January 2024

Blackstone Group chairman, CEO and co-founder Steve Schwarzman joins ‘Squawk Box’ to discuss the real estate market, doing business in China, 2024 election, and more.

In my previous article, we delved into the essential elements of development zoning. We explored key zoning designations such as R or C, critical parameters including setbacks, FAR, and building heights, strategies for enhancing density via affordable housing, the role of neighborhood ordinances, and the distinctions between by-right and discretionary review processes.

In this article, we’ll delve into the crucial task of determining the development zoning for your project—an essential step to undertake before acquiring any development project. Mastering the intricacies of development zoning necessitates a strategic methodology, and we’ll unveil three pivotal strategies.

Online Platforms and Geographic Information System (GIS) Mapping

Digital tools can really simply your investigative efforts. Utilize online platforms and geographic information system (GIS) mapping to access invaluable data. Websites such as this one from the city of Los Angeles serve as exemplary resources. By simply entering the street address, these interactive zoning maps can help you visualize zoning boundaries, overlays, and specific stipulations with ease.

GIS websites offer a wealth of information detailing zoning designations, height categories, and occasionally density incentives linked to transit proximity. Additionally, they may encompass neighborhood ordinances associated with specific lots, although accuracy is not always definitive. 

However, while GIS provides valuable insights, it doesn’t prescribe the precise scope of permissible construction. Determining the feasibility of your project hinges on interpreting the zoning designations in conjunction with the city’s zoning guidelines, thereby synthesizing a comprehensive understanding tailored to your development objectives.

Let’s illustrate this with a hypothetical city. Consider a project labeled R3-2. Consulting the zoning handbook, you discern that this designation signifies a residential zoning classification. The “3” indicates a density allowance of one unit per 800 square feet (sf) of lot area. Thus, for an 8,000 sf lot, you can construct up to 10 units. 

Additionally, the 3 mandates specific requirements, such as allocating one parking space per unit and maintaining a 10-foot setback from the property line on all sides. Depending on the jurisdiction, the 3 may also convey additional stipulations.

Meanwhile, the 2 following the R3 designation signifies the height category. In our hypothetical city, this translates to a permissible building height of 45 feet and a floor area ratio (FAR) of 3:1. In alternative jurisdictions, you might encounter a designation like R3-45, which straightforwardly indicates a maximum building height of 45 feet.

Navigating density incentives can be intricate. When exploring GIS platforms, focus your search on terms like “transit orientation incentives” or “density incentives” to uncover potential bonuses. 

If your search proves unfruitful, consider examining state-level incentives. For instance, a specific state might offer incentives for projects situated within a half-mile radius of a metro station, enabling a 60% increase in both unit density and FAR upon allocating 10% of the units to low-income residents. Furthermore, state incentives could potentially reduce parking requirements and permit higher building heights.

In the context of our example project, by designating one unit for low-income housing, you’re able to construct up to 16 units. It’s worth noting that calculations typically necessitate rounding up to the nearest whole number. Thus, if your base unit count is 11, a 10% allocation would equate to two affordable units.

Contacting Local Planners

Engaging directly with city planners responsible for urban planning is a good alternative. While digital tools offer initial insights, consulting municipal offices provides a tailored, authoritative understanding, complementing your GIS-based research. This approach not only validates your findings but also uncovers any local ordinances potentially overlooked in GIS data.

When reaching out to local authorities, furnish specific details about your property or project, including address, lot size, and intended use. This facilitates accurate identification of the relevant zoning designation, enabling officials to outline associated requirements or restrictions. Proactive dialogue with city planners fosters collaboration, giving you invaluable insights into zoning dynamics and navigating development opportunities or constraints effectively.

Furthermore, consider scheduling an in-person meeting or consultation with zoning officials to discuss your project in depth. This personalized approach facilitates a comprehensive review of your plans, enabling authorities to offer tailored guidance and clarify any ambiguities related to zoning designations. By fostering an open, collaborative dialogue with local authorities, you can navigate the complexities of zoning regulations with confidence, ensuring your project aligns with the applicable zoning designations and regulatory frameworks.

Responsiveness can vary among planners. To expedite communication, I recommend employing multiple contact methods simultaneously, such as initiating phone calls, sending emails to both the general email address and a few individual planners, and securing an in-person appointment. This multifaceted approach increases the likelihood of a prompt and comprehensive response, facilitating a smoother progression through the zoning process.

Asking Consultants

Engaging the right consultants can be very effective in navigating the complexities of development zoning, but it could cost you a few thousand dollars. These experts bring specialized knowledge and experience, offering invaluable insights that complement your understanding of zoning regulations. 

Not all consultants will give you good service, so be careful whom you ask for help. When selecting consultants, prioritize individuals or firms with a proven track record in your specific area of interest, whether it’s residential, commercial, or mixed-use developments. Alternatively, you could also reach out to local developers who have a proven track record if you’re interested in a joint venture.

When approaching consultants, articulate your project’s objectives, scope, and any preliminary findings or challenges you’ve encountered. This foundational information enables consultants to tailor their expertise to your unique needs, providing targeted guidance and solutions.

In the preliminary stage, the main consultants needed are architects or land-use consultants. If the site could be contaminated, hire an environmental consultant to do a Phase I assessment, which typically costs a few thousand dollars and takes a few weeks. 

Additionally, it’s crucial to define clear expectations regarding deliverables, timelines, and communication protocols upfront. For questions limited to zoning parameters, which typically take only 10 to 20 minutes, consultants may offer their insights at no cost. However, for comprehensive feasibility studies encompassing design options and floor plans, these services should be anticipated to cost several thousand dollars.

Some Worthy Tips

As a bonus, here’s a look at some other factors to consider.

Escrow timeline

Extending the escrow period is essential for securing development rights, especially with challenging zoning regulations. I recommend at least a 30-day contingency period, but for larger projects, consider a three-to-six-month escrow to do a thorough feasibility study and get some feedback from the planning department. 

Power

During escrow, consult with the local power department or a dry utility specialist to determine the power supply options for your site. Larger projects often necessitate transformers and underground conduits, both of which entail significant costs and time. If securing power is projected to span two years, you must factor this into your project schedule.

Other utilities

While utilities such as gas, water, and sewer typically present fewer challenges, their installation can become complex and costly in rural areas. Thus, conducting thorough due diligence on utility provisions is essential to mitigate potential delays and budget overruns in your development project.

City timeline

Every city possesses its own unique timeline for the entitlement and permitting processes, reflecting varying regulatory frameworks and administrative efficiencies. In some cities, such as Seoul, Korea, the permitting phase can be done in a few months. Conversely, cities like San Francisco exemplify a more protracted timeline, where both entitlement and permitting processes need to be done sequentially and usually take three years. 

In cities where parallel entitlement and permitting are allowed, developers gain a strategic edge. Initiating the permitting process before full entitlement completion can expedite the timeline by six months or more, a benefit of this concurrent approach.

Final Thoughts

I hope these strategies serve you well on your next development project. If you have other tips or questions that you wish to share, feel free to comment below or reach out to me.

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David:
This is the BiggerPockets Podcast show 873. What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, joined today with my buddy, Rob Abasolo.

Rob:
On today’s show we’re going to be talking to a real estate investor named Kate Lynch about her journey from a Wall Street investment banker to a real estate professional in her 40s.

David:
This is a great show to listen to if you’re a working professional wondering how you could spend more time with your family, your children, and those you love, and also get the largest return on your investment.

Rob:
After this interview, we’re going to be answering an audience question in our Seeing Greene segment, so you’re going to want to stick around for that.

David:
That’s right. You’re going to love that question. Rob and I answer one of the most commonly asked questions right now, very hot topic on if you should rent a property out as a short-term, a midterm, or a traditional rental. And without further ado, let’s get to Kate.
Kate Lynch, welcome to the show. How are you today?

Kate:
I’m great. Thanks for having me.

David:
All right, Well, thank you for that. First question, when and how did you become an investment banker?

Kate:
Oh, gosh. I was just your stereotypical overachieving undergrad, straight-A student, really hustled my way into a job on Wall Street, I wanted to be doing the best in anything that I could do, and that was the crème de la crème for people interested in finance. So after I got an MBA, I just worked my tail off until I got there.

Rob:
Is it true that investment bankers work 100-hour weeks? I’ve always heard this from every investment banker that I’ve ever met.

Kate:
It was when I was on Wall Street. We literally would work from probably 9:00 in the morning until… Well, you had to work until your job was done, and that often meant you were there the next day. If it’s not done, you’re still working the next day when people show up for work. I probably had a dozen or so of those all-nighters when I was living in New York. But yeah, it was 9:00 AM to between midnight and 3:00 AM on a regular basis.

David:
Did it look like the show Billions?

Kate:
It was intense. It was amazing and fun and it was the best thing I’ve ever done in terms of my career, but it was hard.

David:
I’ve always wondered if those New York stereotypes actually play out because I’ve never been there, if it’s like you’ve got people screaming at you like Boiler Room, and then papers are flying up in the air, even though we don’t really use papers now. And someone’s showing up with a hot dog or a slice of pizza that they just got off because that’s all you could eat.

Rob:
Wait, hold on. You’ve never been to New York?

David:
Let’s not make this about me, Rob.

Rob:
We’ve got to go to the Spotify Studios and do some shows out there, man. You’re missing the best pizza in the world.

Kate:
It was intense. We were working from 9:00 in the morning until 3:00 in the morning, we ate every meal at the office. And I used to tell new recruits that were asking, “Oh, how do you get a work-life balance?” And I was like, “Your work-life balance is you’re friends with people sitting next to you because you don’t leave the office ever. And if you don’t like those people, your life sucks.”

David:
Was there a lot of forget-about-its going around?

Kate:
There were a lot of F-bombs.

David:
Yeah, I can see that.

Rob:
Different F-word, yeah. So obviously, this is a lucrative career from my understanding, and lots of hours go into it. What did this allow you to do financially, working in investment banking?

Kate:
Yeah, I was probably making, when I was living in New York City, between 400 and 600 a year.

Rob:
Wow.

Kate:
Yeah, and that was at a junior level. The senior level bankers are one to two million. And what’s funny though is that New York is just so ridiculously expensive that you don’t get that much for the money. So when I was in my late 30s I decided to move home to Cleveland, and I took a little bit of a pay cut because of that where I was making 300 to 400 a year, but you can get a house literally 10 times the size of what you get in New York for the same price. We have a house on Lake Erie, we have a swimming pool, we have a beach, we’re 10 minutes from downtown, we can see the skyline.
It’s ridiculous what you can get in Cleveland versus what you get in New York. People making one to two million a year, I would say, they take more expensive vacations but they spend way less time with their family, and it’s just not, I think, a great trade. You add a couple of zeros, but you’re not getting anything more.

David:
So was there a point where you realized, “I’m good at doing this, I’m making good money, but it’s a hamster wheel I’m never going to get off of”?

