Richard

Dave:
Hey, what’s going on everyone? It’s Dave. Welcome to On The Market, and joined here by the full force of the On The Market podcast. We have Kathy Fettke. Kathy, how are you?

Kathy:
Wonderful. Glad to be here with you guys.

Dave:
Henry, what’s up, man?

Henry:
What’s up, buddy? How are you?

Dave:
Doing well. Jamil, what’s up?

Jamil:
How you doing, handsome? I’m great. Good to see you.

Dave:
Aw, thanks, man.

Kathy:
Sounds like a dating show.

Dave:
Oh, yeah. James, flatter me. What’s going on with you?

James:
That kind of caught me off guard.

Dave:
Me too. I’m blushing now.

James:
I’m kind of blushing for you.

Dave:
Oh yeah, I know. Jamil, you’re really charming our pants off here.

Jamil:
You know, I try.

Dave:
Well, today we have a great show. We did a version of the show, I think it was back in May, where we asked you all to bring us deals that you are currently working on, and we’re going to do a version of that. So I mean, we’ve all been talking about how there’s a lot of opportunity in the market right now, and we figured it was a good time to bring this concept back so you can share the types of deals that you’re seeing in the market, that you’re actually working on in the market. And I’m pretty excited to hear from all of you guys.
Is everyone ready to go?

James:
Yes.

Jamil:
Let’s do it. I love talking deals.

Dave:
All right. Well, Kathy’s the only one who didn’t respond to that, so let’s start with Kathy. What deals are you looking at right now?

Kathy:
Well, we have a single family rental fund, as I’ve mentioned, and we are rapidly acquiring properties. So one of them is in Gainesville, Texas, purchase price a whopping $80,000, and the rehab about 50,000, so we’re looking at an ARV of 160. This property will rent for about $1,325 right now, but the area is growing so rapidly with all the chip manufacturing that we expect to see rents go up. Plus we’re doing a A-class renovation because a lot of the jobs out there are six figure jobs, so they’re wanting a nice place to live. So believe it or not, $135,000 property will actually be A-class in this area.
So it’s kind of like a BRRRR strategy, but within a fund. So we’ll be raising the money, raising the capital in the syndication, acquiring these properties with cash, renovating with cash. And then I do expect, at least the bank that we’re talking to is expecting rates to come down by the middle of next year, at which point we’ll refi this part of the fund and go do it again. But I don’t know next year if the deals will be as good as we’re getting right now. So the bank may be… it may make sense to just buy some points down and do a refi sooner to be able to take advantage of the market, but that’s just one of what will be a few hundred of the same.

Dave:
Wow, that’s incredible. I mean, that sounds like a really good deal. Just eyeballing it meets the 1% rule roughly there and that 1% rule is assuming usually that you’re putting 80% leverage on it, but you’re holding this in cash, so that must be throwing off a lot of cash.

Kathy:
Yeah, well, initially, yeah. Initially we’re purchasing with cash. The rates just kind of don’t make sense for a fund at this point. But my partner in Texas has a really good banking relationship with a local bank that’s excited to lend to this fund and is quoting in the fives. So we’ll see.

Dave:
That’s great.

Kathy:
Yeah.

James:
What kind of term is that on the five?

Kathy:
I don’t know for sure, I would need to find out, but I’m going to say a five year. But I’ll have the details. We don’t know what the market lev-lending environment will be in six months, which is when we would be doing the refi. So I don’t know the specific terms, but this is at least what that local bank is saying that they would do.

Dave:
And how do you find this deal, Kathy?

Kathy:
Through my partner. As you know, I’m, I guess, a lazy investor, is that what you’d call it? We have people all-

Dave:
That’s called smart investment.

Kathy:
We have teams all across the country, that’s been our business at RealWealth for almost 20 years. So we have partners in different markets who do the work, they find the property. It’s usually a property management company. So they have the teams in place, they have the repair teams, the acquisition process. I think on this particular one it was a wholesale deal and she is just getting bombarded with wholesalers calling, negotiating, and if you got the cash, you’re in business.

Dave:
You mentioned a little bit about chip manufacturing, is that the main draw to the area?

Kathy:
There’s so much technology moving into that, the Texas Instruments and every single day…

Dave:
The calculator people?

Kathy:
Yeah. If you go to growdevelopments.com where there’s a video of this fund and what we’re doing, you’ll see every single day, there’s… I don’t know if it’s every single day, but almost where a company is moving, usually from California to Texas, because it’s just a better place to do business at this time. So many… Caterpillar is moving there. So there’s just all kinds of different companies. But in this specific area, there’s really… They’re just kind of calling it the Silicon Valley of the… I don’t know, it was kind of a funny term, but of Texas.

Dave:
Well, they call everything silicon something.

Jamil:
I know, I’m so tired of Silicon Valley.

Dave:
Silicon Mountains, they call Amsterdam Silicon Canals. It’s so stupid.

Kathy:
I know, and Park City is the Silicon Slopes. But there’s a lot of tech companies moving there just because the cost of labor is so much cheaper and then your employees can live better. Imagine that, living in a… well, renting $1,325 in rent for somebody who would be paying three or four times that in the actual Silicon Valley.

Dave:
And why specifically single families?

Kathy:
Such a good question. It’s an asset class I’m just really comfortable in, and there’s so many deals right now. It is being hit hard with the higher interest rates. So we are able to get great deals and a lot of times that’s where people want to live, they want to live in a single family home. But we’re not walking away from duplexes or fourplexes. We’re just kind of keeping it in the one to four unit.
There’s just a lot of people who prefer to live in a and rent a single family home. And of course as a fund manager, we can sell off homes that really just aren’t performing the way we want them to. You can sell them off individually. So the loans to a fund are unique in that way that you can sell off assets that just really aren’t performing, whereas that obviously more difficult to do in an apartment. But I know James is going to talk about an apartment. I’m kind of jealous about it.

Dave:
I know, it does look pretty good.

Kathy:
It looks really good.

Dave:
We’ll have to hear about that. Well, any other questions for Kathy? Kathy, it sounds like a great deal. Congratulations on this and the larger fund. Love the strategy. I know a little bit about North Texas. I know you’ve been bullish on that for a long time, so I’m sure it will work out well for you.

Kathy:
20 years, 20 years in… Texas is my happy place.

James:
I love this deal. It’s totally bulletproof right now. You’re buying it for 50% off, the rent covers no matter what. If the property goes down by another 30% it doesn’t matter because your rent’s going to cover and if you decide you don’t want to keep it, you can sell it and rack a return. That’s your bullet-proof safe deal in a recession market right now.

Kathy:
I mean, you just nailed it. I’m older than you guys. I don’t know if you noticed, but we’re conservative and a lot of our members at RealWealth are conservative. We underwrote this fund extremely conservatively. We barely accounted for any appreciation at all. We expect it will be there, but I just didn’t want to underwrite it or promise that. But I’m going for conservative right now and I know a lot of other people are looking for that. And that’s why I like it too.

Jamil:
I think Dolf de Roos said, “The deal of a lifetime comes around every week,” but I feel like this is one of those deals of a lifetime, Kathy, it’s a great deal, I would absolutely do it myself so good find.

Kathy:
It means a lot coming from you guys.

Henry:
Oh yeah, that’s a buy all day. Multiple exits, that’s what you need right now.

Kathy:
Yes.

Dave:
All right, Henry, let’s move on to you. What are you working on there in Northwest Arkansas?

Henry:
Yeah, my deal’s actually not too dissimilar from Kathy’s deal. This one is a single family home. It’s in Fayetteville, Arkansas, so it’s in an area of Northwest Arkansas that people love. It’s a little further out than maybe most of the homes around the area. But I’ve actually done, this will be the third deal I’ve done in this little street. And so I’m very familiar with the area, I’m very familiar with how well or not well it does and so that gave a level of comfortability.
But we’re buying a single family home; purchase price is 70,000. It is a two bed, one bath. And again, I talked about this on a previous episode and I just kind of mentioned it with Kathy. I’m looking for multiple exit strategies right now. If I can buy it and underwrite it where there are multiple exits, I’m typically going to buy that deal because I know I can pivot one of two to three ways and still make a profit. So purchase is 70,000, ARV is 180,000. And what we’re doing with this property is we’re going to go… we’re taking a three-pronged approach.
The first approach we’re taking is the wholetail approach, so this means we would just clear the property out of all the stuff that the seller leaves behind, make sure it’s got floor coverings and make sure that the HVAC, all the appliances are working, plumbing works, electrical works, and we stick that thing on the market. The plan would be to stick this on the market at about $125,000. And when you look at the median home price around here, being up close to 300,000 or just under 300,000, more like 200, 250,000, finding a house that’s livable where everything works and you can pay 125,000, that’s still hard to find, even-

Jamil:
And you’re putting it into a condition where it’s financeable?

Henry:
Financeable, 100%. Financeable, buying it for 70, make sure it can pass conventional loan standards and then put that on the market for $125,000. That’s a steal. And then if for some reason that doesn’t work, option two would be to go ahead and do that renovation and do that flip. So to do the wholetail, we’ll probably spend between 2 and $5,000 just depending on what needs to be done. If we were going to flip it, we would probably spend somewhere close between 25 and $30,000, and then we would sell it for the 180. And then if neither one of those work out, we can always just put a tenant in it.
So we’d spend about 20 grand, 15 to 20 grand, put a tenant in it and rent that sucker out for between 1,200 and $1,300 a month. So I’m fairly confident that the wholetail strategy will work. I am not a hundred percent confident that we’ll sell it at 180 given the interest rates keep rising and that buyer’s pool kind of shrinks, that first-time home buyers pool is shrinking and shrinking when that happens. We’d sell it, but we may not sell it for that 180 that we’re thinking, but obviously we underwrote it so that we have a lot of room if we need to come down.
And then very, very confident in being able to rent it out and get that 1,200 to $1,300 a month. So that’s why I like this deal because there’s multiple exit strategies, but there’s a bonus with this deal that made me really love it.

Dave:
And there’s more.

Henry:
But wait, there’s more. So this house, when I bought it, when I was looking at the property, it’s a house, it’s on almost about an acre, just under an acre and part of it is just kind of a lot that was next door. And so I said, “Hey, is this a part of your property too, right?” And she was like, “Yeah, I think it’s a separate parcel.” So when I did look into it, it’s two parcels and it’s already split into two parcels, so we closed on both. I will sell the house without the parcel that it came with because I can get the same ARV with or without that parcel attached to it. And then I own that parcel now free and clear.
And so I can sell that parcel to somebody who wants to either just have the land, to somebody who wants to build something on it because it is a very build-able lot. You have to clear some trees, but it’s super build-able and there’s obviously utilities. And so the plan is we do the strategy we talked about with the house and then sell the lot probably on terms to someone where we take a 2, 3, 4, $5,000 down payment and then have them make payments to us as the bank for owning that lot. So I get to cashflow the lot and/or sell it and make an additional profit, plus the strategies we talked about with the house.

Jamil:
Henry, how do you make that decision when you come to the fork in the road on whether or not to renovate it for retail or renovate it for rent?

Henry:
Yeah, we just go with the easiest first. I want a quick turnaround if I can, so we’re going to stick it on the market as a wholetail first. We’ll leave it on the market for two to three weeks, see what happens. If we don’t get what we want, then we’ll talk about what’s the best strategy given the current environment. Things are changing so fast that things could be different in a month when we look at making a pivot. But the first strategy we’re going to do is to try that wholetail strategy because it doesn’t take much money to renovate it, we don’t have to do anything, we just get it on the market. If that doesn’t look like it’s working, then we’ll either pivot to a rental or a flip.

Dave:
Well, Henry, things are changing so fast that since we started recording this episode, the Fed raised 75 basis points since we… That’s not a joke, that actually just happened.

Henry:
100% true, yes.

Jamil:
Geez.

Kathy:
Well, it was expected, I guess.

Dave:
It was, it was.

James:
Love this deal. Great, great buy. If you can go through any different channel… I mean, these are no brainer deals. Everyone is freaked out by the market right now. This is the definition of a deal where you can get in and out, rack a return, make money, it’s safe in all different aspects. This is the recession deal. I think it’s awesome. I mean, anytime you can go in and wholetail it, that’s a win because you’re buying… A lot of over the last couple years people have been buying on the performa, whereas if you can wholetail it, you bought on the now. You’re buying so deep that you’re buying below the as-is condition and that’s a safe deal to get into, right? If it’s only worth 125 as is and you’re buying it at that 70 grand, that’s a win. And so buy that way it’s safe through any kind of metrics. I think this is a fantastic deal.

Kathy:
And talk to my lender and just keep them all in your own commercial fund. Don’t sell.

Henry:
Okay, give me some money, we’ll do it.

James:
Hey, I’m in.

Dave:
And for anyone who’s listening to this who’s trying to get their first deal as well, I just want to point out that the two deals so far, Kathy’s was for 80 grand? And Henry’s was for 70 grand. So just pointing out that although houses have gotten very expensive, is more expensive to finance, even if you don’t have a lot of cash saved up, it is still possible to get into the market and do deals like Kathy and Henry are doing.

James:
But I do want to say this would not be a great property for a new investor because it’s a pretty deep rehab as well.

Dave:
But still, even still rented, you said what, the ARV is like 160?

Kathy:
Mm-hmm. Yeah.

Dave:
So still achievable for people who might not have a ton of cash.

Kathy:
It’s just hard to do a renovation on a property that’s not where you live. You need a really good team that you trust and you need to be able to oversee it. So obviously in Henry’s case, he’s going to make sure that it’s being done well and he knows the business. What do you think, Henry? Do you think somebody new to the business could do your deal?

Henry:
My deal? Absolutely. It doesn’t need much work at all. I mean, it’s-

Kathy:
Oh okay.

Henry:
We just need to cover up some of the floorings or replace some of the carpet and then that thing would be… I mean, somebody was living in it right now and it was in decent shape, so. I wish we could show pictures of these things so people could get an idea of what these look like.

Dave:
We probably could in the show notes, if someone wants to… if you send them over. And on YouTube we could do that.

Henry:
Yeah, I’ll send pictures.

Dave:
And we could [inaudible 00:16:51] them in the show notes.

James:
Oh yeah.

Dave:
All right. James, let’s move on to you. You’re switching it up, talking multi-family. What you got?

James:
So my deal’s a lot different than the first two that we talked about. Actually our assignment fee is the total of the two purchase together on this deal. But yeah, so this is actually a building that my business partner locked down. It’s a syndication deal that we are closing on tomorrow. Actually the docs were just on my table. I was signing them right before the show. It’s a great purchase. So it’s 58 units in Everett, Washington, which is where Boeing is, great location. They just opened a new airport called Paine Field, which is actually more… it feels like a private airport, but it’s the airport of Snohomish County.
So we’re right next to the airport, it’s 58 units, we paid 11.35 million for this building. We’re going to put in two and a half million into the renovation, which is actually an all-cosmetic turn. It’s very simple. We get in and out. That’s one thing that we do like to do on our bigger projects or syndication deals, is stick to the cosmetics, not the heavy, heavy value add. It just gets a little too complex at that point. So the total project cost with rehab’s going to be 14 million and after it’s all renovated and stabilized, it’s going to have a 16.9 million stabilized value at a 5.2 cap.
So at a cap rate, that’s very reasonable. These buildings we’re trading for the last two years around a three and a half to four cap. And so what we’ve seen is… My partner, he does a lot more of the syndicating and the packaging of the deals and it’s been hard for us to get in that 50 to 100 unit quantity because all the hedge funds have been buying this stuff up at ridiculous margins. And so since we’ve seen the decompression in the market and the market get a little unstable, it has great opportunities in there.
So we syndicated the deal, we raised roughly about 3.5 million to take it down. And then what we were able to do, and this is key for any of these type of deals, is my partner was able to lock the financing on this. For me, I want to stay away from variable rate loans right now, especially in any kind of syndication deal or anything on a variable rate. And so we were able to lock the financing and to get 5.7 on a five-year term and then it can kick up to plus two over a 10 year. But we plan on actually refinancing this out or selling it at the five year because it yields a 19.7 IRR or it’s going to be a 15.8 IRR to our investor clients. So it hits numbers we have not been able to get in a really long time for this kind of location.
It’s a great purchase. It’s kind of funny, as the market gets worse and people get more afraid, we’re actually taking down bigger deals now because we want to go where the margins are. We don’t really care about the money. If we need to raise the money, we’ll raise the money. If we need to put the money up ourselves, we’ll put the money up ourselves. But these bigger deals are actually coming to be more profitable again and they’re giving really good yields. And so it’s opened up a whole another investment window to where we’re kind of getting out of the lower end and we’re going to the high because that’s where the gaps are right now. A lot of people are calling us with bigger buildings to move around, but we’re stoked about the purchase. We’d never be able to get this in two years and now we’re closing tomorrow.

Kathy:
That’s incredible. What are the terms for the investor? How do you carve that out?

James:
Okay, so they’re getting a 6… So this thing stabilize, one thing I forgot, it stabilizes out as 6.19 cap too, which again, we have not been able to get over the last couple years. So then investors are on an 80/20 split and then they get a 6% pref return and then we don’t waterfall this deal. So they’re going to keep the upside in the IRR at that point, so they get a lot of extra kicker on the deal.

Kathy:
Wow. How do we get on your list?

James:
You have to know us. We are not a not big raiser. For us, we’ve been investing for a long time, we like to invest with people that are like-minded. They know us really well, they trust us. So luckily we’re all on a podcast together, we’re all friends so you’re invited to that group. But we do keep it pretty tight. I think that’s important for anybody raising money, needs to realize, is they better be like mind, they better be on your side. They better have the same understanding and the same goal in their investments or don’t take the money; it turns into a absolute headache. Just because someone wants to give you money, don’t always take it.

