:
Yeah, 2020 is when I bought my first one. I’m happy to say that the roofs weren’t falling in at any of these houses, I’ve had to make pretty minor repairs to most of them. I do have friends that have bought houses that literally did not have a ceiling in them. You got to be really careful and know what you’re buying.

David:
Are you able to see the properties before you bid on them?

Hunter:
Oh, absolutely not, no. It’s illegal to even go walk in there. It’s illegal to go on the property much less actually peek through the window.

David:
What’s the logic behind why the seller wouldn’t want you to see what you’re buying so you feel more comfortable buying it?

Hunter:
Well, number one, it’s really not the owner of the property that is selling the house I guess the … They’re getting foreclosed on. So I guess up until the point when that sale actually happens, the previous owners still has possession of the property. So therefore if you are getting on that person’s property you are technically trespassing on what he owns.

David:
So it’s not that they’re trying to stop you from seeing it it’s just that the bank doesn’t even have title yet to let you see it, it’s still the person who’s being foreclosed on that owns the property and they’re not giving you permission to go look at the property.

Hunter:
Exactly, exactly.

Ashley:
What are some reasons that these sheriff sales would take the property, for example? You were talking about the bank is competing against you to actually bid it if they do have a loan on the property. But what are some reasons a property may go to sheriff sale? Are there maybe other liens and judgments on the property to that you have to find out about beforehand?

Hunter:
Yes. The only way it makes it to sale is if they were to actually just stop paying their mortgage. And I know that there’s multiple notifications that the bank has to give out before that even can make it to the actual sheriff sale. A lot of paperwork, a lot of time has to go into that. So it’s not like you don’t pay your mortgage one time and then boom, the next month it’s going to sale, it’s a long-drawn-out process. But as far as other liens that could be on the property, it’s very important that you do thorough research. And I would recommend hiring an attorney to do title work for you before you bid on these. Some properties will have mechanic liens that won’t show up on the clerk of court or the courthouse documents, but most of that stuff gets wiped clean before the sale. But you have to also be careful because sometimes if you go to a sale you might be buying a second mortgage on the property and it’s not even the first mortgage so you would really only be a … Have a second position on that property.

Ashley:
I ask because I have an investor friend that he bought this piece of land from a sheriff’s auction but it wasn’t foreclosed on it was … His wife sold cigarettes illegally from the Indian reservation to New Jersey and didn’t charge sales tax, and they took that property as almost like his fine or whatever for his wife doing that.

David:
Restitution.

Ashley:
Yes, restitution. And then they resold it at the sheriff’s auction too. So I didn’t know if any of the properties had things like that happen.

Hunter:
Wow. I haven’t heard of anything like that. The only houses that I bought were because people didn’t pay their mortgage. I have seen partitions at the sheriff sales was basically like one person, one heir owned a certain percentage of a property and they didn’t want it anymore so they had to basically take it to partition because them and the other owner couldn’t come up with an agreement on what they wanted to pay each other for the property or if they even wanted to sell it. Whenever that’s the case they partition it to court. And whenever they do partition it to court it’ll go to a sheriff sale.

David:
Okay. It’s definitely worth mentioning this. When people hear, “Oh, I want to go buy something for $42.000 that’s worth $100,000,” they’re all going to be rushing in there. There’s a reason that it’s … You can get that deal is you’re taking a lot of risk. You’re buying something that you don’t get a home inspection on, you don’t know what condition it’s in. Like you just mentioned, there could be additional liens or money that is owed that that property is used as collateral on that doesn’t have as much equity as you thought. You think you’re buying it free and clear but there’s a mortgage on it or there’s two mortgages on it. That you could theoretically be buying title to something that already has debt on it that’s more than what you paid for the deal.
And then there’s the whole element of well, is it going to have bad smells? There’s just a lot you don’t know about it and so that’s why you’re able to get these margins is because you’re taking this risk. But clearly, you’ve jumped in with both feet similar to what you did when you left your education and you said, “Hey, I’m going to go start a business I’m going to figure this out” and you’ve done well. How were you able to scale eight of them? Were you just selling that many crawfish that you were able to get to the point that you could buy this many houses? Or were you refinancing these things and pulling money out of them and reinvesting it into the next deal?

Hunter:
With the original line of credit that I had told you guys about previously … After I bought that second house it was $38,000 and I think it ended up appraising for somewhere around 75 or some odd like that. So what I did was after I bought that second house I rehabbed it and I rented it out. And then what’s the next step, David Refinanced it. Whenever I refinanced it they basically took the equity I had in the home and used it to pay down my line of credit. And now I have a mortgage on that property, property number two, with a freed-up line of credit. And I would basically snowball that over and over and over. And eventually it would get to the point where if I had three properties mortgaged separately I would bundle those on the next time that I would do a refinance that way everything doesn’t seem to scattered out everywhere and I had 15 different mortgages.

Ashley:
Would that be a portfolio loan you did with a small community bank did you use?

Hunter:
Yeah, I used the same local bank for that. The way I did it, I usually did three to five properties at a time. And as I started to do that they increased the amount of my line of credit as that started to snowball.

Ashley:
I want to touch on your mobile homes real quick too. With the financing on that, was it hard to get financing on a mobile home? When you switched to buying these other single-family properties was that easier?

Hunter:
No. Financing for the mobile homes wasn’t very difficult. I have worked with buyers before because I also am a real estate agent on the side. So I have worked with buyers and they have ran into some struggles, especially single-wide homes. If those homes are older than a 2000s model they make sure they’re retrofitted before the bank will even lend them any money on it. So you run into different struggles like that. But as far as me using my line of credit to buy this house I pretty much bought it cash if you look at it on paper. Bought it cash. And then by that time whenever the bank refinances it’s usually just a drive-by appraisal so I haven’t had any hassle on it as far as them not lending money on it due to being a mobile home.

Ashley:
A drive-by appraisal, I’ve not had one of those in a very long time.

Hunter:
It’s beautiful. It’s beautiful.

David:
Especially because appraisals are so easily changed and challenged. They’re so subjective as it is this idea that well, if it’s a drive-by it’s not going to be accurate, but if they walk in the house and they can feel the carpet under their feet they’re going to give you an accurate appraisal. It’s such a joke when you actually see. And then not to go too far on a tangent, but all these appraisals in 2005 that showed a house that was worth something were worth absolutely nothing, right when the market ended up crashing later. In my opinion, it’s always been an appraisal as a false sense of security. It’s not like they’re bad, they do give you an idea if you can look at the comps of other sales. If you’re basing your decision off of an appraisal you’re already doing things wrong. This is a fascinating story, Hunter. I can see how you have pivoted into the WWE and you have such a big fan base behind you. I mean, I’ve been riveted this entire time.
You got into self-storage. You just keep on figuring something out, dominating it, and then moving on. You are like the BiggerPockets poster child of what we want people to follow. And here’s what I love about your story more than anyone else, we didn’t talk about it a lot. You’re still working a job. You’re like hey, I’m making good money, I’m doing good with real estate but it’s an investment it is not a career. So I’m going to keep doing what I do, keep working hard, keep bringing value to the marketplace, keep making money, and then I’m going to use that money to invest in a real estate to set myself up for the future, not retire on the beach and drink Mai Tai’s. So well done to you. I just want to give you your props, man. This is such a cool story, I hope a lot of people take inspiration from this. Everyone, we have the perfecter of the pivot, the DIY destroyer, the deal, Hunter Lawler. Thank you for being here, man. Ashley, any last words before we let him get out of here?

Ashley:
Yeah. Hunter, I want to know, what is your monthly cash flow from your investments on average? I’m sure it changes but what’s that number?

Hunter:
I have it pulled up. Yearly cash flow from my single-family homes is 45,000, and the storage facility yearly cash flow is at 65,000.

Ashley:
Awesome. Congratulations.