Kate:
Yeah, I mean, yes and no. So, my job was advising the CEOs of banks on buying or selling banks, and raising hundreds of millions of dollars of capital debt and equity to support their growth. That’s pretty exciting stuff, and it was fun, and I love the financial analysis, I loved the fact that I was giving advice to CEOs of banks around the country. It felt pretty cool to do until… well, obviously I didn’t have much of a social life when I was working those kind of hours, and so I didn’t get married until I was about 40.
And at that point I didn’t have much of a window to have children, even though we wanted to have kids. So we decided just to have kids if possible, and we had three kids in the four years after we got married. And then I was still expected to be on the road two to three days a week. Because I was living in Cleveland, I was driving to meetings around the Midwest. So I would leave the house at 5:00 or 6:00 in the morning, drive four or five hours to meetings, try to bang out two or three meetings in that day, and then get home between 7:00 and 10:00 PM.
So I had three babies at home who I wouldn’t see two or three days a week. I was pumping milk in the car and then turning it over to my… I had both a full-time nanny and an au pair living in our house who were taking care of my kids. And so that was the point when the job turned from awesome and fun and lucrative to, “What the heck did I get myself into.”
And just to give you a sense for my mindset prior to having the kids, I actually told my boss before having the first baby that I was not going to take maternity leave. I thought that, “I’m used to working long hours and little sleep and I can handle this.” And I really had no concept of how hard it was going to be to take care of one newborn, much less three of them. And so then I just had that moment or a feeling that so many people, I think, in your audience have, which is, “I’m in a place in my life that I need to make some changes,” and it’s really hard.

Rob:
Yeah, I think everyone would hear how much one can make in this industry and be like, “Oh, yeah, with the money, that buys happiness.” But I think most people that have been there probably understand that there is a moment where money maxes out on the happiness scale, and you really start missing all the things in your life that you had to give up to even get there.
So you’re at this point, I think you’re starting to make that realization. What was the exact moment where you felt you needed to make a change?

Kate:
Well, so we had a lifestyle that required the income that I was bringing in. And I kicked around like, “Do we sell the house and the boat, and give it all up and go live in the middle of nowhere?” But I just didn’t think that having built this life over the last 25 years that we would be happy living off the grid somewhere, living off the land. And I had a growing sense that I needed to do something else, and that searching phase, where you’re trying to say, “Well…” Listening to podcasts, and what’s out there, how can I achieve this financial level without this job? But it wasn’t until actually the podcast you guys did with Ashley Hamilton that I-

Rob:
Oh, nice. Yeah.

Kate:
Oh my gosh. So I was literally driving home from a meeting at probably nine o’clock at night, it’s dark outside, I know my kids are going to be asleep when I get home. And I listened to that podcast, and it just changed my mindset 180 degrees because she was in her early 20s, she had two kids, a single mom making $20,000 a year as a waitress. And when I heard her say that she has acquired 10 properties and is home with her kids, it was like, “Oh.” That hurt so bad. I worked on Wall Street, I have an MBA in finance, I had more than a million dollars in my 401(k), and here I was getting home after my kids went to bed, not seeing them for a whole day. It just felt like, “I messed this up,” or at least, “I can do better than this.”
And I thought, “If I can help a multi-billion dollar bank figure out how to not fail through my financial skillset, surely I can figure out how to get myself to a place of financial independence, especially if somebody like her can do it. Why should I not? And I really owe it to my kids to go from thinking about it and wishing I could do it, to just getting it done.”
And that literally, after hearing that podcast, I was committed, “I’m going to make this happen and I will find a way, or at least I’m doing something about it, I’m not just going to keep wishing for it.”

David:
That’s amazing. Well, for anyone that hasn’t heard that podcast, I can attest to how amazing it was. Before I was ever on the show, I remember listening to that as a listener, and that’s episode 331. So go check that out after this podcast.
But I want to ask, Kate, because obviously you’re feeling all of these… I guess the wheels are turning, you’re listening to this episode, and you get into real estate. Do you feel like you had any advantages getting into real estate, coming from investment banking? And if so, what were they?

Kate:
Yeah, certainly my ability to run numbers is relatively good. But running numbers in real estate is not all that complicated, it’s just how much do you invest and how much you get back. Maybe just the willingness to crunch numbers over and over and over again until I find the answer that I’m looking for. But yeah, I started looking into every possible avenue, listening to the podcast and reading the books, figuring out where can I get the most bang for my buck?
Like I said, I had about a million dollars in my 401(k), that I decided I was going to use, and I wanted to get as much as I could from that. And so is it commercial real estate? Is it storage facilities? And just running numbers and numbers until I found a path that I thought would maximize the cash flow for the amount I had available to invest.

David:
So you had been exposed to real estate, you liked it, you just wanted to figure out which type of real estate that you were going to get into?

Kate:
Yeah, my exposure purely came from BiggerPockets, right? It wasn’t like I had zero experience with real estate before. And listening to some of your podcasts with other guests, I often heard people telling a story of they were trying to replace 30,000 or $40,000 of income and so they could get into a property that was earning them $1,000 a month. And I was like, “If I have a property that makes me $10,000 a year, I literally need 30 to 40 of them in order to replace my income.” So initially I thought, “I don’t know if residential real estate would get me there.” Ultimately, as I continued searching, I figured out that I could make it work with primarily triplex in Cleveland using a short-term rental strategy.

David:
I always think it’s funny when people say, “Oh, I’ve got 55 units somewhere.” And you’re like, “I really love real estate.” I’m like, “Well, you can love cats, but you don’t need 55 of them. That’s not always the best way to go.”

Kate:
My goal is having time, right?

David:
Some people need 55 cats.

Kate:
If I want to have time with my kids, 40 properties doesn’t seem like the right way to get there.

David:
Yeah, that’s a great point. You’re just jumping out of one problem into the next one. So, awesome, we’re going to get into how Kate built that small and very mighty portfolio that replaced her investment banker’s salary right after this quick break

Rob:
And we’re back. We’re here with Kate Lynch, a former real estate investor who made a change later in life to go all in real estate. Kate needed to replace her huge W-2 salary with real estate income in order to gain back time with her family, and we’re going to break down exactly how she did it.

David:
How did you go about creating that plan to invest in real estate while you’re still working this full-time demanding job?

Kate:
Yeah. So I just was at night on Zillow, and like I said, listening to everything I could online because I was driving so much, I had a lot of ability to just listen to everything I could. Certainly, Rob and his channel teaching people about using Airbnb, and how much more lucrative that was, was a big factor for me. I wanted to get into real estate in a way that felt less risky. So obviously, David, you wrote the book on the long distance real estate investing, but I wanted to do something, or at least I would say I spent more time analyzing opportunities closer to home because it felt like a lower risk approach to me. And I found that you can buy a triplex in Cleveland for about the same price as a single family home, but with way better cash flow.

Rob:
So I have a question, I think there are probably a decent amount of people that have some liquidity or some amount of money in their 401(k) in the stock market. You said you had about a million dollars, which is obviously a very healthy start for anyone. But what was the actual process? How do you leverage money? If you have a million dollars in the stock market, how do you get that money out and then apply it towards real estate? Is there a particular process? Is it a self-directed IRA? Tell us a little bit about the movement of funds there.

Kate:
Yeah, I’ve heard about people using processes to keep their money in a 401(k) and invest in real estate, but I couldn’t do that because I wanted to live off the cash flow. So for me, I just liquidated it. And there’s a 10% penalty, and you have to pay tax on the income, but as you guys know, the benefits on the tax side from the real estate I was able to use to offset a lot of that income that I had to report. I was lucky enough to be able to… [inaudible 00:12:55] my husband qualifies as a real estate professional, so I was able to take a big advantage of that tax benefits in order to not have a huge hit on the tax side.
But I liquidated it. And it felt scary to close out my 401(k). But if you think about it, it’s really supposed to be a retirement account, and I was using it to retire at 45 instead of 65, so I guess I did use it as a retirement account, I just had to pay the fees for doing it too early.

Rob:
Sure. Yeah, no, I love that. I love that the actual answer is like, “Oh, I just took the hit.” Usually there’s always some secret answer, or someone’s got some strategy that no one understands, but I love it. Obviously, you put money in there, you got it to a million bucks, I’m sure you made a good return there. Can you talk a little bit about the return profiles that you were getting on your investments in stock market versus your real estate investments? How does the ROI compare with both asset classes for you?

Kate:
Yeah, so the long-term returns in the stock market are around 10% per year. There’s certainly great years and there’s terrible years in the market, but over the last 80 years, it’s been an average of around 10% per year. And my return, I wasn’t a phenomenal investor. As an investment banker, I was advising companies on buying other companies, I wasn’t doing individual stock trading. But I had decent performance just like anybody else who invested over the last 25 years, mostly in index funds.
But in real estate, I’m getting, I would say, around 45, 50% return on the cash that’s invested in my portfolio, which is obviously a huge win and certainly worth paying a 10% penalty to get there.

Rob:
Yeah, there’s a delta there. Well, that’s amazing. Okay, so I guess I have to ask because obviously I like short-term rentals, and you said very nice things, so I appreciate you watching the channel. You mentioned you decide to get into the real estate game, the short-term rental game, and you’re like, “Do you know what? I’m going to do this. I’m going to get into short-term rentals in Cleveland.” That is not typically a market that I have my eyes… If someone came to me and they said, “Hey, I want to want to start here,” it’s not necessarily where I’d point them. So what about Cleveland appealed to you? What was it about that that made you go all in there?

Kate:
From a starting point, I live in Cleveland, so it always helps to know the market and what the opportunity is there, and what the neighborhoods are that are good to invest in. But I think it really comes down to something David talks about all the time, and that’s the… you have that inverse relationship between appreciation and cash flow. And I think that when you talk about that, most people probably… If you were to draw a graph of that relationship, you would probably start your appreciation at zero and up.
The Cleveland market, interestingly, I think you actually blow well through the zero metric on the appreciation side and you have actual negative equity going into the property and incredible cash flow. So I think you get way out there on both parts of the spectrum. And the reason for that is properties in Cleveland, you can buy a triplex for between 200,000 and $300,000. And the long-term rent value on those is around 1,000 a month per floor, so a normal investor is getting 3,000 a month.
Because of that, the market is one where the renters don’t really expect you to update the house, they’re fine with living in a place that hasn’t had the kitchen or bathroom updated in 40 or 60 years. They’re also okay with the fact that they have a window air conditioner and you have to turn it off when you blow dry your hair if you don’t want to blow a fuse in the house. So when we started buying properties, we knew we would have to do renovations. They ultimately were far more expensive than what I thought it was going to be going in. So I thought I was going to go in [inaudible 00:16:28]. Yeah, right.
I thought I was going to go in with a burst strategy. The first place that we bought, we just bought for 180,000 of cash, and we spent about a hundred thousand dollars to renovate. We had to renovate three kitchens, three bathrooms, all new appliances. It’s about 5,000 square feet of hardwood that we had to refinish, and it’s gorgeous, but that’s a lot of square footage to refinish. After spending around $280,000 on the house, I was ready to get a loan on it and it appraised for 235,000. So that feels like a loss except that… so I was able to pull out 180,000 from that loan, so I had net 100,000 in the house. And the first year that I put that on Airbnb, I made $50,000 profit.