Henry:
Great advice.

Dave:
James, just curious, with your business, you do a lot of single families, you do a lot of flipping, how big or small can you scale your renovation and construction effort? This seems like a pretty big deal. Can you just keep doing this for as many deals as you can get or do you hit a point where you can’t scale your operations much further?

James:
That is a great question. So what we’ve had to do, because we are in multiple different construction aspects, we build town homes and single family homes. We have our apartment renovations and then we have our fix-and-flip. Those are actually three different segments of construction teams for us. We keep them completely isolated so they don’t share, they’re not mixtures. So our fix-and-flip team, typically we can handle about 20 projects at a time and we don’t go any more than that. But what I’ve done recently is I’ve actually gotten out of third party and brought in more labor on that side to where we’re actually controlling the schedules, which has allowed us to do more projects and keep them moving more efficiently.
Our town homes are all built in-house, so it’s done… we don’t hire out builders, we build them all ourselves, so we manage that process. We have superintendents, project managers and general labor staff. And then we also staff our syndication deals. And typically, depending on the size of the complexes, we do have one roughly about… it’s roughly about 200 doors, down in south King County, that’s actually staffed with its own construction team.
So we have numerous different project managers and then we bring on labor staff behind that, so we can handle quite a bit of projects at one time. Like right now we’re turning about 200 apartment doors right now across different sites. But what’s key to that is making sure that we’re buying in similar locations. We don’t want to stretch out. So if we’re finding deals all in the same geographical location, our team can’t… we are targeting those areas like projects that we already are working on. So we have another 35 unit up in Everett right next to this one so that team can pop right over.
And so that’s kind of where myself and my partner are targeting, “What is efficient?” It’s not about just being able to buy the right buy, what is efficiently work with inside your teams at that point? So we can scale up. I mean at the same time, as the market started coming backwards, we were like, “Well, do we need to cut our staff back because we won’t be buying as much,” but it turns out we’re getting amazing buys so now we’re going to staff up on labor. But by not hiring it out and doing it ourselves in-house, my partner’s been able to reduce our cost per unit by at least 20%. They’re going faster, and then we can staff up and staff down to control the timetables a lot better.

Dave:
Sounds very effective. That’s awesome. Henry, is it the same for you? I know you do a lot of flipping and you do a lot of renovations. Are you scaling? What are you doing these days in terms of your renovation teams?

Henry:
Yeah, so for me running a much smaller operation, the contracting aspect has been difficult. I’ve been looking actually at bringing a couple of the guys that are currently… that we’re currently contracting through on staff to see if that’s going to increase our efficiency at all. We are finding more and more deals. Plus when I’m keeping rentals I’m typically buying undervalue as well, and so those need work too. So it’s not just renovating the flips, but I have rentals that need renovations as well.
And so right now I’ve got more work than my guys can handle. And so we are in the market looking to hire new people, but I’m also trying to think creatively on how can I leverage the people that I have to have them working more efficiently. Dealing with contractors or, said differently, the contracting aspect of the business has always been a more difficult part of the business and it absolutely can limit your ability to scale. Right now I feel like we’re in an okay place. I’d like to have three crews at all times if I’m going to outsource it and right now I have one.

Dave:
Yeah, I mean, I would imagine, as James was saying, it might be easier to start hiring a little bit for these things too. As a lot of construction, at least large scale construction, multi-family is slowing down a little bit, at least in terms of new permits.

Kathy:
And better pricing.

James:
Yeah, better pricing, then look into how you can exchange out your expenses. So what we did on our fix-and-flip, and it’s a new program for me, is I got rid of all my… over the last 90 days, we’ve completely leveled out our construction teams and we rebuilt it in the last 90 to be more efficient for this new market. And what we did is we took our management staff, which is our project managers, which were heavy salaries, they’re around 100 grand a year up in Washington, it’s expensive. But they don’t reduce your bottom line, they just make it efficient.
So what we actually did as the construction slowed down is I replaced my project managers with hands-on general contractors that I’m paying a hundred grand a year. They’re happy to get that money now because they’re sick of running their own business and their workload’s going down, and now they’re project managering and doing labor for me. So I’m sending subs out, they’re coordinating the subs for me at the same time they’re installing windows, flooring, millwork, doors and light framing.
And so what it does is it reduces down my cost, replaces my management cost with labor and management and reduces my overall expense there and things are going substantially faster. I don’t know why I didn’t do this a year ago. We’re just basically right now recruiting generals to be our project managers and then having more of them, but we can run our sites more efficiently.

Dave:
That’s awesome. I mean it sounds like you’ve found some very good people. I’ve never met a contractor that efficient but good for you.

James:
But if they’re on payroll, you can actually tell them what to do every day. It’s amazing.

Dave:
All right. Jamil, let’s get to you. What are you up to?

Jamil:
Well, I just feel like the lazy one here on the panel because my deal’s easy. It’s easy. So I live in a beautiful neighborhood in Phoenix, Arizona. The neighborhood’s called Arcadia. It’s on the border of Scottsdale and Phoenix. Just lots of activity, lots of people, lot of short term rental activity, great hotels. So I like to be in the short term rental game where there’s luxury five star hotels nearby because that tells you that’s where there’s demand for people to want to stay in that type of property.
Well, we are going to be hosting the next Super Bowl here in Phoenix, Arizona. And it just so happens that the first time I ever got into the short term rental game was the last time we had the Super Bowl here in Phoenix. So I’m familiar with what happens to a town when you get Super Bowl activity. We’ve got the Barrett-Jackson Auction that comes every year. We have Waste Management which happens every year and now the Super Bowl. So I feel that for the next, at least 12 months, we’ve got strong demand in the short term rental space.
So I am purchasing a very beautiful home that’s been sitting on the market on my block actually. It’s about five houses to the east of where I live. And it’s a gorgeous 3,800 square foot house that was remodeled in 2010. Now, 2010, if you guys remember it was slate central, so it has really terrible slate floors, gray and purple walls. I understand why the house didn’t sell, the sellers needed to do just a little bit in order for the house to hit that price point. It just so happens that the house was just recently appraised at $1.7 million, which is in line with the comps for the neighborhood.
But these sellers are really motivated, they’re both attorneys and they just want out. They want to downsize, they may be leaving the state, and so they were ready to make a deal. I basically just called off the sign and I shot them the number that I wanted to pay and that was a million dollars and I was very firm with my number and they took it. So now looking at that, at a million dollar purchase with a 1.7 million current appraisal, I believe I’m walking into some equity. Even if we do slide down even further, I’m going to be in a tremendous position when the market rebounds.
But in addition to that, if I leverage and put 20% down, I’m looking at around a $4,800 a month mortgage payment at 6%. My estimate right now after running some numbers is I should be able to net about $500 a night at 20 nights per month, so I should be getting about $10,000 a month in gross rents for a short term rental. Now, because we had been in the space before, my wife was running our short term rental business in the past. Our daughter, who is almost 17 years old, really doesn’t want anything to do with us anymore. So my wife has taken a little bit of a… She’s like, “What do I do?”
And so this would be a great opportunity for her to get back into the short term rental game. So our goal is for her to manage it, [inaudible 00:30:22] going to reduce our expenses on it. I’m expecting to be running it around 25% expenses. So my goal is to cashflow roughly $2,000 a month on this property. And if I’m putting down $200,000 as a down payment, I’m getting $2,000 a month in cashflow and when the market rebounds, I have a few hundred thousand dollars in equity, I think it’s a pretty decent deal.

Kathy:
Sounds like it. Sounds pretty decent.

Dave:
Did I just hear Jamil say he was going to hold onto something and he used the word leverage in the same sentence?

Jamil:
Yeah, both things I’m typically allergic to, but.

Henry:
I was wondering if anybody else was as blown away as I was.

Jamil:
I’m really tempted to buy it out in cash, but my accountants have said, “Jamil, stop it. This is irrational. You need depreciation, we need to spread your money out further so that you can get,” because I wrote another ridiculous cheque to the IRS this year, so I’ve got to do better. And so this is going to be a part of that process.

Dave:
Well, all joking aside, I mean, you have been on the show, said many times that you’re adverse to holding debt. You’re primarily a trader, you’re flipping stuff, you’re not holding onto things. But in this market I think most people would assume you’d keep doing that, not wanting to hold onto something. Obviously the tax implications are big for you, but what is it that changed your mind and makes you feel confident doing it in this market? Is it just such a good deal?

Jamil:
It’s such a good deal and I really believe in the neighborhood. First and foremost, Phoenix, Arizona, the average lot size for our properties is like 7,000 square feet. It just so happens that these two streets where I live, my street and then the one street north of me, we all have half acre lots. And it’s really rare in our neighborhood to get huge lots like this, so there’s a lot of demand for properties on these large spaces. Secondly, I get family coming into town all the time. I thought this would be a great spot for them to stay at when they do come to town. They don’t have to stay in my house, they can stay down the road.
But $700,000 walking in equity. And this wasn’t a friend of theirs who appraised it. It was one of the foremost appraisers in town that gave them an appraisal and so at $1.7 million current appraisal, I think what happened for these guys is they just didn’t… they had the house so customized to their liking that if they had just done maybe 30 or $40,000 in updates to the house, they would’ve gotten their number or they would’ve gotten close to it. They probably would’ve sold this for a million five.
But they didn’t want to spend any money, they didn’t want to do the work. And so I’m looking at it as though I can put in a little bit of cash, update the house so it’s beautiful for a short term rental. And I know as soon as the market comes back, I can put that thing right back on the market and probably make a few hundred thousand. So I’m playing an educated timing bet, like I’m timing the market right now. I know we always say, “Don’t time the market,” but I feel like I’m timing it well, I’m buying this deep and my goal… I’m not going to hold this forever, but I probably will hold it until the market rebounds and then I’ll sell it for a big payday. And in the meantime, I’m going to make great cash flow and my wife’s going to have a good time managing the short term rental.

Kathy:
I just looked up some of the tax benefits you can get from this, so be sure to talk to your CPA about the Qualified Improvement Property, the QIP. It says in 2017 The Tax Cuts and Jobs Act created a class of property called the QIP. So big bonus depreciation there and then cost seg strategies, that some of them will disappear or be lessened next year. So great year to be doing that and to try to be claiming some tax benefits. We’re doing the same thing with one of the Park City properties that we bought and I’ve been furnishing… I’m going this weekend to finish furnishing it and all of that is like accelerated depreciation. Talk to your CPA because it’s different for everybody, but this is a really good year to take advantage of those cost seg strategies and QIP.

Henry:
I think I’m taking this a little personal. The last episode I recorded with Jamil, he said, “Hey, come stay at my house,” and then this episode I’m here like, “Ugh, I got to buy a house down the street because I got to stick people like Henry in it when they come visit.” I’m taking it a little personal.

Jamil:
I didn’t know you were going to pick up on that.

Dave:
Yeah, Jamil, how much did you say it’s going for a night?

Jamil:
I’m expecting 500 a night.

Dave:
All right, Henry, you’re getting charged 500 a night to stay at Jamil’s house.

Jamil:
It’s resort-like though, guys. Half an acre, there’s a beautiful pool, they got a jacuzzi. The entire second floor is only the primary bedroom.

Dave:
Wow.

Jamil:
It’s got mountain views. It’s delicious.

Dave:
Who needs a bedroom that big?

Henry:
If you don’t want me to stay at your house, you don’t have to pitch me on this one, it’s fine, I’ll get a hotel, Jamil.

Jamil:
I really do want you to stay at my house because I’m expecting you to tan by my pool.

Henry:
I’m absolutely getting a hotel.

Dave:
Oh man, that’s the second time today, Jamil. It’s become clear how bad it is to be a seller of unique properties today. Like those weird houses that need a little bit of love, man, they’re sitting on the market for a long time and sounds like you’re getting what, 30 or 40% off because of it.

Jamil:
And I’m just obnoxious on those calls too. Listen, there is tact in how you find alignment with a listing agent. So first and foremost, just for everybody listening, very quickly the strategy I used, I used the listing agent as my agent. So I had them do dual representation, which aligned the listing agent to my side and gave me some extra leverage, because now she’s getting a 6% commission and I’m playing on the fact that I know that she probably hasn’t closed a lot of deals recently, and so a 6% commission right now is going to be huge for her. So she’s really going to bat to help me get this deal done.
Secondly, I actually disclosed that I was the guy… I actually live on their block and because they know me, they know who I am, they’ve seen the production vans and the things in front of my house when the TV show is being filmed, they know that I had the financial capacity to close. And so for them, they’re looking at it like this guy, he can close, he’s legitimate, he’s real. I really played my hand firm and I wasn’t attached to it. So when I gave them my number, they tried to negotiate with me multiple times to try to edge that price up and each time I just swatted back and said, “Nope, firm. Nope, firm. Nope.” And finally it got done.

Kathy:
Well done.

Dave:
All right, well, thank you all for sharing these. This has been super fun.

Kathy:
Well, I just have to share that I found out what it is, it’s not the Silicon Slopes, it’s not the Silicon Beach, it’s the Silicon Prairie. Okay. So maybe where I’m investing isn’t super sexy, but the numbers work.

Dave:
Prairie.

Henry:
Silicon Prairie, I don’t even know what that means.

Dave:
Nothing, Henry, it means nothing.

Jamil:
It means absolutely nothing.

Kathy:
And it means it’s out in the middle of nowhere. It’s the boonies. But that’s where these tech companies are moving, to the boonies, to the prairie.

Jamil:
Sounds nice.

Henry:
For those Silicon Prairie dogs.

Dave:
All right, well, we’re going to take a quick break and after that we’re going to answer a question from someone on the BiggerPockets forums. All right, we have a question from the BiggerPockets forums and a reminder as always, if you have questions for the panel, want us to answer them, you could do that by going to the BiggerPockets forums and posting a question.
So this one comes from Ryan Williams who asks max market rent or stable rent? “Hello. I have a lease ending on my rental property here in Denver and I’m debating whether I should re-list my rental at a max market rate, 200 or $300 more per month than my current tenant’s rent. Or if I should put it close to what I had rented out before, a little below the market rate and hope to fill the vacancy as quickly as possible?” Henry, going to you with this one, I think you usually have a great perspective on this kind of thing.

Henry:
So the question is, do I go for the top dollar rent or do I stay a little above the average and fill the vacancy quickly?

Dave:
Yeah.

Henry:
Yeah. I’m all for the latter in this strategy. Vacancies just cost too much money and the longer it sets, the more it’s going to cost you. And what we’re finding right now and what we’re seeing is when we put properties out there at top dollar, they sit a little longer and then we end up coming down off of those prices anyway having to lower rents. Because we do a strategy where we’ll post it and if we don’t get what we want within a certain time period, we drop about 50 bucks off until we hit that sweet spot. But if you feel like you know where your sweet spot is or you feel like you know where somebody’s going to rent it at, I think that’s where you should try to get it.
But don’t just rent to the first person; you want to rent to the first person who meets all of your qualifications because it doesn’t matter what your rent rate is, if you don’t get a quality tenant, it’s going to cost you more money in the long term. So your tenant selection process needs to be rock solid. But I’m all for coming in a little under that top dollar rent price and getting somebody in at a price where they want to stay.
Because if you get them in a top dollar and rents come down a little bit right now because rents are trailing, are starting to do what prices are doing in some parts of the country, if you get them in a top dollar now and in 12 months they can get a place similar or better than yours for 50, 100, 200 bucks less. Yeah, it costs them a little bit of money to move, but you don’t want to be dealing with that turnover because then that costs you more in the long run anyway.

Dave:
Totally agree. I actually just did this in Denver two weeks ago. I had put it at max rent and wasn’t getting the quality applicant that I was looking for and just like Henry, I just lowered it like 150 bucks, and within a week found a great tenant. No vacancy, worked out really well. Kathy, did you want to jump in?

Kathy:
Yeah, I was going to say it really just depends on the area, and I usually talk to my property manager to see what kind of demand that they have and what they think because if they’re seeing tremendous demand, then it might go quickly at the market rate or a bit above market. That’s what we’re seeing still in parts of Tampa and Florida, where there’s still so much demand. But I generally, as a rule, do like to stay a little bit below the market rent because that does make your tenants so happy that they’re appreciative and want to stay generally a little bit longer.

Dave:
And it just protects you, especially going into a potential recession or job loss, you don’t want your tenants to be stretched. It’s just not a good situation for anyone.

James:
And it always comes down to what Kathy said, it’s just market conditions. What is the supply and demand? Even though it’s just a rental, every asset class is this way. We just listed a flip the other day and we went on the higher side of the market because it’s in a neighborhood where there’s no inventory. Yes, there’s a lot of inventory all around us, but if you want to be in this one specific neighborhood, you are buying our house, that’s it. And it’s a high demand neighborhood. And same with rentals. The first thing is look at where your supply and demand is, what’s your absorption rate, and then how do you… don’t overprice it to where you’re losing a month of income, but also don’t under-price it because you don’t want to give money up if you don’t need to give money up. And if there is no demand or there’s a high demand, you can get that high rent.
Also, dig into the data a lot. A lot of times that high rent comparable may have a unique feature that yours might not have. Is it more walkable? Does it have a better yard? You do want to dig into those things and make sure you’re comparing apples to apples because there is always that outlay or comp for selling, for renting, for whatever it is. And so really dig deep into that comparable and see what the deficiencies are. If your product’s more deficient, then go with the lower rent comp. If you have the same walkable features or upside, then go for that higher number. People will pay for quality of living and we’ve seen that the last two years. And so just dig into the data. The data will guide you on how you should price up your asset for rent, sale or whatever it is.