Hunter:
Thank you. Thank you all for having me. It’s an honor to be on here with you titans

David:
The honor is ours, my man. Thank you very much for doing this. If you guys would like to learn more about Hunter and connect with him check out our show notes where his contact information is there. Mine and Ashley’s is there as well. Hunter, we’re going to let you get out of here because you probably got another deal to hunt. This is David Greene for Ashley, my new co-host, Kehr signing off.

Ashley:
This is Real Estate Rookie episode 347. My name is Ashley Kehr and I’m here with my co-host Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we’ve got an amazing guest, Matt Marcelissen. Matt is a funny guy, great at telling the stories. And you’ll hear the ups, the downs, the ins, the outs, the lefts, the rights of his journey building out his portfolio. And we talk a little bit about the end of whether or not Matt should quit his day job and do this real estate thing full time.

Ashley:
We actually found Matt and met him in the Real Estate Rookie Facebook group. So if you are not a member, please join. And this is where Matt had asked for advice on whether he should quit his job or not. There’s hundreds of comments of people giving their advice on there. And ultimately we decided to drag Matt onto the show to talk about his story and where he’s at now with 11 units and making that decision. So we read the Facebook post, we kind of go into background of why he’s thinking he should make that decision, and then we go into his story and what has brought him to that point today. But Matt is very captivating when telling his stories and you won’t believe some of the stuff that has happened to him while he has a full-time W2 job and managing these properties that he has done. So definitely take a listen. And don’t forget, if you also want to be a guest on the show and you want to captivate our audience with your real estate stories, successes and failures, you can apply at biggerpockets.com/guest.

Tony:
And last thing, if you guys are a part of the Rookie audience and you haven’t yet left us an honest rating review on Apple Podcasts, please do. Again, the more reviews we get, the more folks you’re able to reach. And when we can reach folks, we tend to have a pretty positive impact like Matt. So I just want to give a shout at to someone by the username of KDemsky79. KDemsky left us a 5-star review saying, “I love this podcast because it gives me the inspiration to pursue my real estate investing dreams, good spread of expert guest and rookie’s telling their stories.” So again, guys, leave that rating review on whatever platform it is you listen to the Real Estate Rookie Podcast.

Ashley:
And before we get into the show, just a little side note when we are recording this, this is Halloween, so I do make a couple references to Halloween in the story, even though this is December that this is airing, but I just wanted to make that little note for you guys.
Well Matthew, so we found you in the Real Estate Rookie Facebook group. I’m going to share your posts with everyone right now if that’s okay.

Matthew:
For sure.

Ashley:
Okay. So I was scrolling, scrolling, scrolling as most of us do. But it was in the Real Estate Rookie Facebook post or group, and I came across this post and it said, “I need some guidance BP fam. Since I bought my first fourplex in 2021, I’ve scaled to four properties and 11 doors. I’m at a point in my real estate investing career where I’m considering stepping away from my W2 job. I’m a consultant and it takes a lot of my time. By the end of the day and the week, I’m exhausted and don’t have time to be proactive in real estate like I should be. I only have energy to work in the business, not on the business.”
“Below are examples of tasks I just don’t have time to do, not working, securing private money from friends, family, mailers, other marketing, deal analysis, portfolio design. While I am grateful for the paycheck, the opportunity cost is high and I’m not sure how I can grow my real estate investing business. I think if I had the capacity to put as much work into my real estate business as I do my W2, I could knock it out of the park. Did you all have a similar decision in your career? If so, how did you navigate it?”
First of all, Matthew, how did I do impersonating your voice? Was that spot on?

Matthew:
That was spot on. Spot on. Exactly the same. Good job.

Ashley:
So Matthew, tell us a little bit about why you decided to put this post in the Real Estate Rookie Facebook group.

Matthew:
Oh, man. So I had been toying with this idea for quite a while and it was actually on my to-do list for two whole weeks, which is a very long time for something to stay on my to-do list. And it was to reach out to the BP family and see if anyone has been in a similar position, which I know that other people have.
I know I’ll get into the backstory in a little bit, but during the second half of this year, I really felt myself being really stretched thin. So I was converting an LTR to an STR. No one really talks about the boxes on the podcast and the mess that I creates and how long it takes to really set one up, make the post on Airbnb and get the tenants in there. I was doing property management for my fourplex and my other triplex. I have a long-term far away STR in central Texas. And with my day job, while trying to run this budding real estate profile, I just found myself without time. So I would work during the day, very intensive. I would be so brain-dead at the end of the day that I couldn’t even put two sentences together. I would just turn off my Zoom, go make dinner, go to the gym, and that was it.
During the weekends I couldn’t hang out with any friends setting up the STRs, working in my business to where I’m constantly exhausted. Ran out of friend time. I actually had to start integrating my social time with the gym and running. So I’m like, “Hey friend, if you want to see me, let’s go for a walk together instead of let’s go out and grab some drinks.” So I felt that-

Ashley:
That actually sounds like a healthy friendship relationship though, going for a run instead of going for drinks.

Matthew:
No, and I actually love it and my friends love it. And it’s a really great time, but I just feel that I need help, I’m at this crux and that’s why I reached out.

Ashley:
Well, we’re definitely glad that you did because I think this is something very important to talk about as to when is the time to leave your job to go full-time real estate investing. And so Tony and I have different experiences. Even today I still get a W2 paycheck. I get $1 deposited each week into my bank account, but I get my health insurance paid for. I still do bare minimum work for another investor to get health insurance covered. So that’s always been a big thing for me, is if I completely go full-time real estate investing and don’t do work for anybody else, it’s just for me, getting my health insurance paid for. And right now, this has worked really well. It doesn’t take a lot of my time, but there’s so many components. So let’s break down first as to why haven’t you just quit. What are some of your holdbacks?

Matthew:
Oh, why I haven’t. It’s the security, right? I went to college, I was trained to go out and get a W2 and work for someone else and grow that career. And so we get used to that security, especially if we have one that is on the higher end of the pay scale. If we can be defensive with our spending and we can save those funds to buy more real estate, it’s really worked well for me as I transitioned from living paycheck to paycheck six years ago to being able to be proactive and put myself on a budget and save money. It’s just that security blanket. But as the progression happens in real estate, it is that need to being like, “Okay, it’s time to go. It’s time to fly. When is that time?”

Ashley:
Let’s talk a little bit about that progression.

Matthew:
Okay.

Ashley:
Let’s go back to the beginning of that timeframe. How did you start into real estate and why has that kind of path brought you to this decision that you have to make?

Matthew:
Perfect. So I would say that my journey began back in 2017. And back at that time I was super cool, fun max. I was making six figures, but I was living paycheck to paycheck, and that was completely by life design that I chose. No one else chose it for me. So I chose the $2,000 a month luxury apartment in the best part of Houston. Since I’m a car guy, I chose the competition package M3 that I love, and I drove and made all the fun noises and sounds with. I would go out to happy hours, I’d go on the weekend, I would go shopping. I would have a credit card bill of five grand a month with nothing to show for it. And I really didn’t think anything of it because I was able to sustain that. I was like, “I could actually pay that entire credit card bill with one paycheck. It’s not a problem. I don’t have to carry a balance. There’s nothing to see here.”
And then that all changed when I was at work one day and I received notice that the company that I was working for was being bought. And because I am in HR, I’ve designed layoffs and I know that when companies merge, they look at the redundancies. I just knew in my heart of hearts I was like, “You know what, Matt? You are not going to have an HR job on the other side of this.” So I sat there and it’s kind of like when everything just goes blurry and you’re sitting with yourself and everything pauses. I looked at my bank account and I looked at my spending. I had fewer than two months of reserves for Maddie Inc at that time, and it completely freaked me out. And I was like, “What am I doing? Why don’t I have savings? Why aren’t you being more proactive?”
So after work that day, I got in my beloved M3, drove to the dealership, walked in, and I said, “Get me out of this car.” And so five hours later, I got in a car that was a little different and I cut my payment in half.