Rob:
Wow. Okay. So let’s recap that a little bit. So you wanted to do the burst strategy, which is where you buy it, you rehab it, you rent it, and then you refinance, and hopefully you get the ARV, the after repair value, so high that you’re able to get all of your money back out. In this instance, you were able to get 180,000 out of 280,000 out, and you left $100,000 in the property. Most people see this oftentimes as they failed at the task, that they didn’t really perform it. But David actually talks about this quite a bit in BRRRR, his book, go check that out, and talks about… David, your philosophy here is even if you have to leave some equity in the house, it’s not really a loss because equity does actually exist if you were to go and sell it, right?

Kate:
But not in my case because I can’t sell it for 280.

Rob:
Because it appraised for 235?

Kate:
Yeah.

Rob:
But that’s okay because then in a year of renting it, then you made that $50,000 differential?

Kate:
Yeah. So from a return on investment standpoint, I’m making $50,000 a year on $100,000 investment, that’s a phenomenal return. That’s why I said, it is negative appreciation. And the long-term rental market in Cleveland is fine with having terrible plumbing and electric. But the short-term rental market, as you know, Rob, they’re not going to put up with a nasty old kitchen, they’re not going to put up with gross rugs and scratched up floors. The place has to be gorgeous to get on the first page of Airbnb. And I was buying houses that are 120 years old, and absolutely beautiful, but they’ve never been renovated, I literally have 120-year old bathroom.
So to get that plumbing, that electric, and all of that taken care of, it just costs more than what the thing is going to be worth after you renovate it. And for me, like I said, I was looking for the maximum cash flow for every dollar that’s invested. It would’ve been great if I could really do a BRRRR. In this case, I have about 30% cash in the house. A traditional house you’re trying to put down 20%, in this case, I’ve got more than 30%.

Rob:
David, how often did you run across this in your BRRRR journey? Did you ever come across, I guess, negative appreciation the way that Kate’s talking about here? What’s the solution? Is it just usually time and waiting it out?

David:
Well, we’re saying appreciation. Does that mean equity in this case? Because appreciation would be the value of the property going up over time, but in this case, we’re talking about the appraisal coming back for less than what we thought, so that would actually be equity, right?

Rob:
That’s what you mean, right, Kate?

Kate:
Yeah, I have less equity in the house than I invested in it. No doubt.

David:
That isn’t common, but it did happen. Over 40 BRRRRs, that probably happened two or three times, I would say. And a lot of that is just appraisals are not a science like people think. It is a measurement of value, it is not the actual best measurement of value. The best measurement of value is what someone’s willing to pay for it, but there’s no way to put that into an Excel spreadsheet, so we come up with an appraisal as some type of method of feeling like we have some idea of value.
And I found a lot of things impact appraisals. One appraiser could think it’s worth more than others. One appraiser could choose comps that are better than others would be. Sometimes you get an appraisal, and as odd as this is, that comes in less when you’re refinancing, but if you were selling the house, the appraisals come in higher. I’ve seen this many, many times over in my career. So that does happen, but that’s okay, that’s why we have different strategies within real estate.
So like Kate had just mentioned there wasn’t as much equity in the property as she thought, but because there is usually an inverse relationship between equity and cash flow, now Kate’s cash flow in $50,000, which I think almost everyone listening would happily take that over the equity. And in four and a half years, you’re just going to pay the whole thing off, and now it doesn’t really matter if you lost the 50,000 equity because you’ve gained 200,000 or $250,000 in equity over that period of time, and you can put a HELOC on it or you can refinance it and hopefully repeat it.

Kate:
Yeah, I wouldn’t say that I would argue with the appraisal. I know what other houses are selling for. And in this market, the long-term rent customers aren’t going to pay for the kind of renovations that you have to do to make a good quality Airbnb. And my contractor on the one house kept telling me, “I think you’re making a mistake, you’ve got to stop.” And I was like, “No, no, I think this is the right path.”
And almost all of these properties are on the first page of Airbnb in my market, and they’re renting for $100 a night for a three-bedroom, 2,000 square foot place that with a huge porch and a garage and laundry for free, and close to the Cleveland Clinic. And so it’s so much cheaper than a hotel where people can stay, I have cribs and rocking chairs in them. But $100 a night is $3,000 a month, times three units.

Rob:
All right, now that we know how Kate developed her strategy, we’re going to dig into her costs, exactly how much money her properties are netting, and how she’s doing this in of all places, Cleveland.

David:
I want to ask, not a lot of people, me included, immediately think of Cleveland when we think about short-term rentals. So what was it that stood out to you that made you think, “I think I can do a short terminal and compete with hotels here,” as opposed to the traditional vacation market that most people think about?

Kate:
Yeah, I think primarily the Cleveland Clinic. So as I was listening to podcasts, a lot of your people on the Airbnb side or even the mid-term side talk about being close to hotel. And Cleveland has a phenomenal world-class medical services center here where I have guests coming from Pakistan who are getting procedures done at the Cleveland Clinic, and their whole family comes with them, and they’ll stay for two months. And so I think that that is a huge draw. And all of our properties are relatively close to the Cleveland Clinic, and that, I think, is very impactful in terms of… Like you said, I’m competing with a hotel, but for people who are traveling with their family and want to stay together and not in hotel rooms.

David:
Yeah, and I suppose you had the backup plan of, “Well, if for some reason it doesn’t work, I can rent it out as a long-term rental, and I just have the prettiest long-term rental in the world.”

Rob:
Well, on the note of having a property that does stand out a bit, maybe, from a hotel, whether it be price or cost or whatever, you’re furnishing three units, which is pretty expensive to do at once, so what is the average that you’re spending to typically furnish your short-term rental units, especially in a triplex situation? Because it’s very different for furnishing a three-bedroom home, for example, where you’re just buying the sofas one time, you’re buying one TV for the living room. You’re buying everything three times for every single unit, so surely it’s got to be expensive.

Kate:
It adds up, I have a lot of points on my Amazon card. Yeah, well, I will say the first house I bought, it was all Facebook Marketplace. And listening to you, Rob, talk about buying, what you say, buy nice not thrice, I learned my lesson with buying some sort of cheap stuff the first time around because you’re so scared getting into it the first time. I try to buy high quality stuff that will last because it’s going to get a lot of abuse. But yeah, I think I’m probably around $10,000 per floor, which is, I think, in the range for any two to three-bedroom space.

Rob:
That’s actually not bad at all. And now that you’ve got it running, what are you making in general on your entire short-term rental portfolio, and how does that compare to your job in investment banking?

Kate:
Yeah, so we closed on the first house in July of 2021. At that point, my kids were two, three and five years old, and that’s when I decided, “I’m going to make this happen.” As soon as that first one started running, and the dollars were bigger than I even expected it to be in terms of the… I had a sense for what the rates would be, but the occupancy… They stay really full, so the income was really strong, and I just said, “I’m going to hit this as hard as I can.”
In particular, I was lucky because rates were still low at that point, so I bought three more houses that first year. I had four in the first year, and then a couple of weeks before the kids’ school let out for the summer in 2022, I gave my notice at work. So I quit that job about a year after I started down this path. At that point, I only had the four houses making around 200,000 a year, but I could see that the strategy was working, and I was going to get there, and I wanted to be home with the kids that summer. So I spent that summer with them, then over the next year and a half, we bought three more properties and we now have seven investment properties, and we are making around 350 to 400,000 a year.

Rob:
Net or gross?

Kate:
Gross. Oh no, that’s my profit. Yeah, that’s what I’m taking home.

Rob:
You’re making 350?

Kate:
I’m making 50,000 per house times seven, yeah.

Rob:
Oh my goodness, you’re living the dream. That’s amazing.

Kate:
Granted, that’s seven properties, it’s like 16 units. And yeah, the power of, I think, the automation in the short-term space, so I try really hard to automate it. But yeah, I get my share of the phone calls at night from people telling me that, whatever, the power is out or they can’t get into the unit.

David:
See, that’s a great segue into my next question. Running a, what’s it, 14 or 16 unit short-term rental portfolio is not without stress. How does it compare to the stress of being a full-time investment banker?

Kate:
So in investment banking, when you’re at the top of the food chain, it’s a commission job. So the stress there is you’ve just got to find another deal, and you’re competing with the other investment bankers to win on every deal. And you don’t have control over the outcome. I think that the stress in that industry was big stress. Here, it’s a lot of small things. So when somebody calls you and says the heat’s not working and it’s 10 degrees outside, you have to solve that problem, and I guess the…
But the worst-case scenario is you just have them stay at a hotel and it sucks, but you suck it up and you’ve got to pay, Airbnb makes you pay for the hotel. And that’s happened a couple of times, but the dollar amount of the impact on that is 300, $500, I would say, versus investment banking. You’re winning deals that are 300,000, $500,000 of revenue that either going to make or break your year.

David:
All right, so I’ve got a two-part question. First part, how much more time are you getting with your kids now than before?

Kate:
Oh, it’s night and day. They wake up every morning, and I’m able to wake up with them, hug and kiss them in the morning, and they go to bed every single night with hugs and kisses from mom. And both of you were influential in me achieving this, and I know that probably that my children will never say thank you to you, but they have their mom at home in a way that is just so special, and I appreciate that from you guys, that you guys were able to put that content out there to make that happen.

David:
Did you hear that, folks? BiggerPockets making sure kids get good night kisses since 2013.

Kate:
But what’s interesting is, so my youngest is in preschool now, and I’m with them, I drop them off at school, I pick them up. But now during the school year, I have a fair amount of time, and I wanted to talk about on this podcast… because when I was making the decision to leave my job and go into real estate, I felt like I was walking away from the career that I had built over 25 years and I felt like I had to make that choice, it’s either this or that. And so I made the choice to walk away from it because my kids are worth it.
But what I didn’t realize is that once you get to the point where you’ve established financial freedom and you have a functioning portfolio that’s relatively stabilized, you also open the door to other professional opportunities that you could never have been part of before that. So I’ve been having people reach out to me, not every day, but once or twice a year, somebody will say, “Hey, would you be interested in this or that?”
My brother actually is an entrepreneur, he started a bunch of businesses. One of them that he owns is a bourbon distillery, and he called me a few months ago and said he can buy wholesale barrels of bourbon at 50% of the value that he can sell them at after two years. And he said, “Do you think we could raise a 10 or 20-million fund around this bourbon arbitrage opportunity?” And because my kids are in school right now, I was able to say, “I’ll look into it.” We did some research, I did some financial modeling, and ultimately said, “This is a phenomenal opportunity. Let’s get it done.”
And now being able to work on something with my brother, and seeing him go into investment meetings and crush it, it is so much more rewarding professionally in a way that I had no idea these kinds of things were going to come along. And I think that there are probably a lot of, probably men and women, but more so women, who are doctors or lawyers and have succeeded in their career, but still feel this pull to be at home more with their children.
And what I found is that once you get that financial freedom, you can still use those skills in other ways. Somebody who’s a doctor could consult with a hedge fund that’s investing in medical technology. There’s other ways to use those skills that aren’t a W-2 job. And it’s funny that I went down this path thinking I was leaving a job I loved, and now I’m at a point where I love the professional aspect of it so much more because I don’t have any of that pressure from the W-2 job, and I can accept opportunities that are on my terms in the hours that are available.