Dave:
All right. Good advice from everyone. Well, thank you all for bringing your deals. I really appreciate it and this was a lot of fun hanging out with you all today. I’d love to hear how all these work out. So definitely track the performance of each of these deals and maybe we’ll revisit this in a couple of months and see how you’re all performing.

Kathy:
Sounds good.

Henry:
Love it.

Jamil:
Happy to share.

Dave:
Well, on the show you all are performing great. You all did an excellent job. Thank you for being here and for everyone listening, we appreciate you. If you appreciate this show, make sure to share it with a friend, we would really appreciate that. Thanks for listening again, and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, researched by [inaudible 00:43:59] and a big thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Spencer Rascoff, Pacaso co-founder and chairman, and former Zillow CEO, joins ‘The Exchange’ to discuss how much home values will fall, how the real estate market can get ‘unstuck’ and what will keep home prices stable, relative to 2008.

David:
This is the BiggerPockets Podcast show 690. I know no one likes to hear this. There’s people hearing it right now and they’re making a face like they just swallowed a bug. It’s just that’s not what I was told. This is my dream. I’m trying to quit my job. I need cash flow. Just take your dream and extend it a little bit longer. All right, so it’s the first thing is you did nothing wrong if they don’t cash the like you thought.
The next piece I want to say is if we can start with that baseline, it would be very similar to me saying if you go to the gym your first week, you’re not going to see results. Would you believe that? Or would you say no, there’s a way of working out where my first week I can see noticeable muscles.
What’s going on everyone? This is David Greene, your host of the BiggerPockets podcast here today with a Seeing Greene episode. If you haven’t seen one of these before, these are shows where I answered your questions directly sent to BiggerPockets to see what I can do to help you grow wealth, solve a problem, overcome an obstacle, or maximize your results. Whatever it is about building wealth through real estate, I want to help you based on my experience and all the information I’ve gathered hosting podcasts like this.
Now in today’s show, we have a cool little bin. I’m actually bringing in some support, so we have other BiggerPockets authors that have come in to help answer questions, and then I throw my 2 cents on top of it like the cherry of a Real Estate Wealth Sunday. This is kind of a special show because we at BiggerPockets are having a discount. This is a Cyber Monday book sale extravaganza. If you’ve ever wanted to buy some BiggerPockets books, but I’ve been waiting on the sidelines. Now is your time to get involved.
In today’s show, you will hear some really good information about things like a 1031 into a syndication. Is that possible? Can you 1031 money into a syndication? And what else can you 1031 money into? While we are on that topic, we talk about what to do with equity in your home. More specifically, how to make sure that your equity is working for you and options that you have to make more money with existing equity. This is a really, really, really important concept, especially right now in the market cycle, as many properties have appreciated in value, but it’s becoming harder and harder to find the next deal. We talk about how relationships can make you money. Pat Hiban gives some very good advice about what you can do to focus on making money through relationships and finding the mentor that will help you get to the next step. All that and more with great conversations from live guests with big goals.
Today’s quick tip is I want to call attention to all the non Robert Abasolos out there. Robert is someone who does not read books. So if you’re not like Robert, you’re a non Rob, this is for you. BiggerPockets is having a Black Friday, Cyber Monday sale, November 25th through the 28th, and everything is up to 60% off. The Real Estate Rookie 90 Days to your first investment book, which is not even out yet written by Ashley Kehr is available for pre-order only for a limited time. You can only get it until Monday. There’s also different bundles you can buy in addition to the books that you could get 60% off on.
For instance, there’s the Rookie Collection, the Classics Collection, the Creative Strategies Collection, the Gifts Collection, or the New Year New Me Collection. Each of these collections have books put together that all have similar threads and patterns to help you with specific challenges that you’re going to face in your journey, and we’re giving them to you for up to 60% off. And you can use any author’s name like mine, David, to get 10% off any books that you’re buying in the BiggerPockets bookstore. Simply go to BiggerPockets.com/store.
All right, let’s get to today’s first caller. All right, welcome everyone to another Seeing Greene episode. We are going to kick this one off with one of my favorite things to do a live coaching call today. We have [inaudible 00:03:34] who is here to talk some real estate with me. Mr. Chi, how’s it going?

Chi:
I’m good, David. Thanks for having me. How are you today?

David:
I’m doing pretty good. Thank you for asking. What is on your mind?

Chi:
What isn’t on my mind? No, no. The chi is strong in this one. So should I start with my goals? Is that okay?

David:
Well, let’s start with your problem and then I’ll probably dig into your goals.

Chi:
Okay, so my first problem is I’ve been investing for about five years since 2017. My first property was an Airbnb, so I’ve managed that for five years. I’ve done some BRRRRs, I’ve done some rentals, I’ve done duplexes. So you can already tell I’m all over the place. My first question is how do you avoid shiny object syndrome when it seems like everything you do isn’t quite profitable? Because the reason I’m jumping is because I tried this and I’m just seeing meager returns, so I keep looking for the next thing.

David:
Okay. Before you even go any further, I can tell you one big piece. You’re not going to want to hear it, but you’re going to need to hear it. Okay, So getting ready for some vegetables. This is Seeing Greene, so this can be broccoli. Green vegetables here. Real estate is not intended to make you a lot of money in year one. This is going to sound like heresy. Everyone’s going to hear this. They’re going to get up in arms because from 2010 through maybe 2016 or so, the market was so low that you could just buy a house that would cash flow very strong right off the bat. That was an anomaly. That is not normal. Good assets usually sell at a price because you make so much money with real estate over time. It’s such a desirable asset. There’s so much competition for it. You very rarely make a lot of money in year one.
This is a buy and hold long term. It’s like planting a tree. Trees do not produce fruit when you first plant them, but that isn’t what gets talked about. Okay? People bring their deals and they hold up the best fish they ever caught and they brag about the ROI on that deal and then we all see it and go, “Oh, that’s what I’m supposed to do. I must be doing something wrong.” And it creates this shame and guilt in our industry that we bought a house, we did everything we said we were told to do and it lost $400 in the first year. So we shouldn’t be real estate investors at all. Or we do what you’re saying, we jump to the next strategy. It’s in my opinion, because everything’s just opinion, that’s BS.
It’s not supposed to work that way. If you buy a B class property, A class property, if all things were equal, it should have probably cash flow for the first three, four, maybe five years. But the next 25 years of owning it, the next 40, 50 years of owning, it’s a cash cow. It is okay to accept delayed gratification in real estate investment because you make money in so many ways. Now I start from that baseline and then I look for everything I could do to put the odds in my favor over the long term. Can I buy it under market value? That gives me a head start. Can I do some value add? That puts a cherry on top. Can I get more than one unit so that the rents will increase, it’s going to cash flow more later, even if it doesn’t cash flow a lot right now? Can I get it in an area where it’s going to be no headache? It’s just like tons of tenants.
Can I improve it in some way? Because I know that if I just buy a turnkey property fresh out the box, it’s not going to perform super great for me. So just hearing that part before we get any deeper, do you have any pushback? What are your thoughts here on that?

Chi:
No, that’s great. You know what? I wish someone mentioned this before I stepped in because I would have then focused more on growing slowly, get some reserves in place, knowing that it’s not meant to cash flow rather than starting hoping for huge cash flow and then just killing myself to make things.

David:
Sometimes we make it cash flow, but it’s not designed to cash flow. They do not build residential real estate for the purpose of cash flow. That’s why it’s called residential real estate. It is built for the purpose of someone residing there. Now us investors have been creative and we have figured out ways to buy single family homes that will cash flow, but it’s not easy and it’s not natural. Commercial property is designed to cash flow, it’s designed for commerce. It’s evaluated as a business based on its NOI. Residential property is evaluated based on a non-business purpose. What did the neighbors pay for their house? That’s not a business way of looking at something. That’s ridiculous. Okay? That’s what a consumer cares about. Well, what did the Smiths pay? I don’t want to pay more than them.
A business looks at metrics like the cap rate and the actual cash on cash return. So if you’re looking to get into cash flow real estate, commercial is really where it’s built for that purpose, but it takes more money to get into that game. You can’t use an FHA loan to buy a commercial property. It’s a little more sophisticated. You got to be able to have a property manager oftentimes that manage it. It’s just like buying a business. It’s harder. Residential real estate is much simpler, which is why everyone’s drawn to it. Then they get frustrated when they get there and they’re like, “But it’s not cash flowing.” That’s okay. It’s not always supposed to. This is why I frequently tell people they should house hack because you get this built in buffer that even if it doesn’t cash flow, but you used to pay $2,500 a month in rent, now you don’t have to. You still came out on top. And over the next 20, 30, 40 years, you make so much money you don’t care about what it did in the first year.
I know no one likes to hear this. There’s people hearing it right now and they’re making a face like they just swallowed a bug. It’s just that’s not what I was told. This is my dream. I’m trying to quit my job. I need cash flow. Just take your dream and extend it a little bit longer. All right, so it’s the first thing that you did nothing wrong if they don’t cash flow like you thought. The next piece I want to say is if we can start with that baseline, it would be very similar to me saying if you go to the gym your first week, you’re not going to see results. Would you believe that or would you say no, there’s a way of working out where in my first week I can see noticeable muscles?

Chi:
No, that makes complete sense.

David:
Okay. So if we can accept it in other areas of life, in your first week of a relationship, you don’t really know the other person that well, it’s not going to be super fun. Your first week at the gym, you’re not going to get big results your first week of being a parent, you’re going to screw up a lot. It’s okay when you start something to not be good at it. Now the thing with if you went to the gym and worked out your biceps for a week and you looked at them and said, “They’re not any bigger, I better move on to a different muscle group.” And you bounce around forever, you never would actually get the result. You see where I’m going with this?

Chi:
Yep.

David:
Now it may be true that you work out your biceps and you’re like, “Well now they’re tired. I can’t work them out.” Well, don’t just stay home and do nothing. Go work out your triceps, go work out your chest, go do something else while it’s recovering. So sometimes you buy a house with a primary residence loan and you got to wait a year before you do it again. Your biceps are tired. Well, there’s other ways you can go invest in real estate or make money in real estate or do something productive while you’re waiting for that year long period. But what happens is in a year when your biceps are ready, got to work them out another time, that’s what’s going to make them get bigger. So part of what you have to figure out is a strategy that you could stick with over time, but shiny object syndrome’s going to show its face. Scratch that itch when there’s nothing that can be done in the space that you’re currently at. So hearing that, what thoughts are coming to mind?

Chi:
I guess I just need to pick a strategy based on my unique strengths, resources, and then go. But I guess my second question then comes into play around your point, which is I spent a lot of years even while investing, just listening, getting in the podcast, just learning, growing. I have a good idea of all the different strategies and how to make them work. But how would I go about let’s say hiring people or finding partners? Because for the very first deal, which was an Airbnb, my big headache was just maybe, well I need to do mails, I need to go door knocking, I need to do all of these things. But this isn’t bringing in any money to then reinvest into the business.
So these are two questions in one. When I spoke to my wife and I said, “Hey, I know all these things we can do that will bring in quality leads.” And she is like, “Then do them.” And I said, “But I’m managing this house. I have my own full-time job. I also am doing two jobs. How can I do these things?” So how do you convince your spouse that, trust me, I have the knowledge and it’s a good investment even though we’re not quite making money to do certain activities, like money producing activities I guess.

David:
So is your spouse not wanting you to do those activities?

Chi:
She doesn’t want me to pay someone else when I’m making money from the real estate.

David:
So she sees the safety and security of just work your job, make your money. We don’t want to lose what we made by hiring somebody else.

Chi:
Yes.

David:
What are the things you want to hire out?

Chi:
I would say something just someone to go and drive for dollars or even drop out flyers for we buy houses just in a neighborhood.

David:
Can you find a person who loves real estate as much as you do and drops off the flyers and can get some equity in the deal so you don’t have to pay them for their time to go do it?

Chi:
I’m sure it’s possible.

David:
Much harder.

Chi:
Okay, go on.

David:
No, no. Is that what you’re saying? It’s just hard to find a person that will do that.

Chi:
Yes. And for some reason, I’ve been so quiet about my investing because I’ve not needed to work with someone, so I’ve been using all of my capital so I’ve not had to say “This is what I’m working on. This is what I’m working on.” And also being from where I’m from in the world, if you start to show your achievements, people start to ask you for money. So it’s just hard. It’s a very tricky line to play where I’m trying not to show what I’ve been doing but without showing that, you don’t get people coming to say, “Hey, how can I work with you? Hey, how can invest with you?”

David:
So you’re afraid that they’ll want to take advantage of you if they saw that you were making money in real estate?

Chi:
Just the people back where I’m from. But the people in Canada will definitely be saying, “Oh hey, how can we work together?”

David:
So the people back where you’re from, how do they play a role in your situation that you have right now with your wife in real estate?

Chi:
I would say the biggest influence is that they’ve stopped me from marketing on Facebook, which is the primary place I market on to both-

David:
But you don’t want other people to start asking you for money when they see that you’re a big shot realtor.

Chi:
Yeah.

David:
Sorry, big shot agent. Sorry. Big shot investor.

Chi:
Yes.

David:
That’s what I’m getting at. Okay.

Chi:
Meanwhile we know that it’s not producing income, right? It’s a nice house. We took everything we had.

David:
Can you advertise on Facebook and not have your face be in the person talking? Can you hire a person and pay him 30 bucks to record? “Hey, if you have a house and you want to sell it, go to this email address, go to this landing page.” Can you do something like that?

Chi:
So that goes then to my wife who doesn’t want to pay for anything.

David:
Okay. The Facebook ads are the thing you want to put money towards. Your wife doesn’t want you to do it.

Chi:
She doesn’t want me to pay for anything. If you want to do something, do it yourself.

David:
This is so tricky for me because I’m not married so I don’t know what this struggle is. My perspective in life is you shouldn’t judge a sin if you’ve never struggled with it. Okay, so I’ve never drank alcohol, I’ve never been an alcoholic. So I don’t have an opinion on what it’s like to be an alcoholic. I can have an opinion on something I have struggled with and the marriage is definitely not a sin, but the same principle applies there. If I’m not married, I don’t like to give advice. What I would probably do if I was you is I would say,
“Listen, I decided to work two jobs. I can either quit one of those jobs or I can work both jobs and we’ll set aside 30% of the money from my second job, which we wouldn’t be making anyways, to reinvest into real estate.” Because now your wife isn’t looking at it like we’re losing money we’ve made. She’s looking at it like if I want to keep the 70% of the money that comes from his second job, I have to let him put 30% of money towards this endeavor. Would that work?

Chi:
Yes.

David:
That’s probably the approach I would take. Just say, “Honey, you know what? I’m so tired, it’s really hard to work two jobs. I think I may need a break and I’m just going to go back to one job.” And she’s going to start thinking like, “Well that’s not good. That’s less money.” And you’re like, “You know what I could do though, if you want me to really keep working this. I need a goal. I want to be able to take you on vacations around the world and real estate’s going to pay for that. Let’s take 30% of the money I’m making from my second job and put that towards investing and we’ll keep 70% for security.”
If you could get her to buy into that and then she can start to see results that come in from the 30% and she actually sees you got a house and you wholesaled it and you made 40 grand or something like that, that’s the time to go and say, “All right, can we put 40%, can we put 50% right?” Can we get to where we’re putting 100% of the money from my second job into real estate and when the results are rolling in, [inaudible 00:17:15], the conversation changes from, I don’t want you doing that to how do we do more of that? Like this. I don’t know why it’s like that. I’ve had so many people in my life that just push back, don’t want to believe, don’t want to listen to the direction I’m asking them to take, fight me on everything. And then as soon as they see the results, it just immediately goes away. “Oh, I’m on board.”
It’s frustrating because they didn’t have faith in you in the beginning when you wanted. But that’s human nature and if you can fast forward how quickly you can get to that point, I think your career can really take off.

Chi:
Awesome. That’s a great idea.

David:
If there was stock in you, I would buy it right now. You’ve got the attitude, you’ve got the work ethic. Everything you’re saying is how can I do it? Not, “But David, this is why it’s hard.” I can promise you if I have a conversation with someone and every single time I tell them this is what could be done and their reply is why that would be difficult or why it wouldn’t work, I can almost guarantee that person will not be successful. When they say, “Oh I could do this or I could do that. What would it take to get there?” If they stick with it, they will be successful. You’ve got the right attitude. I wish more people thought like you, and I can promise you you’re going to be good at this. You just keep asking those right questions and keep pushing forward.

Chi:
Awesome. Thank you. Thank you. I have a second question.

David:
Okay.

Chi:
I recently listened to the Residential Assisted Living one and again, I would say it’s a shiny object, but I would say it’s a shiny object because I’ve run an Airbnb, I’ve bought, fixed and flipped homes, so I understand everything they’re saying and it just makes sense. It’s real estate plus business and they also mentioned that it has the potential to even just one deal can bring you 10,000 and up in revenue. If you go to a really nice area and you buy right and you have the right demographic, you can make even more money even though you have to buy a more expensive house, do more expensive upgrades. Well, the first question I ask was is it even possible to maybe find a really expensive home? Because you say you’ve been knocking it out of the park with your negotiations and getting 100,000, 200,000 in concessions or off the asking price, right?

David:
Yes.

Chi:
Would that be a good idea to find a really nice house?