Ashley:
I mean, that takes a lot to be able to take that step backwards. You work so hard, you have these dreams of the car that you want, the house you want to actually take that action of walking into the dealership and trading it in and getting into something that’s, I’m assuming if it’s half your payment, it’s a lesser model.

Tony:
Madam, I’m curious, man. I think there’s a lot of people who are living paycheck to paycheck even with big incomes per se, right? But they’re still low paycheck to paycheck. You drilled down this a little bit, but I don’t know, man, I guess there’s so many people who have that same experience but never actually pull the trigger on making that lifestyle change. So how did you make that fear real enough to you to actually facilitate that action? And what would your advice be to someone that’s in that same situation that’s maybe struggling with pulling back that lifestyle creep?

Matthew:
I would say don’t let yourself be fooled into thinking that you work hard and you deserve it. And yes, we all have to live and we want nice things, but there’s a time and place to buy something that makes you happy. And so, instead of spending your active income on something that’s going to depreciate so badly, why don’t you wait until you can buy an asset and have that asset pay for it instead? And you can do that later.
And so another example I have of that is at the same time Hurricane Harvey came through Houston and my luxury apartment flooded, and I used that opportunity to go to the leasing office and I said, “Hey, what’s the cheapest thing you have in here? All your amenities don’t work, so I really need it cheap.” And so they let me sign a lease for 1,200. So within the first week, I was able to start saving more than a thousand dollars of giving myself an pay increase, right? But it wasn’t going to fix that inherent spending habit that I had. I was swiping at everything, but I wasn’t connecting the dots that I had to pay for it at the end of the day.
So me knowing myself, I created myself an accountability spending spreadsheet where every day at the end of the day, I would have to go and record the vendor, how much, and why I bought it. And so it really made me pause at the register like, “Hey, when I record this later today, am I going to feel good about the expense or am I going to feel bad?” And that’s what really helped me keep the credit card around two grand, which was much better than the five.

Tony:
And Matt, the reason I wanted to highlight this is because I think for so many Rookie that are listening, it’s easy to get caught up in the hype of, “Oh man, he’s got four properties, 11 doors, and he’s thinking about quitting his day job,” but they gloss over all of the sacrifice that went into putting you in this position. Giving up the luxury apartment, giving up the luxury car, getting yourself on a budget, saving month after month. Those are the things that people oftentimes miss when they see the success at the end. And they’re comparing themselves to the final version of Matt and not the version of Matt that went on this journey. So after you traded in the car, you bummed down your living expenses, what’s the path that kind of gets you towards real estate?

Matthew:
Right. So I had always had an interest in real estate. And after I graduated college, I actually got my salesperson’s license in Texas. So I went and got that reactivated. That’s also when I found BiggerPockets. I just started consuming content as often as I could, at the gym, on my walks. I would listen to five podcasts a day, writing down everything. I remember the first time I heard ARV and I was like, “Oh,” I stopped running and wrote that down. Really didn’t know what it meant at the time, but I was going to go back and research it.
Once I learned about all these different concepts, I settled on flipping. And I settled on flipping because I wanted to make sure I had that cash at the end of the day because I felt like I wasn’t in it and enough to do other things like wholesaling or things like having a buy and hold at the time. And so not really knowing anything about flipping, I looked up how to analyze a deal. I built my own deal analyzer in Excel. And I really believe I don’t learn well from other people’s products, so I knew that if I built the Excel analyzer myself, I would know what that formula was behind that cell so when I went through it, I really knew what the numbers meant.
And then I also set up an auto search on the MLS. You can Google like, what are the 50 terms that you can look through the private remarks that signal a distress buyer. And those were things like estate sale, foreclosure, fixer upper. And every day those would come in my inbox, I would analyze them. And then on the weekends back in 2017, when you could do this, wait until the weekend to go view them.
And then, because I really didn’t know what success looked like with a finished flip, I would not only look at the really bad houses, but I would actually go look at the flipped product and I would walk through there and go, “This looks cool. Why?” Or, “I think this is going to sit awhile because this is horrible.” And so I could kind of get a knack of what flipping looked like when it was finished properly, and then I could track the days on market and see if it sold. So that’s kind of how I got into the groove.
And then during this time, I had to really practice mindset as well because I was brand new into this game. I was seeing all these flipped properties and I really had to overcome the scarcity versus abundance because I would go visit a flip and I’d be like, “Everyone’s flipping. The game is over. There’s no properties to buy.” And then I would have to say, “Matt, calm down. Cool your jets. Investors can’t be everywhere. There are 10,000 properties that close on MLS every month in Houston. Calm down. There’s properties for everyone.”
So through this process, we’re getting into the fall of ’17, I’m starting to save money. My hunch was right. There will be no job at the other side of this, which is scheduled to close in the spring of ’18. But I continue to save money. By the spring. I have 30K saved up. I feel comfortable making offers. And then I just start letting the offers fly. And I write really embarrassing offers, like the ones that made me cringe when I pressed send. And then I would call for a follow-up, and of course they wouldn’t want to counter, but I just knew eventually that I was really going to be able to land one.
So I did land an estate sale in that summer, which was fantastic, because during this time we were scheduled to close in April, but the company came to me and they said, “Hey Matt, even though we don’t have a job for you, can you stay behind and help us close down the Houston office?” And I said, “Absolutely.” I’m never one to turn down a good time for a couple of reasons. One, I wanted the paycheck for a little longer, and two, I was going to collect experiences doing something I hadn’t done in HR that I could take with me to my next company. So I just thought it was a win all around. So as we’re going through-

Ashley:
So If I close down the office, does that mean you have to fire everyone?

Matthew:
A lot, like so many. And one of the things that has helped me transition into being a really good landlord is that I’ve had those difficult conversations. I can set those expectations.

Ashley:
Oh my gosh, what a learning experience.

Matthew:
Yeah. So over 300 individuals during the course of the summer.

Tony:
You had to let go of 300 people?

Matthew:
Yes.

Tony:
No way. That is insane, man. So in my W2 job, I was in people management, but I was on the management side on the HR side. And I’ve definitely had to fire people in my role. But dude, it would be like one or two people maybe at a time. But 300, that’s insane.
But before we keep going, Matt, because you said something incredibly important that I want to make sure that we don’t gloss over here, but you gave like a mini masterclass on how to get good at analyzing properties as a flip. You said the first thing you did was you set up searches on Zillow, Redfin, wherever, for all of these different phrases that people should be looking for, foreclosure, fix and flip, damage, needs repair, TLC. There’s all these phrases you see for properties that can be flipped.
Then you said you analyze all those properties, right? So you got really good at knowing what kind of, again, repairs might go into it and what the potential profits might be. And then you walked some of the properties that had already been flipped to give you a good sense of what you might need to do for your property. And then you watched those properties that you walked to see what they actually sold for. So you were able to put together a really clear picture on the condition of those properties before they start, what the final condition needed to be, and then what those houses were actually selling for. And the fact that you knew that there’s like 10,000 houses being sold per month in your city, it’s crazy. I don’t know that from my markets, but it proves that you took the time to really drill down and know your market. And again, I think those are the steps that people don’t take that separates those who are successful from those that aren’t.

Matthew:
Exactly. And I’m super risk-averse, so I knew that if I could qualify for a conventional 5% down, house that I could live in after I flipped it, that was safer than getting a hard money loan for my first time and having rent plus a hard money loan. So to me, it seems less risky. Also too, I love grandma specials, and this trust sale was a grandma special. And I just call those, they’re the houses that are probably foundationally okay in terms of their big systems. They’ve been maintained with their HVAC and their roof and their other systems. They’re just really sad on the inside. And all I wanted to do was take that sadness and make it amazing so I could sell. And I found you could put your money towards the cosmetics instead of the big bucket items that we always don’t like to pay for.