David:
All right. Second part to my question, have you considered carving out a chunk 50,000 to 75,000 a year of that $350,000 income to hire a property manager to screen a lot of the stuff before it hits you so you have more time and energy to put towards some of these other professional endeavors?

Kate:
Maybe someday. I think, like I said, my income that I was trying to replace was 300,000 to 400,000, and that’s where we are right now, and it feels like a comfortable place right now. Obviously, in this interest rate environment, it’s harder to get the kind of cash flow that I was getting initially. So once you start buying real estate, it’s hard to stop. So I imagine that we will at some point be buying additional properties, and so when the cash flow is at that point, then that is something that I would be open to, but for now it’s working the way it is and we’re not-

Rob:
Yeah. I think you’re at that inflection point where 14 to 16 units, that’s about as much as one person can handle. I think 20 is really the max. How long did it take you to do this? How long have you been investing in short-term rentals to build what you’ve built so far?

Kate:
I got the first four in a year, then I left the W-2, and then it took another year and a half to get the other three. Less than three years in July of 2021.

Rob:
You’ve built an income of $350,000 a year in two to three years when most people spend an entire career in real estate trying to make $10,000 a month in, quote-unquote, “passive” income. So you’ve done something that 99% of people don’t do, so congratulations, and thank you so much for sharing your story. That’s just kudos to you. You’ve done it, you’re living the dream, and it’s a perfect success story for what’s possible in this industry.

Kate:
Thank you. And I really want to make sure that I’m sending that message to other people who have that same angst, that it’s possible, and it’s possible to replace a high income job with real estate if you’ve just put your money in your 401(k) over your career, you can get there.

David:
Amen. Thanks so much, Kate, we appreciate it. Thank you very much. I hope we have you back on again, and things continue to grow.
All right. Welcome to the Seeing Greene segment of the show where we take questions from you, our listener base, and answer them for everyone to hear. Today’s question comes from Katie M. in New Jersey. Katie writes, “I’m at an inflection point with work. My job is being restructured and I’m being offered one year’s salary as severance. I’ve been climbing the corporate ladder since college, but now that I have a little one at home, I’m reevaluating everything. I’d like to ultimately build a real estate portfolio that could replace my W-2 income of about $150,000.
“My husband and I bought a duplex in New Jersey with train access to New York City, and about a block and a half from shops and restaurants in New Jersey. We plan to BRRRR and house-hack the property. We will rent out the upper unit, a four-bedroom, three-bath. My husband and new baby girl and I plan to live in the downstairs for the next three years.
“Ultimately, my question is what’s the best way to determine if we should rent out the upstairs unit as a long-term rental or a short-term rental? The upper unit would rent for 5,500 to $6,000 a month as a long-term rental. And I assume that a short-term rental would be more attractive, but not sure how to assess that. We’re hesitant to potentially have new short-term rental guests every few days while our family is downstairs, but the potential extra income is enticing, especially with me likely leaving my W-2, and losing the $150,000 a year.”
Rob, pretty good, straightforward question here. Lots of information. What are you thinking?

Rob:
Well, I will say that running a short-term rental that you live on site for is not for the faint of heart because you’re going to have the crutch of being next door, which is really great from the standpoint that you can address problems really quickly, but also not great because you can address problems really quickly and you’re always going to feel obliged to just go walk over and fix things. Whereas, whenever you live a little bit further from a property or in a different state, it forces you to create systems where you don’t have to rely on yourself to go and solve problems.
So I think if she’s developing her family, she’s talking about and they’re kind of getting in the groove of things, I think short-term rental is going to keep her pretty busy. Now with that said, 5,500 to $6,000 a month as a long-term rental actually seemed… that’s crazy, that’s a lot.

David:
Yeah, I thought that was going to be the short-term rental income, and I was like, “That’s pretty good.”

Rob:
That seems like that’s already going to be a somewhat profitable unit, 5,500 to 6,000, so I would probably run your numbers, and if the property is closer to 8,000 to $10,000 a month on Airbnb, then it’d probably be worth it. When you get into this territory of 6,000 to, I don’t know, let’s say 8,000, 8,500, compared to the long-term rental, I just don’t think the profit’s going to be all that much more, and I don’t know if it’ll be worth the hassle.
So I would say really consider what your profit is. If you’re going to make 9,000 to 10,000-plus as a short-term rental, it would probably be worth it. If it’s less than that, I’d probably just rock it as a long-term rental just because it’s a set-it-and-forget-it type of situation. What do you think?

David:
I was thinking similarly that I don’t know how you would make significantly more than $6,000 a month as a short-term rental, and you’re taking on a buttload more work here as well as some more risks like now you’ve got to furnish it. People don’t think about that, that’s a lot of money that you’re putting into this thing, and those things are going to break a lot of the time, versus a long-term traditional rental, they bring their own furniture, and if they break their own stuff, they’ve got to replace it.
Part of her question there, Rob, was, “How would I assess?” And I think what she means is, “How would I determine what it would rent for as a short-term rental?” Any advice for her there?

Rob:
Yeah, so you’ve got to go and you run your comps. I use the AirDNA for this. And basically you’ll go to AirDNA… Actually, what you can do is you can go to biggerpockets.com and go to the tool section. And in that section, there is a little tab called Airbnb. You go and you click on that, and it gives you access to the AirDNA Rentalizer. And you can put the address in there, you can put the bedrooms, the baths, all that stuff, and it’ll give you a projection of what you could possibly make as a long-term rental. It is not something to live or die by because it is just like an initial gut check, but it can at least give you an idea of what’s possible. And if it seems appealing to you, if it’s high enough from a yearly standpoint, then you can go and get a subscription, and run your comps a little bit deeper.

David:
That’s the first step. The second step I’d recommend is find another short-term rental operator in that area and ask them, “What does yours get? How much vacancy are you having? What are you making in a year? What are your challenges?” Most real estate investors are very generous with their numbers. We’re not a group of people that tends to hide stuff from everybody else. I think you can get a really good idea of what it would be like to operate it by asking someone else.
Last question, Rob, do you think that there’s any benefit in her looking into a medium-term rental here?

Rob:
It is really hard to say because a medium-term rental is going to fall right smack dab in terms of revenue standpoint. So if we’re looking at like 5,500 to 6,000 as a long-term rental, I’d say a mid-term is probably going to be like 7,500 to 8,500, and then a long-term rental would probably be like nine to 10.
Really, based on my calculations, I always say mid-term rentals make twice as much as long-term rentals, and short-term rentals do three to five times that. But with these numbers, I just have a really hard time believing that she’s going to do 15K a month. You still have to buy all the furniture though and-

David:
That’s what I was thinking too.

Rob:
Yeah. With a four-bedroom, three-bath, she’s going to spend, at a minimum, 20K. She’s probably going to spend 20, 25K, which is $2,000 a month, if you were to extrapolate that over the course of a year. I would say my favorite strategy is a hybrid, you do short-term rentals as much as possible, and then mid-term rental when you can.

David:
All right. But in this case, we’re both on the same page, that probably isn’t necessary because the traditional rents are so good. You probably don’t have to deal with any of the headache, just rent it out traditionally, make it very, very low work for you, and then look for another property that you could short-term rental that one.
But, man, when the real estate gods bless you with rent that high, take the blessing, don’t be greedy, don’t try to milk out another $1,000 a month. Just take it and then put that energy and time towards your next deal where maybe you don’t have the long-term rental option and you have the short-term rental, and then you get two of them.

Rob:
And you’ve got a new baby girl, maybe get through that stage, it’s very hard to raise a newborn and get into the Airbnb game. So maybe just simmer on that, let it marinate for a bit, and then once you’re ready to do more, make a little bit more money, then you can transition into STRs.

David:
The Airbnb method is not recommended, don’t combine the two. All right, Rob, thank you for joining me on Seeing Greene. And thank you for the submission, Katie M., hope that we could help. And if you would like to have one of your questions answered on the podcast, go to biggerpockets.com/david, where you can submit it there. I’ll get us out of here. This is David Greene for Rob my Airbnb Abasolo, signing out.

Dallas Tanner, Invitation Homes CEO, joins ‘Closing Bell Overtime’ to talk the housing and rental markets in 2024.

Ashley:
This is Real Estate Rookie Episode 357. My name is Ashley Kehr and I am 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 in your investing journey. And today, do we have a story and a little bit of motivation for you. We’ve got two amazing guests on the show, Justin Noe and Nate Cherubini, and they’re business partners doing this real estate investing thing together. And obviously, Ash and I are big on partnerships, right? Head over to biggerpockets.com/partnerships, learn more about that. But I think today, you’re going to hear firsthand how partnerships help you as you’re going on this journey, especially for those that are new in the business. So really excited to get into today’s conversation.

Ashley:
We have a story today that involves a property in distress, a hometown bar, longtime relationships that turned sour, termites, zoning issues, and a plane ride with a wholesaler. So stick around how this can all possibly tie together. We’ll get into how to turn around a bad relationship with the city, taking extreme ownership, and the importance of problem solving today.
So Nate and Justin, welcome to the show. We want to hear about one of your first deals together and why you guys actually decided to do a deal together.

Justin:
Thank you, Tony and Ashley, for having us on here today. This is huge and a lot of fun to be here with you guys. But Nate and I, we started a journey together back in 2018 where we were at a marine requirements conference and he’s in real estate and I was into real estate and we started out as a mastermind and spent about six months doing a mastermind. And then I had bought a deal in Florida, showed him the deal, he liked it so him and I bought a deal together. We thought we did so awesome on the first deal together that we would buy a second deal together, and then things unraveled pretty quickly from there.

Ashley:
What were some of the reasons that you decided to partner with Nate? Did you have this checklist of, “Here’s the things that I want in a partner”? Was it spur of the moment? Can you tell us a little bit more about taking that leap into partnership?

Justin:
Yeah. We knew each other in person. We both went through officer training together in 2013, and so we became really good friends there. And then kept up with each other through the community and we-

Ashley:
Oh, I see.