David:
It works for the purpose of you have less competition so you can get a better deal on the asset. Yes. It would be a bad idea from the perspective of when I buy a short-term rental or a rental property, I can hire a property manager and say, “Go rent it out.” It’s very difficult to do that with an assisted living facility. You have to find an administrator. You have to find an operator that actually has done this before. They have to be willing to do it within your area. It would be easy to find the property. It’d be very hard to run the business. And if you’re working two other jobs and you’re trying to go find off market opportunities, I think you would get swamped. I don’t know for the situation you’re describing that residential assisted living facilities would be a good idea.
Now let’s say you came back to me and said, “David, I found a person. They have three other homes, they manage all of them. They said if I find a house that looks like this in this area, they will pay me $12,000 for rent or $20,000 for rent and I think I can get a property for only $6,000.” Then I would say yes, put your effort towards it because you’ve got the pieces in place. Don’t go try to find the house, which is the easier part and then go try to find the operator, which is the harder part. Switch that around.

Chi:
That makes sense. Okay. I’ve had trouble in the past in attracting investors because I’ve never needed investors. I had a good paying job because I’m a software developer and I got access to a lot of credits from the bank plus my own money I was able to do whatever. Times have changed and my lines of credits have been closed. In fact my full-time job is gone right now. I’m only doing a part-time job, which is my business. Now I have the time actually to take on that role as the operator, find the day to day manager and the only thing I would need would be funds from an investor to partner with me by this property. I’ve also been in contact with the residential assistant living, Lady Isabelle’s team and they do have a course to work us through the whole process. So I can’t get the knowledge, the skills required. I guess how would you go about raising capital?

David:
I wouldn’t be even thinking about raising capital until you already had the knowledge, the skills and the track record. It’s different than what a lot of people say. I don’t mean to crush your dreams. My philosophy is you should not spend somebody else’s money on something until you have a track record of showing that you can do it yourself. Again, I’m going to say don’t let that discourage you. Make that the carrot that you chase. I’m assuming you’re not originally for America. Do you know that phrase when we say the carrot? You know what I mean by that?

Chi:
Yes. Yeah.

David:
Let that be the motivational factor that you say, “All right, I want to get into that space. I’m going to have to learn the business.” Find another person that Isabelle connects you with that is currently operating one. Go sit down and talk to them about the challenging parts of the business, the fun parts, see what they need help with. First off, you’ll tell if you even want to be in that space if you talk to a person that’s doing it. I was a police officer and every time someone would say, “I think I want to be a cop.” I’d say, “Okay, do some ride-alongs.” That’s where you sit in the car with them and you go around to see the job. That’ll let you know if you actually want to be a cop or not when you actually see what the person’s doing every day and what emotions they’re going through.
Do something similar and if you like it, start asking the question of how you could help them see if you could help with their business. When you add value to that person, they start to get comfortable with you. Now at minimum you could probably raise money and say, “Look, I’m going to raise money to buy the house. I’m not going to run the business.” They’re going to run the business and I’ve been working together with them for 6 months or 12 months and they’re the operator and you bring them in to talk to the investor who wants to know who’s going to protect their money. It’s a form of building a team.

Chi:
That sounds like a great idea.

David:
And I have no doubt you’re going to go do it because you’re one of those people that just says, “That’s not hard.” And that’s what I love about you, man. Like the minute I say that to someone else and they go, “Oh, that would be uncomfortable.” They don’t want to do it. You hear that? You’re like, “That’s all I got to do?”

Chi:
Yeah. Let’s do it.

David:
All right. I want you to make sure that you stay in touch with us because I want our entire audience to see the success story that you are going to be. I have no doubt at all and I want them to emulate your attitude and your approach because I think it’s beautiful, man.

Chi:
Thank you. Thank you very much.

David:
Thank you for being here. We’ll stay in touch. All right. In this segment of the show we like to review our comments on YouTube from you, our lovely listeners, see what you like, see what you don’t like, see what your comments are and just see what you’re thinking. So please continue to leave these YouTube comments for me and we will pull them out and maybe read one of yours on a future Seeing Greene episode.
First comment comes from Selvin George, “I’ve discovered BiggerPockets only two months ago and I absolutely love your content. I’m learning new concepts, strategies and ideas at such a fast pace thanks to you. Would you be able to recommend a real estate investor focused agent in the Berkeley area?” Ooh, this is a good one. Okay, so first off, if you’re looking for an agent anywhere, BiggerPockets does have tools to help you. Simply go to BiggerPockets.com. Look for the nav bar on the top and there’s a little option that says find an agent and we call it that because that’s what it does. You can find a BiggerPockets approved agent on that nav bar for you to use when you’re looking in different areas.
Now Berkeley specifically, you are in luck, Selvin, because my team works in that area. The David Greene team works in the Bay Area, Sacramento, southern California. We’ve got California covered. So reach out to me specifically and I will get you in touch with one of my top agents that will help you find a property in Berkeley. We do a lot of business in that area and we know it well.
Moving on. From Another Channel. “The buyer’s market is not back at all. You don’t get a market like that with a 40-60% appreciation in two years. Only have an 8% drop in prices with 7-8% rates. Maybe the thumbnail that said the buyer’s market is back will work in quarter two of next year.” I like this. Another channel. Here is a little spicy. So let’s talk about this. When we say buyer’s market or seller’s market, what we’re really describing is whether buyers have more leverage or whether sellers have more leverage. And this can be simplified. If every property or the majority of properties are getting more than one offer, the entire dynamic of the deal changes. So when there is a buyer competing with a seller, sort of an even playing field, but usually the buyer has the power if there’s only one buyer because the seller needs to sell more than the buyer needs to buy. The buyer has other options to look at. If there’s only one buyer, that means the seller does not have other options to look at.
Makes sense, right? The minute you introduce more than one buyer into an opportunity, all of the leverage goes to the seller. Now the buyers are competing with each other instead of competing with the seller. So as a real estate broker who runs a real estate team, this is a dynamic I’m always looking for. If we send an offer on a house and we get back a seller multiple counter offer or the listing agent tells me there’s other buyers, I’m usually leading my client more towards finding another house unless they love it because we don’t want to be competing with other buyers. If I submit an offer and only one counter comes back, meaning we’re the only person that the listing agent is negotiating with, I like it. It means we have the power. That’s all that a buyer’s market means.
I think that Another Channel’s comment here, and I’m saying Another Channel because that’s the name of the person who put this comment in, is saying that the prices have not adjusted enough to where we should call this a buyer’s market. I think that what they’re trying to say is that the value of the properties is still too high. We went up by 40 to 60%. We’ve only gone down 8%. So that’s not a buyer’s market. Well, what I’m saying when I talk about a buyer’s market is an opportunity where buyers can get a better price. They’re not competing with other buyers. Now if the market hasn’t corrected to where another channel thinks that it should, that’s a completely different conversation. I’m not sure how we even determine that.
Here’s my problem with the comment. When you say that prices have gone up 40 to 60%, but they’ve only gone down 8%. Well first off every market is different. That’s not applicable for the entire country. But second off, the reason that I think prices went up 40 to 60% is because we added 80% of the money in existence to the supply. We’ve increased our money supply by almost doubling it. It’s ridiculous how much dollars we’ve added to what’s going on. So of course that’s going to make asset based prices go up. That would make sense. That’s inflation. So the prices haven’t gone up inherently. They’ve gone up because the value of the dollar has diminished. So if they went up 40 to 60% but inflation was a 80%, then they could have gone up even more. And if they’ve gone down 8%, you can’t compare the 8% to the 40 to 60 they went up. You have to compare the 40 to 60 to how many dollars were in supply before.
I understand this is getting complicated. I’m not trying to make it confusing. My point is when the government messes with the money supply like they have been, it makes it very difficult to know what anything is worth because what a dollar is worth isn’t the same as what it was worth yesterday. Just think back to what you were kids, depending on how old you are, how much did things cost back then? Do you guys remember a time when gas was like a 1.30 a gallon? Not trying to make myself old. It’s not like I was running around in a horse drawn carriage or anything, but when I first got my license, gas was less than $2 a gallon. We actually used change for stuff. When I was a kid you could save coins and it was a meaningful thing. You could go buy a GI Joe with quarters that you had saved up. Quarters mattered. I don’t think coins matter at all. We almost forget that they exist. We don’t even use hard money like that anymore.
So Another Channel, I appreciate what you’re saying. I would probably disagree with you that the buyer’s market is not back. I do agree with you that it’s because we have a 7-8% rate increase that has caused the prices to go down. The buyer’s markets are not based on price in neither a seller’s market. A buyer’s market or a seller’s market is indication of who has the leverage in that negotiation, not the price point that the negotiation is starting at. If you think prices are going to keep going down, I hope they do. I’d love that. I’ll buy a whole bunch more real estate if that happens. But if they don’t go back down, I’m not going to miss the boat because I was waiting for something that probably isn’t going to happen. I’m still buying the best deals I can in the best areas I can, getting the best deal that I can and paying the best price that I can and then waiting. And inflation tends to do when inflation does.
All right. Our next and last comment comes from Gator Gator. “Buyer’s market? You mean banker’s market? I can’t afford the higher rate just like I couldn’t the seller’s, higher price. Landlords, cash buyers and banks control this market.” All right, Gator Gator, I can understand the frustration that is clearly seeping through your comments here. What you’re saying is, “Well, when rates were low, I couldn’t afford the house because the price was too high and now that rates are high, the prices come down, but I can’t afford the house because rates are high. I just can’t ever afford a house.” And here’s what I would steer you to. There’s a reason this is happening, okay? It’s not a conspiracy that the world has against investors to keep prices high so we can’t buy houses because you know who else has this same problem? The people that are trying to buy a house for themselves to live in. The people that are crimping and saving, trying to get every dollar they can so they don’t have to rent.
You know who else has the problem? Renters whose rents keep going up as home prices keep going up and they have to keep paying more than before. This problem is universal. We all have the same thing. Housing is too expensive. Now rather than getting mad about it, I would advise you to ask the question why? Investigate. Go a little deeper. Get your Batman on, the world’s greatest detective. All right, let’s actually ask Batman. Batman, what do you think is going on with high home prices? I’m glad you finally asked. It’s really an issue of supply and demand. There are not enough properties and too many people to want them. A simple understanding of economics would bring a lot of light to the situation. And I like your green light, Dave.
There you go folks. You heard it from Batman himself. Prices are too high because there are not enough homes and too many people that are trying to buy them. Interest rates going up obviously does dilute the pool of buyers that want these properties because the demand goes down as they’re less attractive with higher rates. But there’s still so many people that want them. The demand has not gone down enough to where prices go as low as Gator Gator would like them. So Gator Gator, you got a couple options. You can invest in a different asset class that has different supply and demand fundamentals that might be skewed in favor of the buyers. Problem with that is when things turn around, those assets are not going to increase in value as fast as real estate does, which is probably what you like about it in the first place. You could look for a market where there are less people looking for the same homes as you. That puts the buyer in even more favorable position as prices will have come down further than areas where they haven’t.
Problem with that, same thing. There’s not as many tenants that want those properties. They don’t go up in value as much in the future and rents don’t increase. What we always find when we come back circling around looking at every single option is the reason that homes are hot and everybody wants to invest in real estate is the same reason you’re here listening to this podcast. You want them too. Everybody does. They are far and away the best investment vehicle that we have so far in this country. And now that podcasts like this and books and blogs are putting the secrets out. This used to be the thing that one or two people in town had figured out and they made a lot of money investing in real estate and everybody else was afraid of it because of leaky toilets. Now we have so much software, so much support, so much information, stuff like the forums on BiggerPockets where people can go in and get questions answered. You don’t need to know the old person in town. The secret is out and with that demand has increased.
So it sucks, but we all got to swallow this bitter pill. We want these homes, so does everybody else. We’re competing with other people. That’s the reality. Keep listening to podcasts like this so that you can get the information and we’ll keep you one step ahead of the competition because that’s what I’m doing.
All right, let’s take a look at a video question. Our next one here comes from Brittany being answered by Brandon.

Brandon:
Hey, what’s up? It’s Brandon Turner. You know the guy from the BiggerPockets Podcast for nine years before I stepped away to grow my business Open Door Capital. Yeah, that’s right. That’s me. By the way, Open Door Capital, the name is changing soon, so keep an eye out and ear out for that. But I am here to steal some of David and Rob’s limelight and answer a real estate question. So here we go. Today’s question comes from Brit in Placerville, California. Here’s what Brit said. “I thought I heard on an older episode of BiggerPockets that you can do a 1031 exchange from the sale of a real estate investment into a syndication like Brandon’s company, Open Door Capital. Is that true that I hear that correctly?”
So here’s the long and short answer. Yes, it is possible. Most syndicators do not allow it. It’s complicated to do it. So for example, in my company, we will take 1031 money, but the way to do it is through what’s called a TIC. And there’s a lot of rules and regulations and red tape and paperwork involved in it. We typically don’t do it unless it’s a million dollars or more. Let’s say you wanted to sell a property, you were in a 1031 exchange. And by the way, for those that don’t know what a 1031 exchange is, it’s basically where you sell a property and then you take all the profits from it, all the money you made, and then you buy a new property with it and then you don’t pay taxes. And that’s a very, very short definition of it, but that’s the gist.
So typically you have to own the property that you’re selling and then you have to own the property you’re buying in the same entity, which is why it’s hard for syndications to do it. There are ways to do it. It’s just a little bit complicated. So yeah, if you have a lot of cash, most syndicators will look into it. If you have a little bit of cash, if you’re putting in 30 grand, you’re going to have a hard time getting a syndicator to help you with that. That said, there is another concept that my CPA Amanda Hahn talks a lot about and she wrote the book Tax Strategies for Savvy Real Estate Investors for BiggerPockets. You can get it at the bookstore. She talks about something called the Lazy 1031 Exchange, and that basically means you don’t do it 1031.
The problem with a 1031 is you only have like 45 days to identify the new property and it’s all this paperwork and all this rules. Instead you just sell the property. Just sell it and then you buy a new one. But when you buy a new one, you buy one that has really good depreciation benefits. In other words, it’s getting a little in the weeds here on the tax side, but in other words, you buy a new property or you can write off a whole lot of it as a loss in year one. Well if you do it right and you’d buy the right to have a property, for example, mobile home parks, one of the things that I buy a lot of have tremendous depreciation benefits and so you can invest in it and then you get this massive loss like year one. And then that can actually offset your gain or a good chunk of it that you would’ve paid on the profit of that investment.
So in other words, it’s like doing a 1031 exchange. You can avoid most or all of your taxes without having to go through the hassle of a 1031 exchange. In which case, if you can invest in them with a syndication company and go completely passive, you can literally move from an active investor into a passive investor, make as much money if not more as you were before, and then do way less work. It’s really kind of a cool process. So yes, it is possible and do it. Going active to passive, that’s fun.
All right, hope that was helpful. I don’t know, am I supposed to say anything else at the end of this thing? I don’t know. I guess I’ll throw it back to David.

David:
Well, thank you very much for that, Brandon, and so nice to see you again. Also shocked me a little bit as you were wearing a pink shirt in this video. Can’t help but notice that you have some little book things hanging from your wall in the background, which you clearly got that idea from me, but I will forgive you for that because you are the reason after all why I am on the podcast now. So nice to see you again, buddy.
Couple things with Brandon’s commentary that I’ll add. One, it’s not called Placerville. It’s called Placerville. That is either Brandon’s ignorance of California real estate, which is frankly unforgivable, or more likely his Northwestern accent where they say big and drag and instead of bag and drag and like a normal human being would. As far as his real estate advice though, that was phenomenal. Something people don’t realize is that you don’t need to do a 1031 to shelter your gains. You can also do exactly what Brandon said by having enough depreciation, which we typically call bonus depreciation when you take it in year one to cover your losses. There’s more than one way to avoid paying taxes on capital gains. That’s what Brandon is getting in.
Now we sort of have a situation for the next five years where bonus appreciation is going to be on a step down system where you’ll only be able to use 80% of that appreciation in 2023, 60%, 2024, 40% in 2025 and so on. So if we do lose bonus depreciation for the near future or permanently, then the 1031 will become more important. So here’s a little bit of advice I’ll give to everyone listening. Look up what is called a Reverse 1031. Assuming you have enough capital in the bank, there is a way, and it’s a little bit complicated. You have to use a qualified intermediary to pull this off, which is not that hard to do. If you email me, I can connect you with the one that I use. Where you buy a property first, but you do it very clearly taking title in this Reverse 1031 fashion where it’s not actually you that ever owns it. You have like a neutral third party that owns it. Then you sell the property that you had to sell and use that money to buy the property you bought as a Reverse 1031.
It’s basically a way of not forcing you to sell a property and identify a property in 45 days. You identify the property first, you put it on contract, you hold it in this neutral third party. Then when you sell your property, you take the gains and put them directly into that and you don’t have to pay taxes. You can roll them over in that fashion. So there are some creative elements of ways you can pull off at 1031 because Brandon and I have both learned the hard way. It sucks when you’re up against that 45 day timeline and you end up making a decision on day 44. It always ends up working out that way. So thank you Brandon. Very nice to see you again. Fantastic advice as always, and you’re looking good getting that sun, man. Hope you’re enjoying Hawaii.