Ashley:
That’s cool. I just bought my first property that wasn’t a state sale too, and it was an older gentleman, never married, never had kids. You go through the house and all the stuff is in there before they actually have the estate sale, and it is so sad and stuff. But then it was really sweet. His sister was the trustee of the estate and she was the one that handled the sale of the property to me. And on the day that we closed, when I went into the property, there was a beautiful bouquet of sunflowers and a little note and just saying her brother had such this vision for the house and she’d love to see it when I’m all done with it and everything like that. And it’s just like, “God, I was just going to turn into this simple rental property, but God, maybe now I need to actually do something amazing.” I’m like, “No, no, no. Focus, focus, focus.”

Matthew:
Focus.

Ashley:
But yeah, the way you buy different properties, it’s just like that experience of dealing with the seller. Things like that, it is crazy how evergreen experience can be so different doing those transactions. So since that property, what has happened since then and bring us to date?

Matthew:
Oh yeah. So, so much has happened and it’s traumatic, so I’ll try to make it as least traumatic as possible. But while this was happening-

Ashley:
It’s Halloween. Bring the drama.

Matthew:
Bring the drama. So as this was happening, on the work front, I guess I was doing a really good job because what I wanted to do with these individuals who were losing their job was treat them with dignity and respect and make sure that they felt like the new company respected them as they went to their next chapter of their lives. And apparently, I did a really good job at this because the company actually found me a job. They didn’t lay me off. So they said, “Hey Matt, we found you a job, but it’s in Dallas.” So again, I don’t want to say no. Who knows what’s going to happen? I accept the job in Dallas. The flip goes through without a problem, except it takes a little longer to sell. I end up moving to Dallas while the flip is still on the market in Houston. We’re getting into December. I used all of my savings. I had a lending tree loan to pay for the repairs. So I was just sitting there just waiting for it to sell and it finally sold. And so I was super excited with that.
And so once I had the proof of concept of yes, I nailed my first flip, not nailed, but I was pretty successful, I wanted to do it again in Dallas, but I had no idea what the market looked like. Since I had my license, I joined the Dallas MLS, and then I just started analyzing different neighborhoods and I would look at the cheapest price per square foot and the highest price per square foot and see if there was enough space between me improving it and making a profit. I would even double check the school districts because in Texas they get their funding from the tax base, from the houses. So even being zoned to a different school could throw off your numbers being on the wrong side of the street, so I really wanted to confirm that.
So in May of 2019, I actually went under contract on my second flip. I was too slow and it went pending, and I was really upset. So I called the agent and I said, “Hey, agent, do you have a backup contract?’ And she said no. And I was like, “Well, let’s work out one.” And so I was super excited and I always recommend to anyone to always ask if there’s a backup contract. And if not, negotiate that contract because one of the great things about it is if that first contract terminates for any reason, you’ve already negotiated that contract with the seller and yours comes into play like that. And that’s how I got two of my four properties.

Ashley:
Yeah, it’s kind of explained that process. So you talked about you’re just notifying the agent saying, “Do you have a backup contract?” Maybe just explain exactly what that is and how are you making yourself competitive that you think that they’re going to actually take your backup offer instead of going back out onto the market?

Matthew:
Perfect. So in Texas, you can negotiate a backup offer just like you would the very first active offer. So you’re negotiating the price and the terms and the option period, earnest money, any sort of concessions. So you have to be as enticing or aggressive as you would be if this were just that regular first offer. The great thing about it is that you sign it, it goes to the title company, you send your earnest and your option money. And then if that contract comes into play by termination of the first one, then you’ve already negotiated everything. And sellers like to do this as well because they like to have the power during that first contract that, “Hey, if they ask for too many things during the option period, we have this guy, Matt, in the back wing over here waiting to buy it.” So it gives them a leg up as well.

Tony:
That’s great. I’ve actually never done it that way. I’ve talked to agents like, “Hey, if things fall out, let me be your first guy.” And my second property, that’s how it happened where I was second in line, but I didn’t sign a purchase agreement. I didn’t send any money into escrow. So that’s a totally different way of solidifying that offer behind them. And if your offer’s better, it almost incentivizes the seller in a way to find reasons to poke holes and what the buyer’s asking for.

Matthew:
It did. And it was. I made sure of it just because I kind of had a feeling where I needed to be from the agent because I went to the open house, I built that rapport. I called her, I was checking in and she was like, “Matt, they’re getting cold feet. They haven’t done their inspection yet.” And I’m like, “Fantastic. Let’s hope they don’t.” So it really helps if you build that rapport with the agent just so then they may keep you top of mind if you do need to negotiate a backup buffer.

Tony:
So Matt, once you close on this property in late 2019, does it go as smoothly as the first one? Are you replicating that same success? Or walk us through how this next flip turned out for you.

Matthew:
Tony, you’re foreshadowing because it absolutely did not. This was probably the hardest time in real estate that I’ve ever had. So it starts off smoothly. It’s okay. I’m in my apartment in Dallas checking on the flip. And then I get a call or email while I’m at work. Everything dramatic happens at work for some reason. And it’s from my contractor and he said, “Matt, after much thought, I’ve decided to walk away from your flip. It’s too much work for me. I’ll make sure you get back your money.” And my heart sank because I knew I had paid him $20,000 in advance. And I just knew in my heart of hearts that I was not going to see that money again.
And so it was a huge lesson for me that we preach all the time about not getting ahead of your contractors. And the reason why I felt comfortable doing it is I went with a really reputable company in Houston that only works with investors, only fixes flips. They don’t work with any residential people. So that was my state of mind when hiring this guy. And so I looked at the bank account and I said, “I don’t have enough money to hire another GC. I barely have enough money to order all the things that need to be done to finish the flip.” I would say it was about 80% done. So I take a mattress-

Tony:
But Matt, sorry, did you get the money back from the… Did you get the 20K back? Or did he keep-

Matthew:
No, I didn’t. He did a lot of song and dance and he kind of just disappeared. And I actually, right before statute and limitations ran out, I was able to serve him, but then something else happened and it never went forward. And I just kind of used that as a huge learning lesson of-

Tony:
It’s tough, man. I just want to… And Ash, I’m curious what your feedback is on this as well. But for me, when I work with the contractor for the first time, I usually try and back load that last payment. So I’ll do… I don’t know. I think my last contract with new contractors, it was like, “I’ll give you 10% upfront, 15% after you finish demo, another 15% after you finish, I don’t know, rough plumbing or electrical or whatever it is. And then the last 20% is once the job is actually completed.” Is your schedule something similar to that as when you’re working with a new contractor?

Ashley:
Right now all I’m doing is I’m being invoiced based on what is completed. So no money upfront. And then right now my contractor’s doing every two weeks he’ll invoice me. He’s a GC, but he does some of the work himself. But the painter just finished, so I just got the invoice for the painter and things like that. But we just do it that way and that’s kind of easiest for us. And I’ve been working with just one contractor recently.

Tony:
And it’s easier, I think, once you’ve built a relationship. Like my guy Nacho and Joshua Tree, we don’t even sign any contract with him. Nacho is like a second father to me and Sarah at this point. So we trust him with our lives. But if it’s a new contract, we typically set it up that way. So Matt, sorry to hear that he runs off with your 20K, but yeah, I guess from that moment, how do you get this job finished?