Justin:
… came back together for an event that was put on, and we talked real estate at lunch one day. And so from there, he had actually introduced me to BiggerPockets and I never had heard of it. And so at the time I drove home, I spent about six hours just crushing BiggerPockets podcasts and learning so much about real estate. And I was like, “I didn’t even know that this was all this stuff is in real estate.” So from there, him and I, this was in December of 2018, we decided in January that we would become accountability partners. And we spent five to six months working as accountability partners, giving calls every week, holding each other accountable to the goals that we set for that week and did a lot of that.
And one of my goals was is to buy. I had rental properties already, but I wanted to buy a property that I’d never lived in as a rental property. So as a marine, you travel around, buy houses, leave, and then turn them into rental-type situation. And so I was looking originally in Colorado for that. And I dropped my kids off with my grandparents in Florida in my hometown, spent the time in Denver, came back, and ended up finding a rental property in my hometown. And it met the 1% rule. It was a pretty good deal. And I showed Nate the numbers, it got him interested, and then that’s where we decided that we would partner on something. And it took about three months for us looking together to find our first deal.

Ashley:
Nate, I see you smirking. Is your story completely different as to why you decided to work with Justin?

Nate:
I didn’t like the first deal. I thought he was biased towards his hometown, so I tried to disqualify it and use some intel analysts on the analysis on the market there. And I realized that the place just really worked. And getting into why did we partner, over the five months of holding each other accountable, I realized we had shared values and vision. We looked at money the same way. We looked at helping people the same way in our careers. So I feel like it was a good match. At first, I felt like we were too similar, and you’re supposed to find a partner that’s opposite to you. And over the last few years, I realized that we’re very different. We have shared values, shared goals, and that’s important. I think that’s the underpinning important in a partnership. But we do have very different characteristics that complement each other, so I think it’s a good fit.

Tony:
I just want to comment on that because that I think is the ideal partnership where you have the same values, you have the same vision, but you have complementary skillsets. If you can align all those pieces, that is a partnership that’s going to take you guys to the moon, right? Because you guys are working towards the same goal, you guys value things in the same way, but yet you can be strong where one person’s weak and the opposite is true as well. I think you get conflict in partnership where there is that lack of alignment, there is that lack of vision, or there’s too much overlapping skill sets and now there’s deficiencies in the partnership, so man. I guess how did you guys come to understand that the vision and the values were shared? Did you sit down and just have a discussion like, “Hey, tell me your vision,” or was it just more of an organic thing that happened over a beer or whatever it was?

Nate:
We did a vision statement. We did lay out what our goals were with our careers and our families for the next five years, and we zoomed out to the 10-year and 20-year, which isn’t as detailed obviously. But if you know the direction you’re driving and you set that course, then we can fill in the details of where we’re going to stop for gas. So we started with the big picture, what kind of life do we want? What kind of impact do we want? How do we want to feel like we’re still serving after we retire from the military? And a lot of that set the roadmap for us on how we’re going to operate. So unless Justin sees it differently.

Justin:
Yeah. No, I think that it did happen organically though. It was us talking on the phone, us being in in-person meeting, talking through these things and these strategies, and then that culminated into us actually writing a article in the future of 2026, which I got from Brandon Turner’s, one of his methods.

Ashley:
Yeah, the Vivid Vision, right?

Justin:
Yes, the Vivid Vision. Yes, correct.

Ashley:
Yeah, that’s a great book for anyone who wants to read that. We are going to hear more about mistakes that were avoided by Nate and Justin when we get back from this commercial break. Let’s hear a word from our show sponsor.
Okay, we are back with Justin and Nate. So starting out in this partnership and on your real estate journey together, what are some of the mistakes that you both avoided during your journey that maybe you saw other investors make? And Nate, let’s start with you.

Nate:
Shiny object syndrome. Everything looks good. Listened to the first 700 straight BiggerPockets podcasts and note investing sounds great, land flipping sounds great, everything sounds great. So we came up with more detailed plan of what we’re going to go after, like our buy box, and tried to stay focused on what do we have to do this month, this week, this day to make progress and less about do we need to set up an LLC now or next month. Do we need liability insurance after we have 10 units or before? So instead of worrying about all the things that are distracting, we just broke it down. What do we have to do today? Who do we need to call today? And try to make it manageable.

Tony:
I just want to add to that because the shiny object syndrome is such a real thing, especially for people that are entrepreneurial. I feel like Ash and I are probably even more prone to shiny object because we talked to two to three different entrepreneurs, real estate investors every single week. And we just talked to someone before you guys, and I’m Googling. What was she doing? She was doing group homes in Philadelphia for sale. It’s like every week, I’m searching for something different.

Ashley:
Tony already found one by the end of the episode.

Tony:
I already found one. I already found one for sale during the episode. So it’s really a common thing that happens. But I think your point of really getting clarity on, okay, what is it that we want to do and then what are the specific action items that we need to take this week today to make progress towards that is important. And the more successful that I become in my personal life and my business life, the more successful people that I know, a lot of times it’s not about what they’re saying yes to that makes them successful. It’s about what they’re saying no to and your ability to say no to more things so you can really focus in on those one or two that are going to drive the ball forward for you. That’s what makes a big difference.
But there’s this misconception with new investors where they hear, “Oh, real estate investors have eight different income streams and I got to go chase eight different things if I really want to be successful.” But that’s only after you’ve achieved a certain level of success.

Ashley:
You’ve built that foundation.

Tony:
Right, you build that foundation first. Elon Musk can be Elon Musk, can be the CEO of eight different companies because he started with one that he sold to PayPal for a bunch of money, and then he went and did all these crazy things. So we’ve got to really focus in on what are those one or two things that we really want to be great at. Justin, what about for you, man? What were some of those mistakes you felt that you guys were able to avoid by seeing what other folks have done wrong?

Justin:
One of the things I believed in, and this is my first deal I got into with no money down as a VA loan that I bought as an eventual rental property when we were PCS-ed, was gain knowledge, gain some knowledge about real estate. And then you can do some analysis, whatever you need to do. But the most important step in all of that, in my opinion, was action. And so that’s where I’ve always gone is hey, we can learn as much as we can and analyze a deal until you think everything’s 100%, but you got to take action. And so I think that’s where Nate and I are a little bit different. He likes to analyze things. I like to take action. And so we have a good balance there where I have to, whenever I’m bringing something to the table, I have to know my numbers. I have to know some analysis. And then Nate will then murder board me and then I’m pushing him to try to take some action on it, but he’s always like, “Hey, let’s make sure we’re doing the right step here.”

Nate:
Justin is aggressive. He gets after it. He sees an opportunity and he’s like a bull in a China shop. “We’re going to make this happen.” I am not nearly as aggressive. That is my downfall. So I’m glad to be partnered with him. I would just be on the sidelines. So he brings something to me. And we’re both marines. We’re supposed to have a bias for action. It’s one of the things that we’re known for, and he gets after it. I can’t justify trying to bring him down. So I get on board and I’m like, “All right, let’s think about how this can work. Let’s solve this problem. Let’s figure it out.” And we get into it and we brainstorm. And sometimes we talk ourselves out of it and other times we solve the problem and figure out how to get in the deal. So I’m grateful to have him because that action motivates me to put all my analytical brain that gets paralyzed with whatever doubt, fear, and indecision, and it gets me out of that.

Justin:
And on the flip side, because Nate is there to walk me through the steps, it has prevented us from getting into things that we shouldn’t.

Nate:
Not to mention the SPOT project, but whatever.

Justin:
Yeah, that’s it.

Ashley:
Well, before we actually get into your deals, I do want to follow up with one more question about your partnership is just seeing you guys complement each other and talking about what each other’s skillset is, how do you guys stay aligned? Are you having alignment meetings or what do you do to build your partnership and to keep it strong?

Justin:
We started out where we would take trips down here to Florida at the same time and spend time together doing a variety of things, not just real estate stuff. We’d go out on a boat together. We’d go fishing or go have a beer at a local establishment. But then we also do a lot of calls. So we were talking once, twice, three times a week if we needed to. Now, we’ve got ourselves on a weekly call with our team and just making sure that things are staying updated, that we understand what our tasks are for the week and then executing towards those tasks. But we recently took a trip to the BiggerPockets convention over in Orlando where Nate came down and we both went to that together and got a lot of mind melting and a lot of bonding time, if you will.

Tony:
One thing I see when we talk about mistakes is that people get focused on step 10 when they haven’t even completed step 1 yet. And you talked about that a little bit, right, where it’s like, “Hey,” you want to have this bias fraction and Justin’s one that pulls you along. But what I see is a reason for that is people are so focused on step 10 like, “Man,” like you said, “Man, I don’t have my LLC set up,” or, “I don’t have this,” when really it’s just get the first deal. So I guess how have you guys avoided that mistake? What’s allowed you to really focus on just that next action?

Nate:
We look at what the problem is so we spend a lot of time talking about the problem, and Marine Corps calls it problem framing. We sit there and say, “What are we trying to solve right now?” And then when we fully understand what the problem is, we know what the action step is that we have to execute in order to solve the problem. Sometimes, it’s a complex problem that’s going to take multiple weeks and interactions and outreach to other team members to get done, but we always know when we pull the thread on this, what we have to do today. Is there a phone call I got to make? Is there an insurance agent I got to call? Is there a tenant we have to go serve a notice to? We just are, I think, pretty well aligned at identifying a problem and coming up with that next action step instead of getting bogged down with all of the steps. We’re not going to try to eat the whole elephant. We’re going to take a bite right now.

Tony:
I think you couldn’t have said it better, right? It’s like, “What is the next action that I need to focus on today, right now?” And as long as you focus on that one thing, you’re going to make meaningful progress towards whatever goal you set for yourself. But something you said, Nate, that I want to circle back to because I feel like this is a really important thing for rookies to understand, is that oftentimes we jump into problem solving without problem clarification first. We don’t even really know what the problem is. We’re throwing all these things on the wall trying to see what sticks, when really if we just spent a little bit more time upfront getting extreme clarity on what the actual issue is, then it becomes easier for us to solve that problem.
So say that you’re, I don’t know, say that you haven’t bought your first real estate investment deal yet because nothing fits your budget and you’re doing all these crazy things to try and do creative financing and this, that, and the other one. Really, it’s like, “Hey, if I just worked an extra shift every week for the next six months, I would have the money I need to buy my first deal.” And now you can put all that energy towards that one goal and now you’re in the right position. So I guess maybe not going too far off on a tangent here, but I think it’s an important thing to understand. How do you guys go about getting extreme clarity on the actual problem? What is your, you called it a problem frame? I’ve never heard that before, but what is the steps to actually do that?

Nate:
When you’re problem framing, you’re looking at what your current situation is, what your desired future situation is, possible things you can do to get from where you’re at to where you’re trying to go. You list out things that are facts, you list out things that are assumptions, and you try to make decisions based on clarifying assumptions and bringing those into a fact where you know better what’s going on to eliminate uncertainty. So it is a process and there’s videos on YouTube and all about problem framing and the steps involved, but a quick summary is you just walk through where you’re at now, where you’re trying to be, and how do we get there, essentially.

Ashley:
Speaking along those lines, what is the long-term view? Where are you trying to get?