Zeona:
Hi, I’m Zeona McIntyre, BiggerPockets author and investor friendly agent in Colorado. Today’s question comes from Tiffany in Martinez, California. “Newbie Investor here. I purchased my first home with 10% down in 2011. Five years later I sold with a profit of almost 200k. There are two ways I see investing the 200k. Option one, purchasing two short-term rentals or option two, a small multi-family to do medium term rental for travel nurses. I like short-term rental because we can do 10% down and potentially have higher cash flow. I like the river town of Guerneville, but I don’t like that the county requires property management. I’m also considering buying out of state. With multifamily properties and medium term rental, I have my eye on one that needs some work, but the location is great since it is across from the local hospital.
Option two intimidates me a bit because the 20% down payment will eat up all of our cash and we would have to take out a loan for construction, but it has high potential for the BRRRR strategy. It’s currently a duplex, but the upper unit is four bedrooms, so I would love to split it into a triplex. Cash flow is important because I would like to work fewer hours as a nurse, but I also see the value in long term equity. What are your thoughts on how to best invest our 200k?”
Hey Tiffany. I would go with option two purchasing a small multifamily unit for the medium term rental strategy and here’s why. With the looming recession, I am seeing short term rental booking slow way down. I believe this is temporary, but I don’t know for how long. If cash is important to you, I would like for you to have multiple units so the whole building is not vacant at once. With two short term rentals in the same town, you’re subject to the same slow seasons, which could look like two vacant homes and paying the mortgages out of pocket. Winter is likely your slow seasons. So if you’re looking to buy soon, it may be a really slow start.
Lastly, as a nurse, you may have an in at the hospital and have an easier time filling the units. Warning, with interest rates climbing, a BRRRR is not a strategy I would recommend for the newbie. This would be great to learn through a partnership with somebody experienced down the road. You can always wait for a more renovated or up to date layout or look out of state in a more affordable market. With 200k, you can get a nice quad and have money left over for furnishing in many markets. If you want to learn more about the medium term rental strategy, we just released a book with BiggerPockets called 30 Day Stay: The Real Estate Investors Guide to Mastering the Medium Term Rental. You can pick it [email protected]/pod30. Now I’ll pass you back to David.

David:
All right. Thank you, Zeona, for your advice there. I’ve got a couple books as well. Long Distance Real Estate Investing, The BRRRR Book, the Real Estate Agent Series Sold, Skill and Scale will be coming out early next year. And then I’ve got another book in the works right now that’s going to be an overall banger. It’s going to be on wealth building from a holistic perspective, including real estate, but not only real estate. And I think it’s going to be amazing. I also noticed that Zeona pronounced Guerneville as Guerneville, so she’s now in Brandon Turner status as mispronouncing California cities, which is very funny because you rarely ever hear about these cities getting mentioned. I’m sure that that was the first time either of them had ever even read those names.
Fun fact here, the city of Martinez where Tiffany is residing in is like 30 minutes away from where I’m sitting right now. I sell houses there all the time. So Tiffany, if you don’t have an agent, reach out. I’d love to help you. Here’s my advice for you. Martinez and a city right next to it, Concord, which I’m sure you’re familiar with, have really, really good options for house hackers. So these were homes that were built a long time ago. They’re older cities. Fun fact, the city of Martinez is actually responsible for the name of Martini. The martini was developed in Martinez at a bar there and that’s why it’s called that. Pretty cool, right? Well, they have these homes that were built a long time ago and have had extensions added onto them. So they originally 1100 square feet, then they built up, so they have another floor. Then they built out, so they have a third thing and they work really good for splitting one property up into several different units.
I can sense a little bit of analysis paralysis going on as you’re trying to go through your options. I’ve got option A, here’s all the great things, here’s the bad. Same for option B, same for option C, and just wheels are spinning. Trying to make the perfect choice to invest your 200 K. Take some pressure off. Buy one with a primary residence loan. Put three and a half percent down, put 5% down, put less of your money down. Move into it, rent out the other two units in that property. Then move out and do the same thing again next year with another primary residence loan. The house that you just moved out of becomes the rental that you’re in analysis paralysis trying to decide if you want to buy. The cool thing is you don’t have to make the perfect choice when you’re only putting 5% down. When you’re putting down 20 or 25%, you got to get it right. You got to get that ROI as high as possible.
You take a lot of pressure off yourself by buying a house as a primary, moving out in a year and making it into a rental. You could do this and you could actually watch, as crazy as this sounds, you could watch your savings grow from 200 to 220 to 250, to 280 to 300 at the same time that you are buying properties because the down payment on a primary residence is less than the money that you can save working as a nurse. So you get the best of both worlds. You get properties that become rental properties with low down payments and you continue to save your money so you get all the security that comes from having money in the bank with the long term benefits of real estate.
Look, it’s staring you in the face. I’d love to help you with this, but if it’s not going to be me, this is a strategy that I would highly recommend that you pursue. You can buy a house a year for the next 10 years, end up with 10 rental properties, plus whatever the heck you want, all while growing that savings at the same time. All right. We have time for one more question, and in this one of my original mentors, Pat Hyman, answers the questions from Kyle in New Jersey.

Pat:
What is up everybody? Pat Hiban here. I have a question from Kyle out of New Jersey. Kyle has done one flip. He says, “I’m 21 years old looking to get into real estate. I work in a heating and air conditioning business and a part-time agent. Did my first flip and I did really well on it. What advice you have for your young guy who wants to do more?” Well, it seems like you got the secret sauce about the flip. I would emulate exactly what you did on the first flip and do it on the second one. I would just keep building. In my book, 6 Steps to Seven Figures, Chapter 5, I talk about building upon a success, and if you’ve had a success, build on that success. Do the exact same thing. Don’t try to start something new.
His second question is, “Do you have any tips on finding a mentor?” I love this question. Mentors and mentees are a fascinating subject, and I think the best thing you could do for finding a mentor is just kind look out there. Look who’s doing it. Who’s doing the flips? Who’s the biggest real estate boss out there? Who’s the biggest landlord, who’s the biggest real estate agent? Call them up. I say call them. Don’t woos out and email them or try to IG them. Call them and say, “What can I do to earn a cup of coffee with you?” And then bite your lip. Hold it. Don’t answer. Let them answer, “What can I do to earn a cup of coffee with you? Or earn a half an hour lunch with you?” And they might say something like, “Hey, donate to my charity.” Or they might say… I don’t know. They could say anything, but you’re giving them an option and get together with them and follow up.
Now, the key with any mentor is whatever the advice they give, act like you are massively paying attention. Write it down. And then when you leave, go home and immediately take action on what they told you. Because if you don’t take action, they’re going to ignore you next time you call. But if you take action and you go, “Hey, I want to let you know that those three books that you recommended I’ve bought, I’ve read them through, I’ve highlighted through. They’re amazing. These are my favorite parts. Thank you so much for that. Can you give me three more books?” They’re going to give you three more books to read. Or whatever it is. Whatever they tell you to do, show them that you actually move forward on it. Huge importance.
“What would your thoughts be on someone thinking of starting a brokerage property management company in the state of Florida next few years?” I don’t know about how the state of Florida works compared to New Jersey, but I would question, why would you do that? Why wouldn’t you just do it in Jersey if you’re from Jersey and Jersey upside down and out and your business is in Jersey and the people are in Jersey? If you don’t know anybody, I think it’s going to be quite difficult to go down there to Florida out of the blue and just open up a brokerage, truth be told. Especially if you don’t have any income out there. Now, back to David Greene.

David:
Doesn’t Pat just have a voice for radio? “And now back to David Greene.” It’s like he was made to do that. A lot of people don’t know this, but Pat was at one point the top agent in all of RE/MAX and then later the top agent in all of Keller Williams, meaning he sold more houses than every other agent in each of those companies when he was there. He’s also one of the founders of GoBundance and an overall great dude.
All right. I don’t think I have anything to add to that advice. The only thing I might say different is I’m guessing, now this is me speculating, that the reason the caller wanted to move to Florida open a brokerage is they see the population is moving there and they’re thinking, “Oh, here’s some opportunity.” I think what Pat was getting at is that opportunity is more than just demographics and what the numbers are saying. It’s more about relationships. And if you don’t have relationships with people in Florida, you’re not going to find people to do business with you. I thought that that was a good point.
The way I tend to think, if you’re a single person, you don’t have a family, you got to worry about, you can go do whatever you want. Build one in New Jersey at the same time you build one in Florida or build one in New Jersey, then start one in Florida, because the skill sets are going to be very similar. You just got to have people in place to run each one. I’ll also say this. If you’re a person who runs a halfway decent property management company, you’ll get all the business. Very, very, very, very, very difficult asset class to succeed in. It’s very hard to keep your attendance happy and your landlords happy. Pretty much everyone hates you all the time. But if you can solve that challenge, if you can overcome that obstacle, you’ll get all the business.
And the last thing I’ll say when it comes to property management is most property management companies don’t make good revenue from their model. Their margins are incredibly slim. Their turnover is very high. You’re constantly training new employees and hiring new people who get burned out because everyone’s angry at them from both sides and there’s not a lot of money to be made. You make your money by the relationships within the business. What I mean by that is you have the landlords who will let you sell their house if you’re a real estate agent and you make money on the listing commission or they will sell their house directly to you if you’re an investor before they put it on the market. So most people that do well as property managers are not doing it for the money. They’re doing it for the relationships. So there’s something there. Like Pat was saying, focus on relationships if you want to make money. I know it sounds counterintuitive, we tend to think money or relationships, but the best money comes from the best relationships.
All right, that was our show for today. What did you guys think? We had appearances from lots of people. We had Brandon Turner, Zeona McIntyre, Pat Hiban, Bruce Wayne. There was a lot of different cameos that we had in today’s show. And I want to know, did you like this or do you prefer the shows where it’s just me? Or do you like a little bit of a mix up? Sometimes we bring in some backup for me, sometimes it’s just me, right? Even Batman has a Justice league that comes in at times. Marvel fans, please don’t be mad at me for referencing DC. It’s all just an analogy.
Lastly, please subscribe to our YouTube channel. Just hit that little subscribe button and then leave me a comment telling me what you thought about the show. What would make it better? Do you want to hear more jokes? Do you want to hear more accents? Do you want to hear different topics? Are you like, “Nope, just the facts, man. I just want to know what’s the information and leave out all the fluff.” Tell us what you like and we will do our best to cater the show for you. If you’re listening to this on an app where you listen to podcasts like the Apple Podcast app or Spotify or Stitcher, please leave us a five star review there as well. Those help us a ton.
I want to thank everybody for joining me today. I love making these and I love helping you all make money. And as a way of showing appreciation for all of you, we are having a Black Friday Cyber discount for all of the BiggerPockets books. You can go to BiggerPockets.com/store and get 60% off certain titles in the BiggerPockets book store. I’ve got a lot of books in there. Long Distance Real Estate Investing, BRRRR, Skill, Scale, Sold, all of it. As well as every single other person that you heard on today’s show, they are all authors and they’ve got books. Grow your knowledge and grow your bank account. If you want to follow me online, I’m @DavidGreene24 on Instagram, LinkedIn, Facebook, even YouTube now. I have a handle @DavidGreene24. So follow me there. Let me know what you thought of the show and leave us a comment. Thanks everybody. I’ll see you on the next one. If you’ve got another minute, listen to another BiggerPockets video.

If you are like me, I suspect you’ve heard a good number of gurus, or even seasoned, well-meaning investors, give the following advice in some form or fashion:

“Systems and policies are essential. If you want a business that works, you need to have systems and policies. You need to have those systems and policies, and you need to follow those systems and policies because systems and policies are absolutely essential to have and follow. Systems and policies!”

While it is certainly true that systems and policies are extremely important as I will elaborate on further shortly. Of course, just saying that isn’t particularly helpful. The “how” part is often missing, unfortunately. So, in this article, I will at least sketch out an outline of how to approach building systems and policies for real estate investors.  

Why Systems and Policies Are So Important

First and foremost, the reason systems and policies are so important is because it’s a massive waste of time and energy to simply reinvent the wheel over and over again. Indeed, even the simple act of making decisions can be exhausting, and so if there is a solution ready to go for a given problem (i.e. a system or a policy), you can execute that solution with little thought and devote your mental energy to something else. 

Systems also make it easier to delegate tasks, as employees and contractors won’t have to continually ask for directions. They also allow you to maintain quality control and standardize outcomes throughout the various parts of your business. Furthermore, they make it easier to stay on the right side of the law as treating someone (particularly a prospective or actual tenant) differently than another one could amount to a violation of Fair Housing.

But the most important reason for systems and policies, at least in this author’s humble opinion, is that they lay the groundwork to scale your business. It’s important to remember scaling is not growth. Instead, scaling is what facilitates growth. Investopedia defines it as follows,

“Scalability refers to the ability of an organization (or a system, such as a computer network) to perform well under an increased or expanding workload. A system that scales well will be able to maintain or increase its level of performance even as it is tested by larger and larger operational demands.”

Growth for the sake of growth is the philosophy of cancer, which, left unabated, will eventually kill its host (the business). Only through scaling (which relies on systems and policies) can the foundation be laid to “maintain or increase” the “level of performance even as it is tested by larger and larger operational demands.” 

Only through scaling can you truly and sustainably grow a business. And even if you don’t want to grow that much, systems and policies will make your life a whole lot easier, shrink your liability and increase your profits.

The Key Point To Remember

I can’t think of anyone who has actually said this, but I do think there is an underlying assumption that many entrepreneurs believe you build your systems, and then you build your business. Or perhaps, you start off by building your business by going from one whim to the next, and then you realize you need systems, so you add those, and then you go back to building your business.

If I could ensure that this article accomplishes one thing, it would be to permanently remove this idea from your mind. 

Business does not work in such a sequential manner. Instead, you should be building your systems and policies in lockstep with your business. It’s an iterative and never-ending process. As you expand your business, you should be expanding and updating your systems and policies. It never ends. Don’t expect it to.

Learning and Borrowing From Others

Of course, that doesn’t mean you need to start from scratch and feel your way through the dark to only learn from hard-fought (and expensive) experience.

There are plenty of good sources to learn from, including here at BiggerPockets. You should be regularly reading articles (on real estate and business in general), reading books, listening to podcasts like the BiggerPockets Real Estate podcast, and attending meetups and conferences. You should definitely be involved at your local Real Estate Investors Association or BiggerPockets meetup groups and ask seasoned investors about their various systems. Trust me, people love to talk about themselves. They’ll open up.

There are also four books, in particular, I would recommend reading when it comes to systems and policies. Any business owner should read through these:

The E-Myth Revisited by Michael Gerber

This book outlines the importance of thinking of your business like a franchise owner would, creating the policies that could be handed to someone else in another market to replicate. 

The Checklist Manifesto by Atul Gawande

Gawande highlights the incredible improvement all sorts of organizations have made by simply having and following checklists for recurrent tasks. You should definitely start making these. We have developed checklists for creating scopes of work, screening residents, moveouts and deposit disposition, analyzing properties, due diligence, and financing properties, etc. Having these and following them dramatically reduces mistakes and oversights.

Traction by Gino Wickman

Wickman goes over creating an EOS (Entrepreneurial Operating System) that covers every part of your business and then hones and streamlines them as best as possible. 

Scaling Up by Verne Harnish

Harnish might as well take the torch from where Wickman leaves off when it comes to scaling. He particularly highlights the importance of creating key performance indicators (KPIs) to monitor and improve performance throughout your company. 

As a bonus, I would also add Getting Things Done by Gary Allen to systematize your own life. 

Of course, if you are a new investor, you don’t need to read all of these before you get started. But I would definitely get on reading them as soon as possible.

Laying the Groundwork

As soon as you can, you want to start building systems, even if that’s before you get started. (Although you should not use a lack of systems as an excuse to procrastinate, again, building systems is a never-ending process.)

You should start by identifying your core processes. As Gino Wickman notes in Traction,

“It’s surprising how productive this step is. This exercise creates clarity of thought that is then put down in black and white…just by calling your processes by a consistent name, you reduce complexity and increase efficiency in the organization.”

So, for example, in our business, we have the following core processes. Yours will likely be a bit different, but this should make it clear what you are aiming for.

• Acquisition
• Financing (private loans upfront)
• Refinancing (bank loans on the back end)
• Accounting
• Rehab
• Turnover
• Property Management
• Maintenance 
• Human Resources (hiring, firing, etc.)

We have then blocked these into several departments. So, I oversee acquisition and refinancing. My brother oversees human resources and assists in acquisition, and my dad is in charge of finding private lenders (financing). Thus, in our main office, we have four other departments that report to us:

• Property management
• Maintenance
• Rehab and Turnover
• Accounting

I don’t have the space here to go over each component of each department, so we’ll hyperfocus on one aspect to give a general idea. In this case, we’ll look at how a typical turnover is handled through the property management and rehab departments.

Our process is as follows, with the department in charge noted in parenthesis.

1. Visit the property and evaluate condition and damages (Rehab)
2. Create a scope of work for repairs during the same visit (Rehab)
3. Do a deposit disposition based on damages noted (Management)
4. Send that scope of work to one or more contractors (Rehab)
5. Evaluate the bids and make a decision (Rehab)
6. Verify work is completed and take marketing pictures (Rehab)
7. List property (Management)

This process requires several checklists and policies embedded within it. For example, we have a scope of work template in Excel for writing up scopes. We have a bid template in Smartsheet we send out to contractors. We have a deposit disposition template as well as a master availability list that shows everyone in the organization where things are at as the property proceeds from the management department to the rehab department and back.

Some of these templates are available free of charge. BiggerPockets itself has a long list of landlord forms, including applications and leases you can get for free. If you are a real estate agent, your brokerage and the MLS should also have such forms.

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As you standardize your processes, you should also standardize your materials. Use the same paint colors (or just a few), vinyl, countertops, appliances, etc., for your rehabs and turnovers. This will make it simpler to acquire and replace these items and also make it more likely you can simply make repairs or do a touch-up rather than a full replacement.