Matthew:
There’s really only one option. I took one of my mattresses and moved it into the bedroom of my unfinished flip and I YouTubed my way through the finishing of that second flip. And so I would order the materials, I had to reorder the doors even though I already gave the contractor money for the doors, ordering the baseboards, the cabinets, the countertops. The big stuff I did have to contract out. I can’t install marble countertops. But the carpentry work. I was like, “How do I install baseboards? Okay, got it.” So you get a nail gun. And I just remember going to the baseboard being like boom, and then wiping a tear away and then boom and then wiping. I just thought my world was over and I thought I was really dumb for trying to be super cool and I did one flip and I was awesome and I apparently wasn’t.
And so that took me until December of 2019 is when I finally finished the flip and I was super proud of it and it was gorgeous, and I was just like, “Man, I’m going to live in this house now because I earned it.” It was insane. So as we know, COVID happened in March of 2020, things started to slow down. There was a lot of uncertainty. And I had a lot of PTSD. I really didn’t listen to a podcast for a while. I was happy being in my house, but then I got bored and I got inspired. So I picked up Set for Life by Scott Trench and we talk about living beneath your means, and I’m like, “Oh yeah, I remember that.” And talking about how regular people can build wealth by house hacking, and I’m like, “Ooh, tell me more. Let’s learn about this house hacking thing.”
So I remember I was sunbathing in my backyard, minding my own COVID business, and I read this and I was like, “I’m selling my house. Why am I living in this house? It costs one paycheck to run. Yes, it’s gorgeous. Yes, I love living in it. I feel super cool because I did all the work myself, but this is not going to help me get to where I need to go.” So I ordered a for sale sign from my broker. I ordered the photographer. I put it online by the weekend. I had 15 showings, three full price offers, and I sold the house.

Tony:
Dude, I love hearing when folks DIY. I’m a real estate investor, but I’m not the DIY guy. I’ll hang a light fixture, I’ll swap out some light switches, but baseboards, carpentry, that stuff I’m not that good at. But kudos to you, man, for buckling down and doing the work that needed to be done to be able to get that deal across the finish line.
So the second flip eventually has a happy ending, which is good. And I’m assuming, Matt, were you able to sell that one for a profit?

Matthew:
I was. So what was so crazy about this story too is after I sold it, I was like through the option period, I’m like, “I think they’re actually not going to terminate the contract” and I was like, “Oh no, I need somewhere to live. And also I need somewhere to store my stuff because I have 2,000 square feet of furniture now that I’ve collected.” And so I put my stuff in storage. I found a corporate unit in Dallas because I didn’t know when I was going to have to go back to the office.
And so the profit on that one was 55 grand even with the 20K hit from the contractor. I remember going to the corporate apartment, I’m around all of these weird objects because none of them are mine. I’m sitting at my laptop and I’m pressing refresh on my bank account waiting for the wire to hit. I know, don’t laugh. It’s kind of silly. But to me it represented my hard work on that flip, but it also had my cash from my first flip in there as well. So my bank account was super, super tiny and I was like, “Oh my gosh, what’s going on?’ And then when I refreshed that afternoon and it was there, I felt this proudness and happiness and I was like, “Man, I went from having less than fewer than two months of reserves to 50 months of living reserves in two years.” And it was just a really cool experience that I was very proud about.

Ashley:
Yeah. That is such a monumental moment. That is definitely 100% something to be proud about for sure.

Matthew:
Yeah, it was, sure. And then that kicked off my summer of couch-surfing as I like to call it. So I got sick of living in the corporate Airbnb, so to speak. I knew we weren’t going back to the office anytime soon so I just started, “Hey friend, I’m coming to Austin, I’m going to stay with you for a while.” I wanted to go live with my mom. She loved it. She cooked for me. We binge on Netflix. It was a really cool summer stay with friends in Houston. And I had it in my mind that I really needed a fourplex FHA. And the reason why I wanted it is I wanted to lever as many units I can while still getting a regular loan. I wanted FHA because I wanted the 3.5% down, not the 25% down.
And then, so that was my new mission in life. I went and go. I looked at all the fourplexes in Houston. I didn’t even care if it was an hour away because Houston is an hour away from Houston because it’s so large. And so I found one right by the airport. And so I got out of the car and I was like, “Well, I’m not scared to get out of the car. That’s a good first step up.” And then I look up and I see the planes passing overhead. I’m not kidding, 700 feet. It’s on the final approach. The flaps are out. You can see the Qantas and the Emirates and the Lufthansa, In Spirit, and then you hope the Spirit doesn’t land on your house because you know, their Spirit. But it was that close, and so I was like, “You know what? I’m going to go ahead and make an offer on this thing.”
So I made an offer, it was listed for 450,000. I went in at 405,000 with… I had love to do my 5K kicker at closing just because it’s fun to bring less cash. They counted at 410,000 and then we were under contract. And I was like, “Man, this is super exciting. This is super easy. All of my real estate stuff that’s hard is over and it’s going to be smooth sailing.” Well, because this is the Halloween episode and we’re bringing the drama, this is where stuff starts to get a little bit crazy.
So I schedule the inspection. I haven’t been in these units yet because you know, really don’t get to view them until you’re under a contract. So we start with the first unit, A1. I go in perfectly fine. Two story townhouse, they’re side by each, looks great. Going to the second one, more of the same. There’s nothing really wrong with it. Going to the third one, there’s no floor, so there’s no carpet, there’s no doors on the cabinets, there’s no air vent covers. I’m like, “Okay, well we’re going to have to get this fixed if it’s going to go FHA, but no big deal.”
Then we go into the fourth one. And so I knock on the door. From the information that I have, I’m expecting a 30 something female. And it’s an old lady and she’s like, “Hello?” And I’m like, “Yes, I’m here to inspect the property.” And she’s like, “Okay, I’m expecting you.” I walk in, I get hit with this smell that smells of decay. It’s 90 degrees, they’re not using the AC. This is June in Houston, 2021. I take a look around, I notice these pots and pans. I’m like, “This is bizarre decor” until I realize that they’re full of water because water is dripping from the ceiling. We go into the kitchen, there’s little baby cockroaches running everywhere. And the old lady is like, “Well, you can’t go upstairs yet because my daughter’s getting ready.” Man, I was like, “Okay, ma’am, we’ll just inspect the downstairs.”
So then after a while, she calls me over and she’s like, “You’re going to do a really good job with this real estate thing. Is it okay if I bless you and bless the house?” And again, I’m not going to say no, it could be fun. So she blesses me. She blesses the house. And then at this point I’m thinking, “There may be something going on with the lady.” I said, “Do you mind if I go upstairs and just take a look around? And if your daughter’s up there, I’ll just knock before I go in.” So we go upstairs, we confirm there’s no one up there. The doors are all wilted because it was so humid in the place.

Tony:
Well, hold on. There’s no one up there? As in the daughter-

Matthew:
No.

Tony:
… wasn’t even upstairs? Okay.

Matthew:
She was not there. So we go into the bathroom, the toilet doesn’t flush, the shower doesn’t work. It’s the only shower in the place. I’m pretty concerned. Smart Matt decides to flush the toilet that doesn’t work. All I hear is screaming from downstairs from the lady, “Oh my god, there’s water coming through the ceiling.” I’m like, “Okay, well that’s broken too.” And so I have this moment of, “Matt, what are you doing? This is really dumb. You need to run.” And then my inspector, as if he read my mind, goes, “Matt, do you want me to continue with the inspection?” And I’m like, “Yes, let’s do it. What’s the worst?” So he finishes. I get back in the car, I exhale. And I call the agent and I’m like, “Hey, good news, bad news. Good news, I want to continue. The bad news, we have a lot of work to do and the sellers need to get onboard if this is going to qualify for an FHA.” So we fixed the things that we think need to be fixed for an FHA loan, the lender-

Ashley:
How did you negotiate that with the sellers? Did they pay for it? Did you come off the purchase price? How did that work out?

Matthew:
They did. So my amendment was actually pretty aggressive. I increased my concession to 10K. I asked for all of the stuff to be fixed on their dime during escrow. I even put in there because I didn’t know who the old lady was yet, I had a feeling it was the tenant’s mom. I said that that unit needed to be… They needed to deliver a notice of non-renewal within 30 days of us going under contract because she was on month to month tenancy. So I knew that I wasn’t stuck with that tenant, but I didn’t know if they were going to leave. And then if they weren’t going to leave, I asked for three months of rent from them just in case they didn’t leave, which they agreed to, which was fantastic. So they agreed to that.

Ashley:
Which was probably held in escrow?