Justin:
The long-term view that we initially discussed was, “Hey, we want to build a portfolio of 100 units that are all cash flowing a minimum of $250 a door.” Probably every newbie investor decides they want 100 doors or something, a variation of that, and it’s producing enough cash flow so they can go and live the dream of flying around the world and playing golf every day. So then reality sets in and you look at everything. And we are now still on a path to continue collecting doors, but obviously the markets have changed a little bit. Things are a little bit tougher. Cash flow’s getting reduced because of interest rates and stuff of that nature. And so we’re pivoting.
And so we look at other opportunities to how do we raise capital inside the company so that way we can then go and park it into an asset. Now, instead of looking at real estate as a cash flow to set us up for the rest of our lives, we’re like, “Well, how can we find some active things inside of real estate to produce capital to go buy assets to then continue building that portfolio in these tougher times?”

Nate:
Yeah. I don’t know that we have a well-defined end state as far as metrics. I think it’s more of the lifestyle. We’re both going to be okay because of our military retirement and medical coverage and all that, that we’ll make ends meet. That’s not the problem. So cash flow is less important at this moment. It’s more about building that sustainable foundation, parking, hedging against inflation, having something to teach our kids how business works, how working with people, how to manage things, how to manage projects. We both have four children. We want them involved as much as possible. We want to be able to give and show that we make this money so we can help others that are in need.
And I think that it’s more of the lifestyle of that vision of comfort, reduced stress, or we’re going to stress but it’s going to be about the things we want to be stressed about, not about feeding our family or anything like that. So we’re picking our problems. There’re going to be big problems and sometimes pretty hairy problems to deal with, but we’re looking to have a certain lifestyle that affords us flexibility, spend time with family and friends and stuff like that, while also continuing to push ourselves outside of our comfort zone and growing the business.

Ashley:
I think that a lot of people, especially rookies, even myself included at one point, get caught up in that financial independence of like, “I just want to get on my W2.” And then sometimes that translate, “Well, you know what? Now that I’m doing it, this is like managing rental properties. I don’t like this. I don’t like this part of it. I don’t want to manage contractors, all these things.” And that’s where the mindset shifts. Instead of focusing on how many units and cash that you need to have that financial freedom, it becomes, “Okay, how do I now build my business around my lifestyle?” Like you said, Nate, and that’s where it becomes transformational is building these systems and processes to get to that point and building your business around what you want to do and how you want your lifestyle.

Nate:
Absolutely.

Ashley:
So let’s jump into one of your deals. In the beginning, we had mentioned termites and a bar story. Do we want to start there?

Nate:
I would like to just say that I listened to the first 700 straight BiggerPockets episodes. I introduced Justin and countless others to BiggerPockets podcasts. It’s been a game changer for me. This was 2020 that this happened, and there’s a pandemic and murder hornets and the Tiger King. Stuff was weird. And when the dust started to settle, I looked at Justin and said, “If we ever go on BiggerPockets, not that we ever would, but if we ever did, we’re going to have to talk about the anatomy of a disaster and just say how we lost 100 grand.” And at BiggerPockets Conference 2023, Mindy approached us and out of the blue asked if we had any stories where we lost money that we’d like to share. And me and Justin just looked at each other over our beers and said, “Oh, we’ve got a story. We lost a lot of money.” So yeah, I’ll let Justin unpack where it started, but it’s a pretty crazy adventure of how we turn this into a financial education or a master’s degree.

Ashley:
It seems like it costs that much.

Justin:
Yes, definitely.

Nate:
Oh, yeah.

Justin:
We were on our first company trip down here to Florida to look at the asset that we were getting ready to purchase. We were going to be closing on it and everything else. It was a two single-family homes on the same piece of land in our downtown that I grew up in called Brooksville, Florida. And so we were down here hanging out. We ended up doing some boating with my brother at the time, really building our relationship and showing Nate the town because he had never been here and he was getting ready to invest down here.
And so after some events that day, we ended up seeing this house and a “For Sale” sign in it, and we were like, “Ah, okay. Maybe we’ll call on it. Maybe we won’t.” We go down to the local watering hole called Florida Cracker, which is a Floridian, old Florida style tap room and bar and all that. And we go there, we have a beer or two, and then we’re like, “Man, we should really call that guy on that number.” And so we decided we were going to call this guy and got a little information. He showed us the house and we came back with an offer to him for $60,000. He laughs at us, literally laughs out loud and says, “That’s what we bought it for.” And I said, “Oh, okay. Well, I guess our number sounds right.”
And we had our contractor that was in there working on that deal that we were purchasing a couple of weeks later, and we had told her about that and her and her husband, and they were friends of mine from growing up and all. And they said, “Well, hey, let us go take a look at it for you. Since we’re already working on this duplex, we can go and check that out for you.” And we said, “Okay.”
So they went and looked at it and they walked it and they were like, “Oh, this wouldn’t be too hard to just turn into a triplex and it’d probably cost you 20, 30,000 a unit,” and boom. So we were looking at it. We’re like, “Okay, 20, 30,000 unit, needs a new roof.” And then so we were like, “Okay, we’re in the 80, $90,000 range.” And we said, “Well,” she was a licensed realtor as well and we asked, “Well, what do you think? We offered 60.” And he laughed at us and she goes, “Well, I actually think the price is pretty good and I think they had it listed at 1 5 or something like that.” So we ended up offering, “Well, let’s put an offer in at 115 and go from there.” So we did that and we ended up buying this property.

Tony:
Let me ask something just really quickly, Justin. So you initially offered 60. You went almost double to 115. What was the thought process in between those? Because that’s wildly different. What was the thought process there?

Justin:
Yes. Yeah, great question. So based off of what the general contractor and the realtor had told us right after they walked the property and gave us some numbers, we were like, “Oh, well, this isn’t too bad.” We were thinking that it needed a $200,000 rehab just based off of some knowledge that we had. And so we were looking at it like, “Well then,” if it was a triplex, which we didn’t account for that, we were just thinking a duplex, we’re like, “Okay, now it cash flows even better.” So we were just running the numbers based off that. So we were like, “Okay.” At 115 plus a $100,000 dollar rehab, you’re in it for 215. It produces gross rents of around 2,800 to $3,000 on a conservative estimate at the time. And so we were like, “Wow, this would be a great deal.”

Nate:
We didn’t get any second opinions or statement of work or anything. So we had a lot of faith, a lot of trust and confidence in this couple as a contractor and an agent. So they really did talk us into that price. They actually said to offer full price. They said, “Someone’s going to snatch it up.” And we offered 115 and we got a deal. In our mind like, “Oh, we had a great deal.” So we’re off to the races.

Ashley:
By the tones of your voice is it was not a great deal.

Justin:
Definitely not.

Ashley:
So what happens next?

Justin:
They start work on the project. I think we closed on it in October of 2019. They started doing some demolition, getting all the old stuff out, found out it has termites. We have to tint the property. They painted the outside for some reason before. That’s usually the last thing that you do. But they painted the outside and we got a new roof put on there, and that was all done before the New Year while they were waiting on permits from the city. I follow up with them on a weekly basis and then start biweekly and they’re like, “We’re still waiting on the city. We’re waiting on the city.” Then it’s the holidays, you know how all that goes.
And so January comes. I’m like, “Okay, we’re through the holidays. Everybody’s back to work. We’re ready to get after it. Let’s go.” So this is January 2020, mind you. We’re still having problems with the city at the time. The city planner and all this other kind of things were happening with them and they were holding up our permit and they kept asking for more and more information, that they want us to have architectural plans. So we pay for our architectural plans, for everything that we’re trying to do. And we’re still going through that, following up every week. Nate and I had our scheduled six-month trip come up February 2020, at the end of February of 2020. Just think about what’s going on at that time in the world. Nobody knows what’s lying under the surface at the time.
And so we have our trip. We have a great time. We meet with the contractors. They show us the plans. They say, “Hey, we’re almost there. We’re getting ready to get the approval from the city for this.” COVID happens. The city’s like, “Yeah, we’re not allowing you to approve this plan because it’s not zoned as multifamily.” But we are like, “Well, it was a duplex.” They’re like, “Yes, but now it has no longer been used as a duplex for six months so now it goes back to its original zoning, which is office space or single-family residence.” So we’re like, “Oh, man. Well, what do we have to do to make this multifamily?” Like, “Well, there is a process to do it.” So we were trying to go through this process. The contractor that we were working with was trying to help but wasn’t being a big help. And-

Tony:
If I can just get some clarity before we jump over Nick, because I just want to make sure I understand what you’re saying here, Justin. So the home was a duplex, but because it had been vacant for more than six months, the zoning pretty much expired and your only option was to use it as a single-family home or as an office space?

Justin:
Correct. So it was single-family, office space was the original zoning. The previous owners before the guy that we bought it from, I guess, it had sat vacant for a long time. They had it set up with a duplex upstairs and then a single-family home downstairs, and then there was a garage space where we were going to make the third unit.

Nate:
A dental office.

Justin:
So it was non-conforming duplex, and that was the issue.

Ashley:
So they had never gone and gotten the zoning changed to duplex then?

Justin:
Correct. They just, back in the, I guess ’80s or whatever, they probably… Small town.

Ashley:
They just went and did it, yeah.

Justin:
Nobody was checking that kind of stuff.

Tony:
Wow.

Ashley:
Yeah. I bought a property recently that is a single-family but it’s actually zoned as a duplex but they converted it to a single-family but it’s still zoned as a duplex. It was never changed at all.

Nate:
Throughout this process, Justin has a ravenous appetite for information, thank God, because I assume good intent. So I’m like, “Contractors, they’ll get to us when they get to us.” And he’s like, “No, we need an update now.” So we would get updates and then me and him would jump on a call on Sundays and go over everything and like, “All right, here’s a problem this week. What are our options?” We’d come up with some stuff. And then the relationship started to deteriorate between Justin and the one contractor, so I started just dealing with the contractor.
And Justin and I would war game our solutions, call them up, and sometimes they would work with us and other times they’re just like, “Tell us what to do.” They were not really trying to help solve our problems. At one point they said, “Oh, we can still make it a triplex, but we have to put in firewalls that are up the code and it’s going to be about $40,000 per unit extra.” And it’s like, “Well, that’s more than double that you’re quoting per unit to do the job in the first place. We don’t have the budget for that.”
So we constantly looked to them to help solve problems and they just weren’t on board. They did hire someone to work with the county, the city, and we found out later from the city that the relationship had soured. They didn’t trust them. They found them doing unpermitted work. We got fines for it, which our contractor talked us into paying, saying we are getting ahead of the work schedule and it’s worth the $280 fine. And so we just assumed good intent. They were in over their head and we’re going to get through this. We did get to a point where we said, “Look, let’s just do this like a high-end flip. We’re just going to make it a single-family home and we’ll try to break even on it.”
This is the middle of 2020. This is before things are getting crazy in the buying market. There’s a lot of fear sitting out to see what was going to happen. Everything was closed down. So there’s a lot of uncertainty in the air. And right around when we said, “Let’s just make it a single-family home,” our contractor’s husband hurt his knee and said that they could no longer do any work essentially, and their team quit because they made more money from not working by COVID relief than from working.

Ashley:
Wow.