Now, this probably sounds like a lot. It is. You may be just starting, and the idea of having departments could sound ludicrous to you. That’s completely understandable. It was how I would have felt not too long ago. Remember, building systems is an iterative process. Build your systems for you in the meantime, and soon enough, you will be hiring others who you will want to make sure to follow those very same systems. Trust me, you will need to be continuously building and changing your systems and policies as you grow.

Indeed, we have a whole smorgasbord of old Google sheets and Word documents in what we refer to as the “Google Docs Graveyard” meandering about the cyberspace. There will be plenty of false starts and curveballs no matter how well laid your plans are.

The Iterative Process of Building Systems and Making Policies

Again, there’s only so much you can do upfront. As you go, you will run into all sorts of problems that you hadn’t thought of nor planned for. These unique problems, however, are great opportunities to systematize your business. 

Indeed, with each new decision you make, you should attempt to create a system or policy out of that. Don’t just fly by the seat of your pants as problems get thrown at you. Yes, it takes more time in the beginning to systematize and/or create policies. But this is a Quadrant II activity (important but not urgent), as Stephen Covey discussed in his classic book The Seven Habits of Highly Effective People. These are the tasks that reduce the amount of time you need to spend on such issues going forward. 

These Quadrant II tasks “maintain or increase” the “level of performance even as [your company] is tested by larger and larger operational demands.”

These Quadrant II tasks are the ones you need to prioritize.

To give you an idea of how this works, here are a few examples we have had to deal with and the solution we have come up with:

Problem 1: Cockroach infestation at a house three weeks after a tenant moves in.

Policy Solution: If infestation is within the first month of tenancy, it’s on us (they were likely there when the tenants moved in), afterwards, the cost is on the tenant.

Problem 2: Tenant constantly pays late, clogging up management resources.

Policy: Allow for one payment plan per year. Afterward, an eviction notice will be filed, and the tenant will either need to pay the whole balance or set up a time to leave.

Problem 3: A maintenance order takes way too long, and it was our fault.

Policy: In such cases (when it’s not so egregious, we would consider a rent discount), we offer a gift card to their favorite restaurant (which we ask for when they sign the lease) to smooth things over.

Of course, not everything can be systematized or made into a policy. On a recent portfolio purchase, a tenant gave notice to leave to the seller while we were under contract. Their lease, however, went for another six months. The seller had been soft about enforcing lease terms, so the tenant thought it would be fine. And they just got a house under contract to buy and couldn’t afford both the mortgage and the lease. In this case, we asked the seller to prepay two months of their rent, and we would call it good and let the tenant out of their lease. He agreed.

You can’t really create a policy for such a specific situation, but you can for many. And you can create broad outlines of how to respond to really unique circumstances (i.e. if, while under contract, the seller wants to let a tenant out of their lease, we expect to be compensated for it). So, while it’s impossible to cover every scenario, and you certainly need to leave room for flexibility when it comes to many decisions, you can still systematize and make policies for a lot of ground. 

And that will go a long way to scale your business and facilitate future growth (and continued sanity). 

Key Performance Indicators

As you go, you will want to start developing KPIs for each major area of your business. Broad indicators for your company are pretty simple and should include things like:

• Gross Income
• Net Income (after operating expenses)
• Cash Flow (after debt service)
• Change in Income Year over Year
• Occupancy Rate
• Delinquency Rate
• Units Bought this year

But these indicators are very broad and don’t tell you a lot about why things are the way they are. Thereby, you also want to nail down KPIs for managers, or in the high likelihood that you don’t have managers, departments, or areas of your business.

While it’s true that you may not know whether the number you get with any given KPI is good or bad, you know what’s better and what’s worse. So you know which direction things are going and also have something to aim for, which clarifies your (or your manager’s) goals.

Here are some examples that we track for different departments:

Acquisition

• Properties Acquired
• Units Acquired
• Average All-in Price per Property
• Average ARV
• Rehab Estimate
• Rehab Actual/Rehab Estimate

Turnover

• Total Rolling Days of All Properties in Turnover (at end of the month)
• Average Days from Possession to a Finished Scope (for month)
• Average Days from a Finished Scope to Market Ready (for month)
• Projects Completed that Month
• Average Cost of Turnover

Property Management

• Deposits in Month
• Deposits Minus Moveouts
• Percent of Potential Rent Collected (i.e., delinquency)
• Lease Renewal Percentage
• Occupancy Percentage
• Average Rent Increase
• Total Rolling Days of Properties Available for Lease on Market (at end of the month)

Maintenance

• Closed Work Orders (in month)
• Work Orders Outstanding/Closed Work Orders
• Average Time to Complete Work Order (in that month)
• Number of Work Orders that took Longer than 48 Business Hours to Visit
• Call Back Percentage

Those are, of course, just what we do. Yours don’t have to be the same. But they do give you a good idea of how things are going. And while monthly anomalies shouldn’t be surprising (particularly with things like “Average Cost of Turnover”), these aberrations should work themselves out over the long run and give you a good idea of how things are going.

And if you do have managers, they are a great way to evaluate their job performance without micromanaging or blindly trusting them.

One last note here, in order to track your KPIs effectively, you need to have quality accounting. In addition, in order to sell at top prices and get banks to lend to you or just know whether you’re solvent, it’s critical to have your accounting in order. This is not something to skimp on. Make accounting a priority and either learn accounting or, better yet, outsource or hire someone capable of doing it.

I can’t tell you how many times I’ve seen small investors selling a property with horrible accounting. Such a state of affairs not only reduces the value of their asset but it makes it all but impossible to scale.

Conclusion

Systems and policies are essential for scaling, and scaling is essential for growth. But again, the biggest takeaway here is not just that systems and policies are good and necessary, it’s that building them is an iterative process that never ends. 

Don’t be scared or overwhelmed by the thought of them. Every entrepreneur starts with zero systems in the same way every real estate investor starts with zero properties. But in the same way, you don’t intend to stay at zero properties, you should intend to grow your systems alongside your company. Back forth, around and around, forever and ever.

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

CNBC’s Diana Olick, joins ‘Squawk on the Street’ to discuss existing home sales numbers slowing, year-over-year price declines in home sales, and the factors weighing on higher-end home buyers.

Ashley:
This is Real Estate Rookie episode 236.

Pace:
People confuse debt and ownership, meaning I can take over payments on a house and people go, “How? Don’t you have to pay off the debt in order for you to become the new owner?” No, I don’t. Think about it this way, if I go into a grocery store and I use a credit card and I buy a bunch of groceries, who’s the owner of those groceries if I use a credit card to buy them? How do you know that? If I use somebody else’s money, how am I the owner of those groceries?

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

Tony:
And welcome to The Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. And I usually read a review at this point, but I didn’t pull one up. So I’m just going to ask you guys, leave us an honest rating and review on whatever platform it is you’re listening to and we’ll give you a shout out on the show. So Ash, we have an amazing guest, one of my favorite episodes we’ve done recently, we have Pace Morby on the podcast, and this was an encyclopedia of everything subject two.

Ashley:
And we are going to have him back on and do a live workshop. So we’re super excited about that, too. But Pace talks about creative financing, so doing subject two deals, and seller financing, breaks down what the difference is between them, who is the motivated seller to actually want to do these deals with you, how to negotiate, what the steps you take to actually get these deals done.

Tony:
He also talks about how a truck with over 300,000 miles is what prompted his whole journey into creative finance. It was a really great story, so make sure you listen for that as well.

Ashley:
So once again, we are live from BP Con. We are taking every advantage and opportunity of getting to meet people in person and get them into our interview room here that we have set up that is actually sponsored by Pace. So thank you very much for that, Pace. Welcome to the show. Thank you so much for joining us on our morning talk show, or evening talk show.

Pace:
This is amazing. Look at this backdrop you guys have. They made this just for you guys.

Ashley:
No, it’s just for you. All the other guests have come in here, it was nothing. Then they brought this all on when you came in. But for anybody that doesn’t know you, just tell us a little bit about yourself and actually how you got started into real estate.

Pace:
Oh, great question. So I came from a family of 12 kids, so 12 kids in my family, I’m number three, nine kids underneath me, same mom, same dad. And when I was growing up, my parents were in the construction trades. I learned how to work really hard, blue collar background, and my dad could never afford the house, the size of the house, that he needed to house all the kids he had. So he had a job as an accountant and then moonlit as a contractor. And so my whole life growing up, my parents lived in sub two houses, seller finance houses, lease option houses in order to afford those houses. So that was like my background in real estate and creative finance. But when I got older, I became a contractor and I was Opendoor’s main contractor for seven years.
So I opened up their markets and that’s how I got into construction and got into the real estate world. And one day somebody comes up to me and they go, “Pace, why aren’t you in real estate?” I’m like, “What are you talking about? I am in real estate.” And they go, “No, no, no. Opendoor’s in real estate, you’re a service provider.” And I was like, “Oh my gosh,” and it hit me right in the chest. And I knew that I had to make a deviation into doing projects and construction and stuff for myself. And so luckily I met some people at some meetups, a lady named Brittany, and she says, “Here’s how you do it, here’s how you send out postcards, here’s how you do this.” And I got my first deal 10 years ago, roughly, and it was through a postcard, it was a wholesale deal, and that’s how I got into real estate.

Tony:
So we talk all the time, Pace, about the power of networking and building relationships, and we were just talking about this before we started recording as well, and something we tell all of our audience members is that if you want to get started in real estate investing, oftentimes it’s such a scary and lonely path, and the best way to get past that is by networking. And it’s so funny that the person that you met at a meetup was the person that kind of changed your life trajectory because the same thing happened to me. I met a guy at a meetup, we invest mostly in vacation rentals, and I met a guy at a meetup and it was that guy that introduced me to Airbnbs. Now we’ve got a portfolio across multiple states. So it’s like you never know where that one connection might take you.

Pace:
Yeah, it’s empowering. So when you’re looking at this path of real estate, if you look at it like everybody only has one flashlight, I can only light the path in front of me so far and so I’ve got to find other people with other flashlights on the same path. And so I’ve got to just put people on that path in front of me that have a flashlight too, that light it just far enough, and you’ll get far enough down your path, you’ll get your first deal, your second deal, and you turn around, you look back and you go, “I have never made a dollar in real estate by myself.” Have you guys ever made money in real estate by yourself?

Ashley:
Actually, no.

Pace:
So think about that. If you guys are at home, you’re a rookie, you’re a newbie, you’re just starting in here, if you’re consuming content, no matter how much content you take in or any education you take in, you have to apply that with other human beings. So you have to network, it is an absolute requirement. It’s not a suggestion, it’s not a great idea, it is an absolute requirement. Every single deal we’ve all done has had other people involved that you’ve had to network with in order to get those deals done. Unless you guys… have you ever done a deal where you’re like, “I didn’t need anybody else?”

Tony:
No.

Ashley:
No.

Pace:
Isn’t that weird to think about?

Ashley:
It is.

Pace:
Nobody talks about it. But two weeks ago I was like, “Oh my gosh, I’ve never made a dollar in real estate by myself.”

Ashley:
So in the beginning, when you mentioned your parents talking about how they were able to purchase properties, you mentioned a couple terms, subject two, can you talk about those different creative financing deals and explain what those are?

Pace:
So most people look at buying a home, you got to go through a bank. You go down to Chase, Bank of America, Quicken Loans, and you apply, you get a loan and you acquire a house, right? It’s based on your credit, how much cash you have and your credentials, like how long you’ve been at your job, what kind of job do you have, your degree, those types of things are important, credit score, blah, blah, blah. My parents, no matter how good their credit score was, my dad’s income during the day was a… he was a CPA, so he made $60,000 a year, but he had 14 people in his household. So how is my dad going to afford living in a eight bed, five bath house, making $60,000 a year? He’s not.

Ashley:
And paying for all the food, clothes, everything else.

Pace:
Right. And so what my dad did, bless his heart, he would come home from his CPA job and then he would run a painting company, but his painting company was all under the table, so it was non-documented cash. So a bank’s not going to look at that and go, “Okay, you’re approved for a bigger house.” So what my dad did is he went directly to the owners of properties, he goes, “Oh, there’s an eight bed, five bath house, or a seven bed, four bath house, my kids and my wife and I could live in there.” And my dad would go to them and say, “Why don’t we just work out a deal, instead of me going to the bank and applying, you become my bank?”
And I didn’t really truly understand this until later in life, but I realized that creative finance, like the ability to buy anything without your own cash, without any credit and without credentials, applies to everything, even things outside of houses. And it wasn’t until I was a contractor, like I mentioned earlier, that it really hit home with me. My dad didn’t teach me this stuff. I just knew we lived in bigger houses than my dad could qualify for and my dad would stay, say stuff like, “Own or carry, sell or finance,” and because I was a teenager and a knucklehead, I didn’t take the time to learn it. And my dad also didn’t utilize those strategies as an investment strategy, he only used them to get his family into a bigger house.

Ashley:
It was more survival more, really.

Pace:
Survival. So when I became a contractor, I have this story that really hits home of what seller finance is. It’s my F-150 story. Have you guys ever heard this story? It’s cool.

Ashley:
No, I don’t think so.

Pace:
All right, great. So I have this F-150. I’m a contractor. My guys are driving the truck. The truck hits 320,000 miles. Okay, well now I’ve got some problems. This truck’s starting to have issues. So I go, “Okay, well I’ll take it out of my fleet and I’ll throw it out on Craigslist and I’ll sell this thing and I’ll take that money, go buy a better truck, something with less problems.” So where do we go when we want to find the value of a car?

Ashley:
A Kelley Blue Book.

Pace:
Boom, Kelley Blue book. So it’s like Zillow for cars, right? So I go on Kelley Blue book and the truck says it’s only worth five grand. And I’m like, “Okay, well if I sell my truck for $5,000 on Craigslist, Facebook marketplace, Offer Up whatever, am I going to get $5,000?”

Tony:
Probably not.

Pace:
No. Because somebody’s going to come along and be like $3,500 all cash today, as if like… what else were you going to pay with besides cash? You know what I’m saying? So I decided not to put it up for sale for five grand, I put it up for sale for $10,000 because I’m a belligerent seller. And I go for 10 grand and I’m thinking, “I don’t need all the buyers. I just need one buyer that would pay 10 grand.” Well, three months goes by, I don’t sell the truck. So my wife comes in to me, she goes, “Why don’t… you know how your dad used to buy houses where he would just get the sellers to let him make payments? Why don’t you sell your truck on payments?” And I’m like, “Oh my gosh, that’s so freaking genius.”
So I go back to Craigslist where I had the truck for sale and I changed one thing and it was, “F-150, will take payments.” So did I sell that truck for 10 grand? I sold it for $12,500 and I let the buyer just make monthly payments to me. And I was like, “Oh my gosh, I did this with a truck, why can’t I do this with a house?” Now you might ask yourself the question of, “Well, why did Jose,” the guy who bought the truck from me, “why did he pay $12,500?” I also learned that the value in anything is not based on the purchase price. The value, this is important for people that want to learn creative finance, the value of anything is based on what you can do with the thing you bought.
So he looked at that truck, he made me $350 payment, but he turned around and earned $7,000 a month in a painting business he used for that truck. So did he overpay for that truck? No, he didn’t have to use his credit, he used a thousand dollars down payment to get into a truck he couldn’t otherwise qualify for and I was like, “I need to be doing this in real estate all the time. I can go acquire anything I want this exact way.” So I call my dad and I go, “Is this what you’ve been doing?” He goes, “Yes, every single house I bought.” And so I go, “Well, what about people that have payments on their cars or on their house?” He goes, “Oh, you can just take over the payments.” I’m like, “You’re joking me. I can just take over somebody’s payments on their car?”
And he goes, “Yeah, go to lease trader.com. You can take over somebody’s lease right now. In two minutes, you want a BMW X5, you want a G wagon, you go to lease trader.com right now and you can take over somebody’s G wagon, just take over their payments.” And I was like, “You can do this with houses?” And that’s what subject two is. Subject two is a seller sells their house to you by you just taking over their existing payments. You don’t have to qualify, you don’t have to do anything, just take over their payments. And seller finance means that the seller had the house paid all the way off, and they create an agreement with you that says, “Hey, just make the payments to me.” And I was off to the races and we’ve now, just this year, we bought 600 multifamily deals with seller finance… or with creative finance, and we bought about 70 single family homes all through creative finance, just this year alone.

Ashley:
That’s awesome. Congratulations.

Pace:
It’s pretty cool, pretty cool.

Ashley:
When you had that conversation with your dad, were you already purchasing property, you were investing in that?

Pace:
I was doing some wholesale.

Ashley:
And how did that pivot and change for you?

Pace:
Everything. Because there’s a KPI, if you guys don’t know what the word KPI means, it’s key performance indicator, the number one KPI I looked at in my business at the time as a acquisition person buying deals was cost per contract. So how much money in marketing did I have to spend in billboards, TV, radio, postcards, letters, SEO, PPC, whatever it was, what was my cost per contract? And if you’re a wholesaler or you are somebody out there trying to fix and flip, the average cost per contract when you’re spending money on advertising is about seven to $10,000 depending on what part of the country you’re in.
So you go, “Okay, I want to go out and find my own deals direct to seller.” Well, you’re going to have to spend seven grand in marketing. That’s daunting and scary for somebody that’s brand new. But with creative finance, my cost is zero. And so for me, when I was wholesaling, I go, “Oh my gosh, I can go to other people’s sellers,” like a real estate agent or another wholesaler and go, “When you have a seller that wants too much money, I’ll buy it on seller finance, and when you have a seller that has no equity, I’ll buy it on subject two.” And it changed everything for me. And my cost per contract went to $0.