Matthew:
It actually wasn’t. So I was listening to the latest podcast that just came out and you talked about holding those funds in escrow, and I just added them to the amendment. So I was getting those funds regardless, which was probably-

Ashley:
Oh yeah, great idea.

Matthew:
… a little better for me on the edge.

Ashley:
Yeah.

Matthew:
So then we order the appraisal. So if we go back to summer of ’21, everyone and their cat was refining. I was locked in at 2.6. Everyone else was like, “Yes,” which those days were gone. So sad. But I was locked. No one would take the job because the appraiser would rather get the house in the suburbs that looked like the other houses and they could get the appraisal done within two seconds. So the lender was like, “Matt, we have to up the offering to 2K” and I’m like, “2K for an appraisal. Guess that’s what we got to do.” And so we finally got the appraisal, they did it. It came back. I’m looking for the value. I’m like, “Please come back at 410,000.” It comes back as cannot be determined, tear down status.” So then my lender-

Ashley:
[inaudible 00:39:15].

Matthew:
… my lender calls me and he’s like, “Matt, what kind of property do you have me typed up? Tear down status? This is unbelievable.” And I’m like, “Hey, there’s something wrong with this appraiser.” I sent him all of the pictures from the repairs and from my inspection, and he’s like, “Yeah, there’s something wrong.” So we get in touch with the lender’s boss, the appraisal management company. They convinced the appraiser to come back out, reinspect the property. He gives it a value of the magical 410,000 that we need, but we needed to fix a couple more things. So we go ahead-

Tony:
I just want to pause for a second because I’ve actually never heard of an appraiser saying that a property need to be torn down. I didn’t even know that that was an option.

Matthew:
It was wild. I was just reading the thing. The lender had never heard of it. The lender’s boss hadn’t. The appraisal management company thought it was odd too. So we send the appraisal-

Tony:
And he was still going to charge you 2,000 bucks for telling you just to tear the thing down.

Matthew:
I was like, “Come on now. You can’t break my heart and charge me two kids at the same time.”

Tony:
That’s crazy.

Matthew:
Yeah, it was insane. So we got the appraiser back out there. It comes back at 410,000. We do-

Ashley:
And was it the same one or someone else from the company?

Matthew:
It was. So every one of my experiences with an appraiser is they send the same one back out. I had a similar experience. I was mentoring a friend through his first FHA fourplex and it didn’t meet the self-sufficiency clause, so I had to write a whole thing about that, so they sent the appraiser back out to fix that. But yeah, it’s always been the same in my experience.
And so we finally do the fixes, we send it to underwriting. And then underwriting comes back after we made the fixes and says, “You know what? We actually found more you need to fix. The initial report says that they couldn’t get the heater to work in one of the units, so you need to send the inspector back out there after you can show us that you’ve certified the HVAC for the heat to work.” And I was like, “Okay, fine.”
So we do that, it goes back through underwriting. We’ve blown through two different close dates so far. So found the property in May, under contact in June or in July, goes through underwriting again, comes back out. But wait, they found more to fix. The heater’s fixed, but now they don’t like the fact that there’s cutouts behind the valves and the tubs for the access panels from prior leaks, and all four units had this. And so they said they could not fund the property because of the holes in the bathrooms. And at this point, the listing agent and the sellers, they’re on me, they’re like, “Matt, we’ve been really patient with you.” And I felt bad because they were so nice and they were helping me through the process and they were fixing things for me, and I wasn’t holding up my end of the bargain by bringing the cash and getting this thing closed.
So what do I do is I look up the CEO of my lender, I found his name, I guessed what his email is, and I put everyone on an email chain saying, “Hey, Mr. CEO, my name’s Matt. This is my loan number. These are the issues that we are having. Here’s the timeline. I would really love this loan to close. What do I need to do? I’d also like my appraisal fee refunded.” And so I actually get an email back from him the next day. They work on it, and we were closed and funded within a couple days, which is crazy.

Ashley:
Oh my gosh.

Tony:
No way. I mean, it’s-

Ashley:
Wow. That’s so cool.

Tony:
It’s so crazy because I… And just to clarify, when Matt’s using the term underwriting, he’s talking about underwriting with the lender, right?

Matthew:
Right.

Tony:
So the lender has to underwrite the file to make sure that it’s a loanable product or whatever it is.

Ashley:
And that person is different than your loan officer. It’s someone separate.

Tony:
Yeah.

Ashley:
Your loan officer is your advocate, really. And then there’s the person in underwriting, yeah.

Tony:
Was it the same? Actually, I don’t know this. Was it the same underwriter looking at the file each time or was it just going back to the underwriting department? Because I would find it really interesting if it was the same underwriter and they just kept looking at the same file trying to find something different. But if it was going back to a different person, that might make a little bit more sense. But either way, Matt, I think your step of ringing the alarm and trying to get all the troops aligned here, it’s a step that a lot of folks can take. And obviously when you’re working with the bank or a loan, like a lending company that’s a little bit smaller, that’s probably easier to do. Harder to email the CEO of Bank of America. But if you’re going to a local lender, it’s a little bit easier.

Ashley:
I manage a property for another investor, and yesterday we had an incident where there was some water leaking in one of the roofs and we just had it replaced last year. And the roofing company, we called the guy that had the project manager for who had done the roof for us and been our point of contact and he’s like, “Well, I’m not in the office, you’ll have to call somebody else.” And so we called the office phone, nobody’s answered. Try again, nobody answers. So I send a text message to the property owner and he has a very well established name in the town and I said, “Can you just reach out to him real quick? We can’t get ahold of anyone at his company or anything.” And so I think he just forwarded my text, which I knew he would do it that way. And within two minutes, Daryl’s cell phone ran and the guy called and he was just like, starts the conversation off. “I don’t know why Ashley had to call and blah blah and say stuff,” but it worked. It worked.

Tony:
Right, yeah. It solved the problem.

Ashley:
I was like, “I don’t care if you don’t like me now because I did that, but that’s what I had to do.” And it’s kind of like the book of like, Who Not How. It’s, you know?

Matthew:
Exactly.

Ashley:
I was just going to say like, okay, lets kind of bring it to date as to what your financial position is right now, what your portfolio looks like, what’s your cashflow, what’s your W2 income? And then we can kind of wrap this whole thing up and maybe by the end of the day, you’re quitting your job.

Matthew:
Oh, that would be great. Okay. Let’s get us there. So now with the four units, the fourplexes doing its thing, I’m in my current house hack, another triplex, et cetera, so I always like to look at my net. So everyone loves to spend on gross, but we’re taxed so heavily as W2. I’ve always just accounted it as, what am I taking home at the end of the day?
So as a nice round number, we’re going to call that 10 grand. And so I still have taught myself to live on half. So five is for spending, five is for my buy more real estate. And then my passive or my real estate income is sitting at 4,000 a month. And so that is kind of the spending money that I have now. So with a portfolio that is around 2.2 with 700 in equity, I have my, “oh no” fund or my buy more real estate fund, however you want to look at it. At around 75K, my business bank accounts at 20, I feel like yes, I would take a hit and yes, I would have to really watch my spending and that opportunity cost of letting my passive cashflow build on my business bank account is that worth being able to tackle all those things that I don’t have time to do with designing my portfolio to be able to network and meet with the credit unions, get the business line of credit, being able to go to more real estate events.
And then also start my coaching, which I’m really passionate about, is when I went to the real estate event in Houston this past weekend, I love being able to talk to the newbies and kind of get them to find out why they haven’t taken that first step and kind of coach them. So spending time coaching would also be a passion of mine. And then also improving me a really sad social media. So if we go look at my videos of my progress of week over week, it’s just me holding a camera going, “Okay, this is what I’ve done.” So it’s just having that, but I don’t have time for now.