Nate:
So now, Justin and I are stuck with this. It’s a house set we brought our handyman into because we were talking about coming down there with our handyman and just working under their license and trying to get it done. He’s like, “This is not safe.” We had the place tented and termite damage was repaired, but they did demo and they took everything out to the studs and then started some foundation work but didn’t finish. They started a lot of work and didn’t finish, and so it was like it’s just a shell of a house at this point. We literally spent roughly $110,000 on demolition and supplies that we end up not seeing any work, any value for that money that we spent. And that’s when we decided we’re just going to cut our losses. We’re going to sell this thing.

Ashley:
You just sold it, gutted as is?

Justin:
Yes.

Nate:
I was flying home from one of the trips and I had met a guy sitting next to me who he’s in real estate, and I was like, “I’m in real estate,” a property in a disaster, but I didn’t say that. He’s a wholesaler. So I got his contact information, and later on when all this went down, I said, “Hey, I have a number to a kid that’s a wholesaler. He is an army kid out of Texas but he works with this team down in Florida.” So we got linked up with a team in Florida and they made us an offer of $105,000. Mind you, we bought it for 115 and sunk 110 into it.

Tony:
Wow.

Nate:
So we’re like, at this point we have private money that’s coming due and we just want to get them whole. So if we sell it for 105, we can make them whole and Justin and I just eat the $120,000 left that somebody had to cover, so…

Tony:
Wow.

Nate:
That’s what we ended up doing. We unloaded it to a wholesaler. And then we also didn’t get stated in the terms. We wanted the cabinets and some paint and flooring that were all in there that we paid for, but the contract that the wholesaler signed, he didn’t list that. Those items didn’t convey, and so they had sold the house with all our stuff in it. And so we contacted the new purchaser and said, “Hey, there’s a mistake that was made,” explained this, the case, and said, “Can we just come get our stuff back? “And the guy responded with, “I’ll take legal action to the fullest extent of the law and this is my stuff and this is how I bought it, and essentially was not willing to play ball.”
So I was like, “Okay. Well, you have a good day and rest of your life. Hope I bid you well.” And we moved on and there was so much to chew on when this went down. Justin actually flew out to California so we could do, we call it a hot wash where you sit down and just go through what was good, what was bad, and what was awful, and try to come up with a plan to how not to do this again. But we needed a month to not talk real estate before we could even do this. It’s still raw. It still hurts.

Tony:
But kudos to you guys for going through that and not saying like, “Man, this real estate stuff is a scam. Hey guys, real estate is a lie.” You guys said, “Hey, what do we need to learn from this so we can do it better next time?” What were some of those lessons that you guys were able to clearly see coming through the other side of this thing?

Nate:
I’ll push that to Justin, but first, I’d just like to say this project ends most people’s real estate investing careers. If it wasn’t for BiggerPockets, we wouldn’t have known all the success stories out there. We wouldn’t have known that it is possible to take your lumps. People have taken much bigger losses in this, and they’ve gone on to build real estate empires. So having that perspective and clarity of what’s possible helped us stay focused that this is just a step in the road. It’s just a lump that we took and we have to keep going, or it is a failure and we’re not going to accept failure. We’re going to keep going. We’re going to learn from it and we’re going to be better. But yeah, Justin, what did we learn?

Justin:
Oh, we learned a lot. Yeah, we learned a lot. So biggest thing is needed a better ground game, somebody there that we could absolutely trust with everything. We literally thought we had that in the contractor and realtor because of past relationships with them that we had built personally for me, and that wasn’t enough. So we ended up bringing both of our brothers onto our team. Nate’s brother basically handled all resident relations because we had a few tenants at the time when we were going through all of this through COVID and everything. And then my brother as our ground game because at the time I was in Colorado, Nate was in California, and so we were running a business in Florida. And so we brought him onto the team or both of them onto our team. And that right there alleviated something where we had somebody that we completely had 100% confidence in, so my brother Seth. And we brought them on the team in 2021. We then were able to scale quite a bit more deals just in that year alone.
And the other thing that we learned was all of the stuff that happens with the city and how to navigate that effectively and how not to get on their bad side, I guess, if you will, which they’re the government so they shouldn’t be giving bad treatment to you. But we now navigate things differently. Let’s make sure our permits are in. Let’s make sure that we need a permit. What’s the schedule of work going to be? We get multiple quotes on certain jobs. If it’s a bigger job, we’re going to get multiple quotes on there or we’re going to use a guy that we know for a fact 100% is going to do us right because he’s done us right on past deals.
And so we really look at those types of things as big lessons learned, having a strong ground game, doing things within the law the right way, building good relationships with people, and then having people that you trust to do the work and then do it in a timely manner.

Ashley:
One of the first things you said there was really building your team. So you took on these two team members. How did you structure that? Or did they become equity partners? Are you paying them a salary? How did that work that you were able to bring on two people and it worked out for you financially, I guess?

Justin:
Yeah, absolutely. That’s a great question. So we did bring them in as equity partners. We took the lump, Nate and I did, on the big loss that we had in 2020, and we basically started with what we had which was just a couple units at the time. And we said, “Hey, we’re going to give you guys each 10%,” 10 from mine and 10 from Nate’s. So each of our brothers got 10%, and we brought them in that way.
And then as we started growing and getting more properties under our belt, then we started to provide Nate’s brother, Jeff, who was doing our resident management, he was getting paid a certain standard fee for each property that he was managing. And then my brother, Seth, he already had a lawn business or landscaping business that he had so we were paying him to do all the lawn care. There was two things. We made sure that the lawn was getting done every month or every couple of weeks, and we had somebody having eyes on the property on a routine basis to inform us if there was some kind of issue that was going on on site.

Nate:
We learned that we had to manage our relationships better. The city planner was the first thing we had to make amends to and take ownership and say, “Hey, we trusted our contractor. They did work that wasn’t permitted. That was never our intention. We did not approve it. We want to do things above board and by the book, and so we’re going to come to you and look for guidance and help so that we can do this the right way.” We made amends. We had to throw our contractor a little under the bus, but we took ownership. We hired them. We didn’t watch them close enough. And by doing that, that disarmed, the city planner and the folks that worked up in Brooksville and they were way more willing to work with us and give us information when we asked for it.
When we branched that mindset of explaining our intention through all of our relationships, whether it’s a roofer or painter or tenants. All of our insurance rates had gone up substantially after one of the hurricanes. And so we had to make $100 a month raise in some of the rents and we explained it in a letter to our tenants. “We’re not sitting on money bags like Scrooge McDuck here. We’re trying to provide you with safe, affordable entry-level housing. We’re trying to give you a good product. But to do that, we need to raise the rents because our costs have gone up substantially.”
And so we found we got a lot less pushback and all of our relationships when we explained why we can’t pay as much as a painter wanted, like, “Hey, I really believe that your work is worth every bit of that $4,000, but our budget’s 3,500. Can you meet us at that?” Instead of just scoffing at them and making an adversary relationship, Justin and I are much more about being open and honest with our intentions and fostering relationships because oftentimes, it comes back and pays dividends where people feel like it was a good interaction and then they bring a deal to you later like, “Hey, my stepmom’s selling a house. Are you interested?” So I think you put that good energy out in the universe and it comes back tenfold.

Tony:
So Nate, Justin, what would you say is one missing component that you think a lot of rookie real estate investors might be missing?

Nate:
A big part of what’s helped me get to where I’m at is working on mindset, and the foundation of mindset is physical fitness. I feel like any endeavor, success in any endeavor, begins with physical fitness because that leads to confidence and self-esteem and the mental fitness that gives you that positive mental, that frame that leads to the execution because you’re confident in yourself now that you’re going to take action. And whatever happens, you’re going to get through it. So those consistent daily tasks, consistently getting uncomfortable, consistently putting in workouts when you don’t want to, that all leads to the right mindset, the right frame and self-esteem that make you accountable to yourself. So I believe you have to work on your mindset, and the key to that is through fitness.

Justin:
Yeah. And I just have to pound onto that. Being Marines, we grew up being physically fit and having that in our daily battle rhythm. But I tell you this, that big long ordeal that we had, it was a year long, stressful for 12 months basically of stress. That was huge. And had we not had physical fitness in my daily routine at the time, and I’ve even taken that even further now, I know Nate has as well, and I focus on mental toughness type things every day, getting uncomfortable every single day in something, whether it’s a cold shower, whether it’s going out in a snowstorm to run or a rain, a thunderstorm, whatever the case may be. Because then when a real tough situation comes into play, whether it’s in business, in your family, in life, whatever, we’re going to be able to, like Nate said, handle that.

Ashley:
So those are some great takeaways that you have explained. There’s one thing though that I am very curious about as to you’ve paid for these master degrees with this property. What did your wives think when you came to them and said, “We have each lost $55,000”?

Justin:
I’ll start with that, just because we had to sell two of our other rental properties, not just to cover that but we were already going to be offloading them. But we had plans, other plans for that money, if you will. And so it was tough, but my wife definitely trusted me and understood she could see the stress that it was causing me on a daily basis. And she did trust me to figure it out and learn from it. And now, she’s partnered with me and on a few other deals. So it has worked out in the long run. We’ve learned a ton from it, and I know she’s learned a ton just by watching how that all transfolded or transpired, excuse me.

Nate:
Yeah. It was just open communication. I didn’t hide anything. And when things were going sour, I think she was looking the same way we were, just to minimize the bleeding at this point. And so when we got out of it, it was just a sigh of relief like, “Okay, that’s done.” It really sucked. We had to take out a loan to cover some of the things that we had purchased, and it’s like, “Okay, I’m just going to have to grind this out.” There’s a light at the end of the tunnel. Kids are fed. We’re comfortable. I guess because we didn’t have to really be put in a bad situation financially, we were able to weather the storm. It sucked but I think that they kept faith in us to get through this.

Ashley:
Yeah. I asked that question just because I think it’s so important to have your family involved in what your vision is, that you’re in alignment with not only your business partner but your family too as to, “This is what I’m working for and this is what I’m trying to do.” Even if they’re not part of the day-to-day operations or anything like that, having a supportive significant other can make such a huge impact. And when you do have these ups and downs, having somebody that’s going to motivate you and stick with you, especially when there are those downs, and that’s just one of the really big questions we get from listeners is to how do I get my spouse on board? And I think there’s that big difference of being that support, being there with you through the ups and downs. And that doesn’t mean they have to be your leasing agent or be your bookkeeper. They don’t have to be involved in the day-to-day. So that’s great that you both have supportive spouses.

Nate:
The biggest thing is you have to ask them what their concerns are, what their fear are, and acknowledge it, even if it’s irrational like, “Oh, you’re going to have to be fixing toilets at 2:00 AM.” “I understand that’s a concern, and we can have a plan so that when there’s a call at 2:00 AM to fix something, there’s stuff that happens before we get a phone call so we’re not going to be disturbed.” But to get the spouse on board, you just have to be clear about your intentions and listen to them and their concerns and not to make it an argument, but just to hear them because that’s the whole point of communication, is so that we understand each other. So I think going into it without an agenda, just to be open about where you’re trying to go and try to put their fears at rest with action, that helps.