Tony:
So Pace, you talked about your motivation for selling the truck, seller finance. If I’m a new investor, can I make the assumption that the motivation for homeowners is the same as your truck? What would prompt someone to want to sell their home subject two or a seller finance?

Pace:
Okay, so let’s talk about the difference between subject two and seller finance. So subject to typically, like I’d say 80 to 90%, I haven’t done the math on this, but just my gut experience, 80 to 90% of the time on a sub two deal, the seller’s in some sort of pain, they’re in foreclosure, they’re going through a divorce, they don’t have equity, a lot of times they refinanced their house last year, they pulled all their equity out, now they want to go sell, they don’t have any equity, so they can’t sell without cutting a check. So that’s subject two, that’s typically that pain. So if you guys are looking for a sub two deal, a really great place to go is expired listings, agents. What market you’re in…

Ashley:
Buffalo.

Pace:
Buffalo. You’re doing deals in Buffalo? I don’t know why I thought you were doing deals in Florida.

Ashley:
No, no.

Pace:
Maybe I saw you guys on vacation in Florida.

Ashley:
Probably.

Pace:
That’s what it was.

Ashley:
We’re down there like every month.

Pace:
Okay, there you go. That’s why. See, I follow you and I thought you were doing deals in Florida. So expired listings are a really great way to find sub two deals. Seller finance is not pain, it’s gain. The seller of a seller finance deal wants one thing and one thing alone… now, there’s other benefits than this one thing, but the one thing that they care about anything else is they want to win the negotiation, which means they want the top line price to be as high as possible. So I’ve got a deal in San Angelo, Texas, I just closed 30 days ago, it’s a 43 unit deal, seller’s name is Mario, seller finance, seller gave me $0 down, 4% interest and he gave me 50 year note. Crazy, right?

Tony:
50 years?

Pace:
50 years. I took Eric, my video guy, over there, and it was just like jaw dropping to watch me negotiate this deal. Why would Mario do that? Well, number one, the property, 43 units, is only worth 2.7 million. I paid three million. Did I overpay for the property? I think most people go, “Yeah, you overpaid for the property.” But I go, I didn’t put any money down, it cash flows on day one. I have zero cost of capital. Why would Mario do that? Well, he got $3 million on paper, he’s charging me interest 4%, he avoided going through an agent, so he didn’t have to pay 6% to agents, he didn’t have to pay the closing costs, no appraisal. When you guys are in the commercial world, like multi-family, appraisals are expensive, surveys are expensive, we avoided all of that stuff.
So if you compare him getting three million at 4%, he’ll end up getting about $6 million over the term of the loan. But where do those payments go? They go to his children. So when he passes away, he doesn’t need the three million, he’s like, “I’m worth a hundred million dollars, I don’t need the $3 million right now.” So the biggest reason is sales price. The second biggest reason is that it mitigates their tax liability. So imagine if Mario, who bought that property for a million 20 years ago sells it to me for three million 20 years later, how much in taxes he is going to have to pay?

Tony:
That’s a big tax bill.

Pace:
Massive. He has a $2 million gain. So he’s got a big influx of cash that comes into his bank account, now he’s got hundreds of thousands of dollars of tax. But if we spread that out over 30, 40 years, what he can now do is every year he can offset the money he receives with other tax right offs. So essentially being zero tax liability on that deal.

Ashley:
Okay, so now that everybody listening knows that, they know the advantages, they know what they are for the seller, What happens when you’re actually negotiating with the seller? You’re face to face with them, do you do it on phone, what’s your typical setting? And then how do you actually convince them or pitch this or give them some key points, I guess, or tips?

Pace:
I love that. So here’s the great thing about creative finance, it’s easier than cash by far. People think, “Oh, I’m going to start with wholesale or I’m going to start with fixing and flipping and I’m going to start with BRRRR.” Guys, no offense to any of those, I do all of them, they’re all great, they all work incredibly well, but in order for me to do a wholesale deal, I’ve got to offer 60 cents on the dollar, 50 cents on the dollar. In creative finance, I can pay 80, 90 cents on the dollar and make actually more money than the person who paid 50 cents on the dollar.
The greatest part about it is that creative finance is the only thing that is… it’s not a zero sum game, which means the seller makes more money, it doesn’t take money out of my pocket. In a cash transaction, I have to low ball a seller in order for me to make money on my flip or in order for me to have a good refinance on a BRRRR. In create finance, no banks needed, no credit needed, so I can pay the seller more on paper and when I’m talking to a seller and they go, “Well, why would I do that?” And I go, “Honestly, why would you let somebody pay 60 cents on the dollar? Why wouldn’t you let me pay 90 cents on the dollar of what it’s worth?” What would you rather do, go into appointment and pay 90 cents on the dollar or 50 cents on the dollar?

Ashley:
50 cents.

Pace:
Really?

Ashley:
No.

Pace:
No, I mean in terms of as a salesperson.

Ashley:
Yeah, as a salesperson because-

Pace:
As a sales person.

Ashley:
… you’re going to get the commission.

Pace:
No, no. Let’s say that you’re a wholesaler.

Ashley:
Okay.

Pace:
And your job is to go in and get a contract with a seller directly. There’s no agent, you’re not the agent, you’re just acquiring the deal. You have to convince that homeowner to sell their property to you for 50 cents on the dollar to be a wholesaler. But in creative finance, I can tell them to sell it to me at 90 cents.

Ashley:
So, okay. So yeah, so they’re going to be more willing to make more.

Pace:
They’re making way, way more. The second they see how much more money they’re making, it’s like why would they ever sell on cash?

Ashley:
So, okay to clear it up is you’re saying that you’re able to make the numbers work at 90 cents on the dollar and that’s the advantage?

Pace:
Yeah, all day long.

Ashley:
Okay.

Pace:
So for example, if I go out and if I did that same deal with Mario and I had to buy it cash, I would’ve had to given him $2.4, $2.5 million to make it work and guess what I would’ve had to do? Qualify for a loan and then go raise $700,000 from partners or investors and give that $700,000 worth of ownership to those investors. So now I’m into that deal with a higher interest rate, I had to pull my credit, I had to raise money, give up ownership and the seller actually got less money.

Ashley:
Okay, so let’s break that down even more. How are you figuring out what that purchase price is? So are you working backwards then?

Pace:
We’re always working backwards. So the number one thing I always ask… So when a seller’s… I go, “What are you looking for?” Mario says, “I want $3 million.” I go, “Great. If I was able to come up to $3 million, could you give me terms?” Mario says, “Sure, I’ll give you terms. What are you thinking?” And I go, “Well, here’s the problem, Mario. Most of my deals I buy are $0 down, 0% interest. So I doubt you’ll want to do a deal with me.” He goes, “I’ll do $0 down, but I will not do 0% interest.” I go, “Okay, well what are you thinking?” This is all recorded by the way, I record most of my appointments. “I’ll do 4%.” I go, “Okay, great. Do you want a balloon?” He goes, No. If I do a balloon, I still have the same tax problem. I’d rather just let you make payments to my kids even after I’m passed away. My kids keep bearing the interest, it’s a great investment.” So that’s how… literally was like a four minute conversation.

Tony:
So Pace, are you specifically looking for… you talked about failed listings as one way, you talked about talking with wholesalers or agents that the sellers are maybe asking for too much, but say I don’t have a relationship with an agent, say I don’t have a relationship with the wholesaler, I’m brand new, am I just going on the MLS looking for listings that say seller financing or creative financing? What other ways can I…

Pace:
You could do that. So you could go on the MLS. If you are an agent, you could go on the MLS. If you go on landwatch.com, have you guys ever heard of Land Watch?

Tony:
No.

Ashley:
No.

Pace:
It’s so gangster. It’s a great website. If you go to Land Watch, Land Watch has 11,400 seller finance listings right now on their website. 11,000. That’s nationwide. If you go on your MLS, you’ll average, depending on the market, you’ll average about a hundred seller finance listings per one million population. So there’s a lot of seller finance stuff out there. But let’s say that I’m brand new, I don’t know any of that, what list do I go pull? I would go to listsource.com or wherever you guys… if you guys are using PropStream, they’re a big sponsor of this event, Foreclosures, huge.
Right now, this is what I love doing too and you guys should have me back, I’ll call Foreclosures with you guys. We’ll do it. Tell them in the comments, tell them whatever I will call Foreclosures live. So Foreclosure list is the easiest. We can get a deal in 15 minutes. Hands down, easy done. Foreclosure is really good. Expired Listings is really good. People are going through divorce, people are going through bankruptcy, typically that’s sub two deal. Seller finance is a high equity list, so you can literally pull a list on ListSource that says people have their house paid off. Or you can see people that have owned a property for over 10 years, that typically is a really great seller finance opportunity too.

Tony:
So once I find someone Pace, and I’m like, “Okay, this person’s a good candidate for seller finance or sub two,” how do I structure that in a legal sense that they don’t just run away with the property or try and kick me out after I moved in?

Pace:
Well, he who has the deed is the one that controls the property. So it’s set up the same paperwork that you go to… if you go to Bank of America and you get a loan from them, it’s literally the same paperwork. So it’s no different than anything else. Same paperwork, same documents, same ownership goes to you. It’s not some under the table, weird thing. The deed comes in your name. Nobody can change anything about that. So think about this too, this is something that confuses a lot of people, people confuse debt and ownership. Meaning I can take over payments on a house and people go, “How don’t you have to pay off the debt in order for you to become the new owner?” No, I don’t. Think about it this way, if I go into a grocery store and I use a credit card and I buy a bunch of groceries, who’s the owner of those groceries if I use a credit card to buy them?
How do you know that? If I use somebody else’s money, how am I the owner of those groceries?

Tony:
Cause you bought them.

Ashley:
You take them home.

Pace:
Okay, so great, I love that. So two reasons why. One, I have the ownership physically, but couldn’t somebody just come up and steal those from me? They could, but the second thing I have is I have a receipt and proof of purchase. So in real estate, the receipt of real estate is called the deed. Whoever holds the receipt is the owner of those groceries, so whoever holds the deed is the person who holds that property. So think about this, I go to grocery store, I buy groceries with an American Express and I’m walking out into the parking lot and I walk up to you and I go, “Hey, I see you got those groceries. What’d you pay for them?” You go, “200 bucks.”
I go, “I’ll pay you $225 for those.” And you go, “Okay, I’ll make 25 bucks like that.” And I go, “But one caveat, I’ll just pay your credit card payment for you.” I just subject twoed your grocery bill. So the credit card payment and the ownership are not the same. And so people don’t understand that I can just go and transfer a deed 25,000 times in two days, but the debt just stays in one place. The American Express bill stays in the same place, nothing alters, nothing changes, nobody does anything to it. It’s just whoever is currently holding the deed makes the payment to the mortgage. So a subject two deal is the seller’s name stays on the mortgage, your name stays on the deed, you’re the owner. Nobody can take the deed from you without a legal transfer.

Ashley:
I actually did one subject two deal, and it was actually before I even learned who you were, and we had had a guest on the podcast who had kind of taught us a little bit about it, but I wish I would’ve found you because it would’ve made the process a lot smoother. It took I think over a year to actually close on the property just because my attorney wasn’t familiar with it and get everything… all the ducks in a row. But as I did it, I… it was a farm. So there was lots of pieces moving with it and dealing with this farmer, he didn’t really know a lot and it was answering his question. Cause some of the common questions that he had, and I had, so the first one is how do we know that the mortgage isn’t going to be called because of the change… for the due-on-sale clause?

Pace:
Okay, she’s talking about the due-on-sale clause. So the due-on-sale clause happens about one out of every 5,000 sub two transfer. So it’s going to happen. And if you do a lot of sub two deals, you will run into a due-on-sale clause. There’s very typical reasons why the due-on-sale clause gets called. Number one, improper paperwork. Upfront, you use the wrong paperwork. Number two, you didn’t transfer the insurance properly. And number three, you’re a knucklehead and you stopped making the payment. Those are the only three reasons you’ll ever get the due-on-sale clause called. Then when a due-on-sale clause gets called, which it does happen, it’s happened to me five times. You need to know how to handle it.
So why did the due-on-sale clause get called? It’s because you transferred the… or the farmer, me, I transferred the ownership, the receipt of my farm, over to you, I gave it to you. And the bank sees that we transferred ownership and they go, “Hold on, you just took ownership of this farm, but there’s a loan in that farmer’s name still, you need to pay that off.” Legally you don’t have to pay it off. The bank has the right to call it due, not the obligation, but they have the right to say, “Hey, we want Ashley to pay that now.” So how do you handle it when you run into it? How do you handle the due-on-sale clause? How do you get rid of it so easy?

Ashley:
I don’t know the answer, do you?

Pace:
I don’t know either, yeah, no.
Okay, so the way you get rid of the due-on-sale clause is one, make sure you did your paperwork up front, two, make sure you did your insurance properly and three, make sure you make your payment. But if it does still get called, which is very incredibly rare, what do you do? The deed is what triggered the due-on-sale clause, so what do we have to do?

Tony:
Transfer it back.

Ashley:
[inaudible 00:26:14] deed back.

Pace:
Transfer the deed back to the farmer and repurchase it on a lease option where your option price is the mortgage balance the day of your execution. Does that make sense?

Ashley:
Yeah, it does.

Pace:
So it’s technically a… it’s still a sub two deal, but you haven’t transferred the lease… or you haven’t transferred the deed.

Ashley:
So my second question-

Pace:
I got that from a bank by the way. So I’ll tell you how this happened. So I had a property on Lost Dutchman trail. The seller was in foreclosure and we reinstate the foreclosure, he was behind like $20,000, but we reinstate the foreclosure the day before we transferred the deed. And why is that a problem? Well, because the bank that had the loan, they’re a small bank, Johnston Bank, shout out Johnston Bank. They only had five branches. So the president of all the branches was the person actually handling the foreclosures. So we reinstate the loan, we closed the deal the next day and the following Monday he goes to his stack of manila folders and he goes, “Oh, Lost Dutchman is now no longer in foreclosures.” So he goes to reinstate it. It’s just a slow process for them, they did a couple days after we had already closed on it, and he goes to reinstate the loan and he sees that we transferred the ownership.
So he physically manually saw… nobody’s calling due-on-sale clause unless it’s like a situation like that. So they send out a letter, we get the letter two, three weeks later, I call the guy myself, the branch owner, and I go, “Dude, we caught up the mortgage payments. Why are you calling the due-on-sale clause? We’re making the payments.” He goes, “Oh, it’s just bank policy.” I go, “Okay, well,” and he sounded nonchalant, like he ran into this a hundred times, I go, “Okay, well what do you suggest I do? Because I bought this subject two and I caught up the payments.” And he goes, “Oh yeah, easy. All you do is just deed it back to them and then rebuy it on a lease option and the option price is the mortgage balance the day you execute the option.” I was like, “Done, thanks, have a good day.” Pretty simple.

Ashley:
Yeah, that is.

Pace:
So that’s one of five ways to overcome the due-on-sale clause, we can talk about another day, but that one’s really simple.

Ashley:
So follow Pace if you want to learn more about that.

Pace:
Yeah. If you want to get nitty gritty, this is not rookie stuff, but the reason why don’t I just originally buy on a lease option with the option price being the mortgage balance?

Tony:
Because you want the deed.

Pace:
I want the deed because when I have the deed, I get the tax benefits and the tax benefits allow me to not pay any taxes every year.

Ashley:
So my second question for that would be on the seller side is, okay, the mortgage is still in their name. How do they go and get another mortgage? And this is-

Pace:
So DTI coverage.

Ashley:
This is actually how I found you because this was the last piece of the puzzle, the last question I needed and that’s how I found you.

Pace:
Love this. Okay, how does any investor go and get another loan when we go get multiple loans on… and you guys are going and getting Airbnbs and you’re investing, How do you get more loans?

Tony:
You have to show that there’s income on the other properties.

Pace:
There you go. So it’s the same thing. So when I get a seller, so I had one of my favorite deals I ever did, Dave Biarsky. Okay, so here’s what happens. Dave ski driving home one day, he gets a wild hair and he is driving home one day from work and he sees a new home development across the street from his development where he’s lived for 19 years and he turns in there, he goes in, gets suckered into a $20,000 non-refundable deposit on a brand new build, drives back over to his house and his wife’s like, “Hey sweetheart, where you been? I haven’t seen you. You usually home on time.”
He goes, “Babe, I just bought as a brand new house.” And she goes, “Oh my gosh, this is amazing. Can we turn this one into a rental or something?” And he goes, “No. The lender over at the new home build said we have to sell this house in order to qualify for the new house. We can’t have two houses.” She goes, “Okay, no problem. Let me call my friend who’s a real estate agent and let’s have them list the property. It’ll sell in two months and that house will be done in six months. It’ll be perfect. We’ll rent for a couple months, it’ll be perfect timing.” You following me? Okay, so five and a half months later they still haven’t sold the house.

Ashley:
And it’s coming time to close on that new house.

Tony:
Yeah, they got two weeks.

Pace:
It’s coming time to close. They’re going to lose their $20,000 non-refundable and they’re going to sell that house to another person. The agent on that listing calls me up and goes, “Pace, I saw that you do this creative finance stuff, what do we do?”

Tony:
Wait, and had you ever met this agent before? Did you have a relationship with them?

Pace:
I saw her at a meetup and I was like, “Hey, if you ever have-

Ashley:
The power of networking.