Tony:
Matt. I just want to share a little bit about my story in hopes that it might give you some insight. So for me, very similar kind of journey. I climbed the corporate ladder, had a very healthy six figure job, and I ended up losing my job right at the end of 2020. I had this decision to make of, “Do I try and go back out into the workforce or do I double down on this real estate side hustle that I’ve been kind of cultivating over the last couple of years?”
Sitting down with my wife, we came to the agreement that we would give ourselves 12 months. And we had enough money saved up to last us a while longer than 12 months. So I was like, worst case scenario, we burn through some of our savings. 12 months later, I go back and I get another job. And I’m fairly confident I could go out and get another high six figure paying job that I had before. So we buckled down for 12 months and do that.
The amount of energy that we were able to put into our business during those 12 months, it was insane, the amount of growth we were able to achieve. And it never would’ve happened had I had that day job. Now, this isn’t me encouraging you necessarily to quit your job. But just at least asking the question of, how much runway do I have? And if the worst case scenario is that I give myself 12 months to really build this thing out, and at the end of that 12 months I just have to go out and get another job like the one that I already have, is that really a bad thing? At least I have 12 months to prove to myself that now’s not the right time or prove to myself that now is the right time. So that was my experience, man. And I’m incredibly grateful that I had those 12 months because it showed me that I could be an entrepreneur.

Matthew:
Nope, I love it. I love the fact that you gave yourself the 12-month runway and it’s not a decision that’s forever. And so when we initially look at this jump, especially because there’s so many people telling us not to do it, it seems like it’s a one-time thing and you have to do it forever. But if it doesn’t work out after that allowed time, then you can always go back and get another job. So I really love that perspective.

Tony:
I was just going to say… Sorry, last thing. We’re in 2023, so I’m three years into leaving my job. And dude, even today, if my business is completely crumbled today, I’m still confident I could go out today and probably still get a job that’s going to pay me six figures. So there’s really no downside because once you’ve built those skills in the workplace, you’re always going to have them, right? And you just go back out into the workforce and find that next job. But on the flip side, most people never have the courage to test out, “Can I do this by myself? Can I stand on my own two feet? Can I build value in the marketplace on my own and let my value be tied to what I can do and not what a company thinks that I’m worth?”

Ashley:
Matthew, so I have a couple of questions for you, I guess. And the first one is based off of your and Tony’s conversation, is would you easily be able to get another job or even get your same job back if you did decide to quit?

Matthew:
Yes, I am fairly confident that I could find another six figure job if I decided to quit, yeah.

Ashley:
Okay. And then in your position, would you be able to find part-time work? So you’re a consultant. Would you be able to work for another employer who it’s only part-time? Or would you be able to maybe your own agency where you even posted on Upwork or Fiverr and people could just hire you on demand if need be?

Matthew:
Yep. I’m pretty sure I could do that too.

Ashley:
Yeah. So I think that you have those options, definitely it could ease the pain or the stress and anxiety and the risk of fully quitting, is that you have those other options to actually bring in that income.
One thing that I would definitely do before you do quit your job is to get another bank loan.

Matthew:
Got it.

Ashley:
Go and purchase another property while you have that W2 income. One thing that I would like is, if you were still going to work a little bit as a consultant, if you could get a part-time job, because that W2 income is going to be way more valuable for loans than going out on your own and creating your own little business where yes, you’re bringing an income, but a lot of times banks will want to see two years of tax returns for that business that you have created on your own. But if you’re going out and you’re getting hard money and you’re going to do flips and you have private money and you’re not even worried about doing bank financing anymore, then that kind of rules that out for you.

Matthew:
No, that makes sense. I do like the idea of the one more bank loan. Well, I’m easily bankable before going rogue, right?

Ashley:
Yeah. The next thing I would look at as to what you make per an hour, and then I would make a list of tasks that you could easily outsource.

Matthew:
Okay.

Ashley:
Okay? So right now for my property management company, I have two VAs working for me completing tasks. And I pay each of them $10 per hour. Let’s say for example, you make $30 per hour. Are there things that they could do that would take things off of your plate that you could train them to do? And the training will take time. So maybe this is where you take your two weeks vacation to train some VAs and you work your hour while they’re working their hour and you still net $20? Because your time is more valuable doing your consulting work than doing tasks where a VA could do it.
So we had a guest on, and I can’t remember her name or what episode it was, it was probably a year or two ago, where while she was at work, she had a VA that just found deals for her, did deal sourcing all day long.

Matthew:
Awesome.

Ashley:
And it was probably around the same $10 an hour she paid her and she went to her W2 job and made more money and that easily covered paying the VA to do all of that. And then at home at night, she would do the little pieces of stuff that a virtual assistant couldn’t do.

Tony:
Yeah, the episode you’re talking about Ash, our participant in the chat, I think it was Maria Acosta. And actually no, Maria, yeah, she’s a stud when it comes to using her team. Avery Carl, she’s well known in the BiggerPockets ecosystem as well. She’s got a really dialed in virtual assistant team.
I actually just read a book and it kind of ties into what you were talking about, Ashley, about what is that pay rate that you should look for. The book is called Buy Back Your Time by Dan Martell. Buy Back Your Time by Dan Martell. Really incredible book. He’s a super successful tech entrepreneur. But in that book he talks about your buyback rate. And I think he sets it to like, if you can outsource something for 1/4 of what your own hourly rate is, you should always outsource that. It’s a no-brainer if it’s 1/4.

Matthew:
I love that.

Tony:
Anything above that, maybe there’s a little bit more flexibility. But if you make 30 bucks an hour or call it 40 bucks an hour and you can outsource something for 10, do it every single time because the value you can go and create at that 40 bucks per hour is going to far exceed that.

Ashley:
And your VA might actually do something better than you do too. Mine find things, like little things that I wouldn’t even think of as a third party, someone looking from the outside. And when I give them, “Here’s the scope of work of what I want you to do for this process, the SOP,” they’ll actually poke holes in it. “Well, when I did this, it goes to this,” and then I’ll be like, “God, okay, let me rework it here, or whatever.” But they follow it to a T and it’s done way better and way more efficient than if I was actually going and doing any of these tasks myself anyways too.

Tony:
I think one thing to add onto what you said, Ash, I love the idea of the part-time work. I guess like an ancillary piece to that is, are there additional services that you can provide to other real estate investors? Like if you’re doing property management for yourself right now, can you take on maybe a few property management clients for other owners? So now you’ve got an additional source of revenue there.
If you flipped houses, I don’t know, let’s say you’re really good at finding deals, can you wholesale maybe one or two deals every quarter to other real estate investors? Olivia Tati, who is on one of our recent episodes, she quit her job as an engineer at Chevron. She had a really healthy six figure salary, but she didn’t just rely on her rental income. She started a design business that helps other real estate investors designed their Airbnbs, and that’s a good portion of her rental income. So just the question of like, are there other services that you can provide that build on the skillset you already have to help other real estate investors so it’s still related to the core of what you’re trying to do?

Matthew:
Right. No, that makes great sense.

Ashley:
So my vote is no, don’t completely quit your W2 job. That’s my vote. I say go down to part-time.

Tony:
Yeah, I’m a bit of a risk-taker. So if I’m Matt, dude, if you’ve got the runway, again, I feel like that value that I got from being able to go full time, it was really impactful for me, man. But obviously at the end of the day, you got to make the choice that’s right for you. I would hate for you to quit your job and come back and say, “Tony, I quit my job and my life is falling apart.” So make the call that’s right for you.

Ashley:
“I should have taken Ashley’s advice, but…” No, I think this is awesome that you are considering it. And hopefully you’re able to take some of our advice and find a plan that works for you. And the best thing is, even though you have this decision weighing over you, there are so many millions of people that wish they were in this position where they could make this decision. So I mean, Matt, congratulations on how far you have come and to be able to be at this point in your life, it’s truly remarkable.