Justin:
And one thing that I just happened to be lucky doing at the time was going through a public speaking class for a college course I was going through, and one of the things that I was learning at the time was BRRRR strategy, and so I had to give a speech on something. And so I just chose the BRRRR strategy because I had been reading the book, listening to podcasts and everything else. And I used my family, my wife, my daughters, and some friends that were over to give them the class prior to me going in and actually giving the instruction, period of instruction and everything. And so that was an opportunity for me to actually explain the process and how I viewed it, and it actually got her on board with the process once I understood it so well that I could actually explain it in a way, even though I hadn’t had a successful one yet at the time.

Ashley:
Everyone listening is creating a PowerPoint slideshow right now to present.

Justin:
I’ll send it to them. I’ll send them an example I used.

Ashley:
Yeah.

Tony:
We’ll put in the show notes for today’s episode.

Nate:
Yeah,.

Tony:
Nate, Justin, so, so many good nuggets throughout this entire conversation, and we appreciate you guys being transparent about not just the successes of being a real estate investor, but the downsides as well. Ash and I have done episodes on our failures. I just had a six-figure flip that failed last year so I know how that feels. When you think something’s going to turn out one way and for one reason or another, it turns out the complete opposite, but it’s the courage to move forward after those failures that really, really makes you successful in the long run.
So I want to take us to our Rookie Reply, and for all of our rookies that are listening, if you want to get your question featured on the show, head over to biggerpockets.com/reply and we just might use your question for the episode. Today’s question comes from Jonathan E. and Jonathan’s question is, “Would a hard money/private money loan be advised against as a first-time flipper? I’m not too keen on how rates and financing work. Do I need bids beforehand or will a hard money or private moneylender help me work with the GC they have a history with?”

Justin:
Man, that’s a great question. The first deal that we did, we did not use private money. We went and got a traditional loan. But the second one, we did use private money and Nate went and pitched this deal. That was a disaster to them in the end, and they had no clue where Brooksville, Florida was. In subsequent deals that we used, we used private money for the same thing where people didn’t know where the area was. And they were buying in on us, and the fact that they trusted us with their 100,000, 200,000, 60,000, 15,000, however much that we had to do to raise the money, they trusted us and that we could get it done and that we would make them whole no matter what.
And that was actually a big plus I didn’t think about from the failure is we actually are open about it to people. We’re like, “Hey, look. We failed here. We could have lost these investors’ money, but we made every way possible. We sold stuff to make them whole again and give them exactly what we said we would give them.” And so if you are a trustworthy person and you can prove that to someone else, I think you’ll have plenty of opportunities to find money to get a deal done.

Nate:
I think hard money and private money are great tools. As far as using it on your first flip, that comes down to your risk tolerance, your comfort to take a chance like that. We always come with a prepared investor’s packet like, “Here’s the numbers.” But like Justin said, they don’t really care about that. They’re investing in us and they really just want to know what’s the interest and how long. Is it six months or a year? So we’ve done private. We’ve done hard money. Right now, I’m a lender on the side as well. Private money hasn’t gone up as high as regular mortgage interest rates. So I remember we’re getting private money at 8% when mortgages are 3 1/2 and private money is still around 8 to 10%. Hard money is 10 to 12% plus points.
So it’s not far off from a regular mortgage right now if you can get in and get out, and it’s not a heavy lift. I don’t advise, if the rookie’s looking to use hard money on their first deal, I don’t advise something that’s like, “We’re going to make this into a triplex. We’re going to make this into a quadplex,” or something crazy, rezoning and all that, because you’re at the whims of the zoning and all these other factors. Do something where it’s a little more cookie cutter, a roof, HVAC, prime valve, plank floors, granite, stainless, get it done, and a three-month timeline or two-month timeline. I think if you have a more cookie cutter approach to it, then private money and hard money is a great option. If you’re going to something that’s, say, a full gut rehab down to the studs and changing walls and all that, you’re taking on a lot more risks. So I would just caution that.

Ashley:
One thing from Jonathan’s question that I realized is the last part of his question was, “Do I need bids beforehand or will a hard moneylender help me work with a GC they have history with?” That might actually be a great way to find a general contractor is ask a hard moneylender as to what contractors have been on the deals that they’ve done, because most likely a hard moneylender is sending out an inspector. They have record of who the contractor was, and maybe they can actually give you a recommendation as to, “Yes, in this market, this contractor has done a bunch of the deals that we have financed. Everything’s always been great, every inspection. Payment was always on time because they’ve got the work done,” things like that too. So could be a way to find a contractor.

Justin:
Yeah, that’s a really good point.

Nate:
Yeah, that’s a good point.

Ashley:
Maybe I’ll have to do that today. So Justin and Nate, thank you so much for joining us on this week’s episode. We appreciate you both taking the time to provide lots of value and also thank you so much for your service too.

Justin:
Thank you, Ashley and Tony. We appreciated every minute of it. This was a great opportunity and a lot of fun, and you guys do a fantastic job. So thank you.

Nate:
Yeah. Ashley, Tony, this was great. I’m looking forward to our buddy Tom Mors listens to this because he listens to the Rookie podcast religiously. This coming to fruition after I said in 2020 when we’re still sweating from the loss of money, that one day we’re going to do the anatomy of a disaster on be it BiggerPockets. Thank you. Thank you for making that real.

Ashley:
You just have to think you paid $100,000 to come on the shelf.

Nate:
That’s right. That’s right. It’s all cost, guys.

Ashley:
Great investment.

Nate:
Thanks for having us. It’s great.

Ashley:
Well, if you want to find out more about Justin and Nate, you can go down into the show notes below the episode in the description and reach out to them and find out more information. You can also find the social media handles for Tony and I. Thank you so much for listening to this week’s episode, and we’ll see you guys next time.

Speaker 5:
(singing)

When my husband and I got married, we bought our first place—a brand-new, 1.5-bedroom condo—in Bedford–Stuyvesant, Brooklyn. At the time, the Bed–Stuy neighborhood was rough—for example, a biker gang that loved to throw huge all-night parties was headquartered at the end of our block, and there were abandoned buildings every few feet, often rustling with the sound of homeless inhabitants. Back in the early aughts, this ZIP code was not for the faint of heart.

But at $375,000, a solid C-/D neighborhood was what we could afford in NYC, and our place was new and huge (for Brooklyn) at 1,200 square feet. Plus, I had a hunch. When we first toured the apartment, I went up on the roof and looked out over the neighborhood. From that vantage point, I could see three luxury buildings going up within a few blocks of us. I knew this neighborhood was about to change.

We loved our place and lived happily there for many years. Then, two kids, one black Lab, and an inevitable migration to the Jersey ‘burbs later, our Brooklyn place transitioned into a rental unit. We had good luck as landlords and very low vacancy rates, renting to excellent tenants who always seemed to be at the same life stage as we were when we lived there: just married and about to have babies—since the .5 bedroom in our apartment made the sweetest nursery.

Our Brooklyn rental, however, never drove significant cash flow. With sizeable monthly maintenance (typical for apartments in NYC) on top of our (fixed, 30-year) mortgage, we pretty much broke even every month. But man, did it appreciate.

Over the last few years, we started to realize that based on this equity growth, we could make much more money with our money. With the 2024 resale value of our condo now hovering around $950,000 and a lot of downward pressure on it going much higher anytime soon (due to a hefty New York millionaire tax that kicks in when the sale price tops $1 million), our $800,000 in equity is not working nearly hard enough. 

We realized that, in this case, we were perfect candidates for a 1031 exchange.

What Is a 1031 Exchange?

A 1031 exchange is a tax-advantaged strategy that allows you to trade like for like and essentially kick the hefty capital gains tax can down the road. In our situation, this would save us a whopping $80,000-plus. 

The gist of the exchange is that you hire a third party to manage the transaction proceeds (if you touch the money yourself, you instantly forfeit the tax deferral benefit and have to pay capital gains taxes), and you are bound by very strict timelines. 

Here are the basic rules:

• New property needs to be of equal or greater value than what you’re selling.
• Need to identify the new property within 45 days of closing on the old (you can ID up to three properties).
• Need to close on the new property within 180 days of selling the old.

The timing is tight, and any misstep means you forfeit the tax advantage and are on the hook for capital gains tax. 

Our 1031 timer starts in May—five months from now, when our current tenant’s lease ends. Between now and then, we’ll be learning and networking and putting in place as much as we possibly can, so when it’s crunch time, we’ll be ready to go.

Building Out Our “Sell” Team

Every month, we’ll give ourselves new tasks and things to research to optimize our position and options. Here’s what’s on tap for January:

• Interviewing agents to list our Brooklyn property, agreeing on a fee
• Deciding: Do we need to do anything to the condo before we list it?
• Interviewing and finding a lawyer 
• Interviewing and finding a third party to help us with the eventual money exchange
• Start thinking about where we might want to buy

Next month, we’ll share how we’ll pick our location and narrow down cities for potential investment (all out of state), and we’ll start to think about our buy box. Stay tuned! 

This 1031 diary will be a monthly series throughout 2024, chronicling our journey to a (hopefully) successful and profitable 1031 exchange, which will kick off in May. We’ll share everything—all the numbers, analysis, the good decisions, what we wish we’d done differently, the big mistakes (hopefully not many), and everything in between. 

Got questions? Got advice? What are we missing? Share in the comments below!

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

So, you want to know how to rent your house out. Maybe you’re upsizing or downsizing, moving away for work, or just want to buy another primary residence and take advantage of low-money down loans. Whatever your reason, renting out your primary home can be a phenomenal way to get into the real estate investing game. You’ll make passive income, all while holding on to the equity in your home and appreciation potential. So, how do you start?

David, Henry, and Rob are all on the show today to give you a step-by-step guide to turning your primary residence into a rental property. Hundreds of properties have been owned between these three investing experts, and all of them have turned their primary residences into rental properties multiple times. But before you rent out your home, you’ll need to know if your home is even rentable.

We’ll tell you exactly what you need to know to decide whether or not your home would make a good rental, how to make the most money possible off your home with affordable finishes, added amenities, and upgrades, how to decrease your liability and keep your property safe, insuring your rental, screening tenants, collecting rent, and more. If you’re a beginner landlord or are renting out your home for the first time, you CANNOT miss this.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Watch the Episode Here

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In This Episode We Cover:

• How to convert your primary residence into a rental property 
• How to know whether or not your home would even make a profitable rental 
• Areas to invest in and what potential renters will look for
• Long-term vs. short-term rental investing and how to know which works best for your home
• Affordable finishes and amenities you can add to rent out your home for more
• What you MUST fix in your home to keep your liability as low as possible
• Landlord insurance and the one added policy you (probably) should get
• How to screen tenants, collect rent, and get substantial tax benefits
• Whether to invest in out-of-state rentals or buy property in your backyard
• And So Much More!

Links from the Show

Book Mentioned in the Show

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.