Matthew:
No, thank you so much. And yeah, the decision is not lost on me that it’s a privilege to be here to be able to say, “You know what? I don’t need this anymore. I’m going to go follow my passion.” And I know that not everyone has that, so I’m very excited to be here at this point in my life and be at this crossroads and I’m very much like, “Okay, I’m like Tony, but no, maybe I’m more like Ashley.” And if you go and read the comments from the posts, it is like, “What are you thinking? You need to keep your job. This economy is crazy.” And then the other camp is just like, “Do it. Follow your heart.” And so it’s just two different camps and there’s not exactly one right answer. So it’s very exciting, and I definitely gained some insights by talking to you guys about it.

Ashley:
Yeah, I think you’re in a really great position where no matter what path you take, that there are a lot of safety nets either way for you. So Matt, before we wrap this up, do you have any other questions for us?

Matthew:
No, you guys answered it. Really what I wanted to know, I wanted to know was on your mind about have you been in this before? How would you address it? If you were me, what would you do? So I feel like this is a very good discussion for me to have at this point. And I will be making my decision I think over the next couple of months, once I get that one more loan in my name per Ashley’s advice. Then hopefully I’ll be able to continue to share my story and help others and we’ll see where this journey takes me.

Ashley:
Yeah, it would be awesome to have you back just to do part of our intro to another episode or on a Rookie Reply or something, just to have you back. Leave us a voicemail of what has happened and what you decided and what you did and keep it updated, yeah.

Matthew:
That would be awesome.

Ashley:
Well, Matt, thank you so much for joining us. Can you let everyone know where they can find out more information about you and watch you revamp your Instagram?

Matthew:
For sure. So my Instagram is my last name. So first you have to learn how to spell it and then I’m easy to find. It’s M-A-R-C-E-L-I-S-S-E-N. That is my Instagram and I’m most active there.

Ashley:
Okay, awesome. Well, thank you so much for joining us. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson and we will be back with another episode. We’ll see you guys then.

You’ve been listening to all the BiggerPockets podcasts, reading the blogs, interacting on the forums, and going to all the meetups. Every day, you’re analyzing deals from the MLS and from wholesalers that you’ve met. You’re networking, learning, and doing all the right things, but it’s just not coming together. 

You need to make a change in your life for yourself and your family’s future, and there’s no room for error here. How do people do this, starting from scratch?

The biggest thing holding you back that you haven’t even considered is your car payment. 

Check Your Car Payment

Many investors are looking for deals that cash flow at least a bit—maybe a couple of hundred dollars per door or so. Nerdwallet reports that in 2022, the average used car payment in America was $516. And new cars? A whopping $725. 

That’s per month, folks—and it’s the average. Stack that on top of the fact that most families have two cars, even if they were used, and that’s an average of $1,032 per month in car payments. 

How would you like that cash flow? Well, you could have it tomorrow if you got rid of those car payments. 

“But I need my car to get to work!” Do you mean that job that you are trying to get rid of? Seriously, there are so many alternatives: drive a junker, ride a bike or a skateboard, walk, public transportation, or carpool. The options are endless. 

Think about this critically: Why do you need that car payment? I mentor many aspiring investors in my market, and nine times out of 10, they pull up in a nicer car than I have. I always ask about it, and the answer is always the same: Either they “need” it for work, or they need a “safe” car for their family. 

Well, sure, a 2010 Camry is nominally less safe than a 2022 Tesla Model Y, with all its fancy navigation panels and automatic this and that. But do you really need the latter?

Or you might say, “I’m a contractor, and I need my truck.” If you are a contractor making less than $150,000, the last thing you need is a $1,200 truck payment. The bed of a 2008 F150 can haul a box of nails just as well as a 2023 F350 with a lift. 

Why Real Estate in the First Place?

Before we delve further into the car payment conundrum, let’s talk about real estate investment and why it’s a savvy financial move.

Real estate is a proven asset class for building wealth over time. Unlike cars, which depreciate in value the moment you drive them off the lot, real estate has the potential to appreciate, generating wealth through both property value increases and rental income.

Here are a few reasons why real estate is an attractive investment:

• Steady income: If you invest in rental properties, you can enjoy a consistent stream of income from your tenants.
• Appreciation: Real estate tends to appreciate over the long term, increasing the value of your investment.
• Tax benefits: There are numerous tax advantages to owning real estate, including deductions for mortgage interest, property taxes, and depreciation.
• Diversification: Real estate offers diversification in your investment portfolio, reducing risk.
• Leverage: You can use financing (mortgages) to purchase real estate, allowing you to control a valuable asset with a relatively small upfront investment.

Delaying Gratification

With car payments, the inverse is true in every single one of these real estate benefits. How can we say that we believe that real estate is an obvious path to wealth while we are working a W-2 job and driving a car well beyond our financial means?

Honestly, we all need to check our egos. In American culture, cars have always been one of the statements we make about ourselves, and car manufacturers have done a great job of taking advantage of that weakness in all of us. When was the last time you used that $1,500 built-in drink cooler in your armrest? It sure seems like an alluring option when you are rolling into your car payment. 

There are no shortcuts in real estate, and we all know the way to win in life is through delayed gratification. Why should having your dream car be any different? 

You can absolutely have your dream car, whatever that may be, but you can have it later. If you don’t have enough passive income to cover those payments, you need to examine your budget. If you stopped working your W-2 job tomorrow, how long could you keep making your housing payments, insurance, living expenses, and car payments? If the answer is not “forever,” then you need to get that car sold yesterday and find another way to get around. 

Now, back to the high car payments and their impact on real estate investment. One of the primary culprits here is the need for immediate gratification. We live in a world of instant everything—fast food, on-demand streaming, and, yes, even instant car loans. It’s all too easy to succumb to the desire for immediate rewards, like driving off in a fancy new car.

However, this desire for instant gratification often comes at the expense of future happiness. When you commit a significant portion of your monthly income to car payments, you have less money available for investing. It becomes a vicious cycle: You buy a pricey car to satisfy your immediate desires, but in doing so, you limit your capacity to invest in assets like real estate that can truly change your life for the better. 

All of that, and we haven’t even begun to discuss the debt-to-income (DTI) ratio. When people with average incomes begin to invest and scale, the limiting factor that will smack them in the face the quickest is being shut down by conventional lenders due to their high DTI. If you make $80,000 per year and have a $500 car payment, you’ll struggle to find a conventional lender who will be able to help you scale. 

I know, I know—private money and DSCR loans are where it’s at. Sure, but DSCR loans are really tough to get those ratios on right now, with 8% and higher interest rates. 

Newer investors always want the best deal, and conventional loans are always going to be the best rates and terms available—that rate and those terms are what will make your deal cash flow or not. If you want the best pricing on your loans, you need to free up as much DTI as you possibly can. Getting rid of your car payment is a painless way to make a big dent. 

Opportunity Cost: What Could You Be Missing?

To put this in perspective, let’s consider the concept of opportunity cost—what you forego by choosing one option over another. In this case, the opportunity cost of having car payments could be substantial.

Imagine you have a $700 monthly car payment. Over the course of a year, that’s $8,400. Now, what if you took that $8,400 and put it into a brokerage account to save a down payment on an investment property or contributed it to a retirement account? Over time, that money could grow significantly through compound interest or real estate appreciation.

In contrast, the car you purchased will lose value year after year. It’s a classic case of prioritizing short-term feelings over long-term freedom.

Finding Balance

The key takeaway here is to find a balance between your immediate desires and long-term financial goals. 

If you’re itching for a new car, set yourself an income goal that will pay for the car. For instance, if you buy three properties that cash flow $250 per door over three years, your car with a $750 payment is essentially “free.” Your tenants bought it for you.

High car payments, driven by the need for immediate gratification, are very likely to hinder your ability to invest in real estate. While the allure of a shiny new car is undeniable, it’s crucial to weigh that desire to have a shiny new car now against your goal of being financially independent. Is it really worth it?

By finding a balance between satisfying your short-term desires and earning a financially free future, you can ensure that you’re not just driving in style today but also building a solid foundation for tomorrow. It’s not about denying yourself pleasures; it’s about making choices that align with the future that you build for yourself. It starts today.

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