Pace:
The power of networking. So I go up to people, I go, “Hey, if you ever have a seller that has a hard time selling their listing because they have lack of equity, come to me.” The seller had lived in the property 19 years, why doesn’t he have equity? Cause he refinanced, pulled out all his equity out of the deal. So he has no equity. Now you’re telling a homeowner that just put $20,000 on a new home build that he’s going to have to write a check to sell this house. Is that the only money he’s going to have to pay to close out on that house?
No, he’s got the rest of his down payment, he’s got furniture, because everybody, when you get a new house, you’re pumped about your furniture. He’s like, “I got a barbecue thing, I got all the stuff I want to do and now she’s telling me I got to cut a check to sell my other one.” I go, “Well what if you didn’t have to write a check? What if you just walked from the property, let me take over the deed?” He goes, “No, I can’t do that.” I go, “Why not, Dave, it solves every problem in the book.” And he goes, “Because my lender on the new house says that I have to sell this house in order to qualify.” I go, “No, she doesn’t know what she’s talking about. I was a loan officer for years. Let me call her and talk to her underwriter.”
So I got on the phone with the underwriter, I’ve done this 400 times by the way, get on the phone with the underwriter, not the loan officer, if you’re talking to loan officer, they don’t know, they’re salespeople. I was a loan officer, we’re salespeople. Talk to the underwriter. So you talk to the underwriter and you say, “Hey underwriter, I’m buying this house subject two, I’m going to be making the payments. What do you need to see from me in order to wipe this off their debt to income ratio to qualify for the other one?” She goes, “Oh, he never told me he was going to do that. No problem.” So we write up our agreement. By the way, you should always use a servicing company when you do sub two and seller finance stuff. West Star is the company-

Tony:
Can you define servicing company?

Pace:
So a servicing company is, let’s say that you and I create a financial arrangement and we want to make sure there’s a non-interested third party watching what we’re doing, making sure you’re receiving it, I’m paying it on time, we would hire her as a servicing company to make sure. So there’s companies like West Star Loan servicing that you pay them $17 a month per house and they are the sheriff of every creative finance deal you’ll ever do. So I worked this out with Dave and Dave goes, “Holy crap, you solved every single problem in the book for me. I thought I was going to be in a world of hurt.” So debt to income ratio needs to be wiped out by the underwriter on the deal.

Tony:
So Pace, I mean first dude, thank you so much man. This has been a crash course on everything subject two.

Pace:
Oh yeah, I could talk about this for 20 hours.

Tony:
So I mean, last question for you, brother. So I just want to know, so given where we’re at with the economy, with inflation, there’s a lot of people feeling the sky’s falling, now is a terrible time to invest in real estate. Does subject two still make sense in this environment?

Pace:
My average deal I’m acquiring is 3.25%. My average BRRRR deal that I do is about seven and a half to eight and a half percent. So I honestly don’t know a market where subject two hasn’t made sense, will not make sense. Subject two is and will always be a strategy that will dominate. Right now it is winning big time. I’m being overwhelmed where people are like, “Oh my gosh, our listings went from 10 days on market to now 70 days on market, please whatever you got to do.”
So here’s a really good example for brand new people. I will randomly do this once a month or I’ll go in my local market in Arizona and go, “Anybody in Arizona come to my office today, We’re going to go… we’re going to do a group activity for seven hours today where I’m going to teach you guys what creative finance is and then we’re going to do a contest at the end of the day for 45 minutes and we’re going to get everybody on the phone and we’re going to see how fast we can get a deal.” So we just did this two weeks ago. First, where you go is you go, listings have been on the market for longer than 90 days, call the agent, say, “Hey agent, if you’re having a hard time with that listing, I’m okay just taking over the payments. Would you pitch that to your seller?” So in 45 minutes a group of a hundred people got six written contracts signed back from the agents done in 45 minutes. This market is incredibly easy. You’ll be pouring in with properties.

Ashley:
So when they’re doing that, are you guys looking up on PropStream or any other software?

Pace:
That’s where we got the list.

Ashley:
What the estimated payment is and mortgage payments?

Pace:
Yeah, so you’ll have the estimated mortgage. Here’s how you know, when you said structure, last thing guys, so sorry. Have them have me come back because I will come back and I’ll talk forever. Here’s how we know if it’s a good deal. I don’t care about purchase price. People send me stuff like, “Pace. I got a four bed, three bath or three car,” I’m like, I don’t care about any of that. What can I bring in on the property? What’s the highest and best value of that amount?
Same thing. I go to AirDNA, if it’s going to be an Airbnb, if it’s a sober living facility, I call a sober living company and I find out what I could bring in on that property and then I reverse engineer with the seller and I go, “Okay, if I can bring in three grand a month, the most I can pay the seller is $2,000 a month because I’ve got blah blah blah blah blah, expenses and whatever else.” So you reverse engineer and a lot of that information before we get to the negotiating part of the conversation, a lot of it we find on PropStream.

Ashley:
Yeah.

Pace:
Yeah.

Ashley:
Cause I think that’s such a… Are you finding that too with the seller, finding their motivation to… or what they want out of the deal? So if purchase price is important to them or interest rate, like they just know they want a high interest rate, but maybe you amortize it over 50 years or things like that. Are you thinking at all variables?

Pace:
Sellers typically don’t want a high interest rate unless they’re already a creative finance guy like me. When somebody goes, “Yeah, I’ll seller finance it to you, I want 20% down and 8% interest. I know he’s already… he’s probably already taken my course, or whatever, or he is been in the game for 20 years. Yeah. But if they go, “Oh yeah, what does that mean?” I go, “Great, you care about purchase price,” it’s kind of like a teeter-totter, “I’ll give you a high purchase price but you got to give me low down payment, low interest.” And they go, “Okay, no problem.” They care about the purchase price more than anything else.

Ashley:
Interesting.

Pace:
We have literally barely touched the surface of this. We could go on for hours.

Ashley:
I know, I feel like I’m going to be laying in bed tonight just like there’s so many more questions.

Pace:
Oh my gosh. The thing is I can’t go out and get a cash deal… I could get a cash deal pretty quickly, but I could guarantee you if you guys had me back, I could show you how we could get a deal under contract within an hour on the Rookie show start to finish, agent sending us a contract signed. It’s that simple.

Ashley:
Yeah, we should definitely do that.

Pace:
Guys, less information, more implementation, I would love to implement some of the stuff and do it live if you guys would have me back.

Ashley:
I think that’s part of the problem with the show is we get a lot of stories and what people are doing and stuff-

Pace:
Let’s freaking do it.

Ashley:
… but like the step by step, like doing a workshop, that would be so fun.

Pace:
I would love to. That’s what I… You get, and I know you guys are the same way, you start talking about these strategies, you’re like, “Okay great, let’s go. Let’s go buy something.” So if you guys have me back, I’d love to do that. It doesn’t have to be in person, but we even do it virtual, it’d be great. We could do the same thing.

Ashley:
Yeah. Cool. Well, one question I do have, because I think this would be for everyone that’s listening, where are you getting the proper steps and the proper documentation? So when I bought the farm, it was… my attorney had no idea where to even start with documentation.

Pace:
So I went and paid an attorney in my local state named Sean St. Clair. I have an attorney, actually brought him here to BP Con, had him on my panel. My attorney who I learned from for years and years actually was on my panel today. So I just go to an attorney that’s been doing creative finance and I had them draft documents and then the documents were great, but really you need somebody when you run into a specific situation, especially with a farm, there’s all sorts of weird things going on with farms, you need to have somebody that knows what they’re doing and the way I found these people was networking at meetups.

Ashley:
And that’s cool, the answer is basically just asking what their experience, if they have experience, in doing subject two.

Pace:
Yeah. Have you ever closed a sub two deal? We have a list actually because my job, or my goal, years ago with creative finance is, I said my overall goal is I want to normalize the conversation around creative finance. That’s my goal. If I accomplish that, I could die, I’d be happy. I want to normalize the conversation. One thing that we’ve done is we’ve found five title companies or title attorneys in every single state across the country and we’ve put them on a Google sheet. So if you guys want, I’ll give that to you guys, you can give it to your audience.

Ashley:
Yeah, we would love that. So we’ll put that into the show notes for you guys.

Pace:
There’s not a single state in the country you can’t do sub two, seller finance, novation agreements, wraps, [inaudible 00:38:51], you can do anything in all 50 states. Not just legal, it’s been getting done for hundreds of years.

Ashley:
Well, thank you so much Pace. This has been awesome.

Pace:
Have me back.

Ashley:
And also thank you for sponsoring this media room. We’ve been really taking advantage of it. This is our third podcast we’ve done today in here, so thank you. Yeah. But where can everyone find out more information about you?

Pace:
Go to BiggerPockts episode whatever I was on. It was the first one I was on in November of 2021.

Ashley:
We will also link that number in the show notes.

Pace:
There you go. Go watch that.

Ashley:
Well, thank you so much for joining us today. I’m Ashley at Wealth Rentals and he’s Tony at Tony J. Robinson on Instagram. Thank you guys so much for listening and we’ll be back on Wednesday with another episode.
(Singing)

Dave:
Hey, what’s going on everyone? Welcome to On The Market. I’m Dave Meyer and today, I am not going to be your host. We have a special host today, Mr. Jamil Damji. What’s going on man?

Jamil:
Hello. I am happy to host On The Market today because of a bet that you lost. For those of you that were at the Bigger Pockets convention, we, James Dainard and I, won a bet where we dominated at a debate. And so, therefore, I am your host today. And because I am your host today, I have chosen a great topic and it is called The Depressing Show.
Yes guys, I plan to depress everybody today but actually, not depressed, because if you look at what we’re going to talk about, we’re going to show you how you can gain, how you can make a tremendous amount of money and find big opportunities in a down market. So don’t get depressed because everything that we’re going to talk about today will be an opportunity for you to gain. But before we get into that, we’re going to take a quick break.
Hey everybody, welcome back. Let’s hear from our panelists first. Henry Washington, how are you today brother?

Henry:
I am doing well sir. Thank you. Thank you for doing this. I wouldn’t say you dominated the debate. I would say you eked out a slight victory on a technicality, but I mean you won, so we’re here. But thanks for having me.

Jamil:
Well, I appreciate the fact that you’re a very sore loser, but we did dominate and it was a fantastic debate. I mean, look, you showed up, you did your best, but it just wasn’t enough. Kathy, so good to hear from you today. How are you?

Kathy:
Well, I think we should have another live debate on On The Market at some point so that we can redeem ourselves.

Jamil:
Well, redemption is always good, but it’s not for you today. The only person that I actually have a tremendous amount of respect for on the panel today, is Mr. James Dainard because he was my partner and helped us win. How are you, James?

James:
I’m doing good. We did dominate then, didn’t we? Did we get a standing ovation, if I remember it?

Jamil:
We absolutely got a standing ovation. In fact…

Henry:
It’s cause you were leaving.

Jamil:
Wow.

Kathy:
I remember there was some cheating, some guessing…

James:
Me and Jamil just have good synergy. It just is what it is. But I happily accept Kathy’s challenge for another live debate on the On The Market.

Jamil:
I’m with it. I’m with it, but you know what? They can’t have a round two for another 12 months because you don’t just get another at bat. You got to earn the at bat. And so for now, we’re going to hold onto that belt. Dave Meyer, how does it feel to be demoted?

Dave:
Honestly, I’m terrified right now because you’re going to find out how easy my job is.

Jamil:
Oh.

Dave:
The ruse is up.

Jamil:
Well Dave, I’m sure that the entire audience is going to be looking forward to you taking control of On The Market again. Everybody loves you, myself included. But today’s topic is really important because this is a down market, guys. We are seeing the market completely shift. Interest rates and the Fed have engineered one of, I would say, the fastest slowdowns that I’ve ever seen in the real estate market. It was the dramatic halt. And for anybody investing in real estate right now, there has to be an opportunity. I’ll tell you guys a little story.
Back in 2010, I reentered the real estate market after losing millions of dollars in the financial crisis of 2008. And I built a fortune in that down market. In fact, most millionaires will tell you that you will find the best opportunities in down markets. So what are they talking about? What strategies can we implement? What things can we do right now, to put ourselves in a position to win when the market is cooled off? Because as you might know, when people are zigging, the rich zag, wouldn’t you all agree?

Dave:
I a 100% agree. This is my favorite time.

James:
Yeah, absolutely.

Jamil:
It’s my favorite time too. So let’s share with the audience some of the strategies that we can put into practice right now, while the market is down. And I have five specific ones that I have been personally using to generate opportunity for me. And I will share those five. And I would love if each of you would speak to your experience with one or some of these strategies so that we can share with the audience how they can participate when the market has cooled off.
The first strategy is buying deeper. The second strategy is getting creative. The third is finding new ways to hold property. The fourth is going after foreclosures because they are up. And the fifth is short sales. Guys, do you find any resemblance to what happened in 2008? I know we have to be careful because we have a completely different market than 2008, but some of these things came back up. What are your thoughts. Henry?

Henry:
Yeah, I totally agree with you. There is tons of opportunity out there. I’m seeing more opportunity on the purchase side than I ever have before. And you’re right, foreclosures, short sales, those are all… You know what, a lot of people don’t know this. I bought my first property, to live in, back in 2007 and so, I paid a pretty decent price and then everything went crashing and I was in a tough financial spot. I had to short sell my property. So, I know the not so fun side, what that’s like, but there is absolutely opportunity out there and I think we’re 100% looking at more of those strategies.
And I think the catch or what a lot of people are going to have to figure out is, yes, the opportunity is there, but how do you find the money or the funding to buy those opportunities? And I think that’s getting a little trickier but not impossible and not hard. And I’d love to be able to expand on places where people can… It’s a double edged sword, right? Opportunities are there, find the financing and then, if you can hold through the downturn, then you make yourself a substantial amount of money as things come back up.

Jamil:
So, what Henry is talking about is buying deep. When the market starts to slow down, sellers still need to sell and real motivation is going to move people. Now because there’s so little money in the market right now, so few people are actually taking action and people are fearful to enter the market. A lot of the retail buyers are standing on the sidelines, just waiting for things to cool off. They’re trying to see, “Are interest rates going to come down? Are prices going to come down? Do we have more of an opportunity? When will the bottom actually hit?”
So buying deep is actually, right now, one of the biggest opportunities that we have. But you have to look at it from the point of view of, “How deep do you buy,” Right? That’s a big question because, what if you don’t buy deep enough? What if the market depreciates even further? Kathy, James, Dave, what do you guys think about buying deep? And I know Kathy, for you specifically, you are an expert at raising capital. Just like Henry had described, where do you find the money? If there’s anybody on this panel that I think has a real insight into where the money is hiding…

James:
It’s hiding in Malibu.

Kathy:
There’s a lot of money out there. There’s still a lot of money out there. Lenders are getting more cautious but that’s mainly because, and this is way off topic and we’ll do another show on it, but it’s because there is a belief that mortgages will come back down. And so, it’s not a great time for lenders to be lending. So it’s a little bit harder to get money right now, from a traditional place, although it’s still out there. Again, topic for another show, I’ve got a great guest for that. But at times like this, this is where doing partnerships, JVs, syndicating, working with people who don’t know what to do with their money. Maybe they have a self-directed IRA and they’re just frozen, they don’t want to lose any money in the stock market. There are people who want to invest and know that there’s opportunity but don’t really know how to take advantage of that opportunity.
They don’t have the experience but they have the money. Maybe they don’t have the time. So, it’s times like this, that private money, talking to people who just want their money secured to something because you could… What are they getting elsewhere? What kind of return are they getting elsewhere? They could lend to you. Be in first lean position at… I mean, what are interest rates today? What seven, 8% return that they could get being secured in first lean position on your deal? I mean, private lending is a wonderful opportunity for people to be able to participate with you. You bring in the experience and they bring the money.
I started syndicating in 2009, before I even knew what that word meant. Which was, basically, collecting money from lots of people. Lots of people invest together. It’s regulated by the Securities Exchange, is the SEC. So it’s different than the Department of Real Estate. There are lots of rules about how to use other people’s money. If you have just one partner, you still have to be very aware of security law because if the person bringing the money isn’t doing any work, then it’s considered a security. So, you need to know the laws and regulations. There’s lots of ways to learn that. We could do a show on it sometime, but this is an opportunity. If you could do that, you can acquire so many great deals.
So that’s why we have a fund started right now. We’re going deep, as you say, we’re getting discounts. Discounts on property that we could not even bid on before, there was a wait list for these properties. Now we’re getting discounts. It’s incredible.

Jamil:
Incredible. That’s the feeding frenzy. And of course, there are a lot of people right now who have taken big hits in the stock market and are looking for alternative opportunities to invest. And real estate is always a great option for folks, especially in times like this when you can get incredible deals. And James, I’ve been following your social medias, been watching you walk properties and you are one of the most talented renovators that I’ve ever seen. But I also know you to be an extremely talented acquisitions person. And so, tell us how are you and your team pivoting right now? Because if there’s anybody who can navigate the waters that we’re in right now with great grace, it’s you Mr. Dainard.

James:
I appreciate that. I always try to be graceful. I think this is a great topic. Like, buying deep, what does that mean, right? Everyone’s like, “Oh, the market’s getting unsteady. What do you need to do to get into a safe deal?” And everybody’s answer should be different, right? And going into what Kathy was just talking about, cost of money.
The first thing you got to figure out if you want to define how you want to buy is, what is your cost of money? You have to know what that financing debt’s going to be, what the worst case scenario is and then you put that into your performa at that point. So for us buying deep right now, we bought hundreds of homes in 2008 and nine, when the market was crashing down rapidly and we were flipping properties on the regular. So it’s a business model that works, but you have to be really good at implementing the right plan and knowing what your buy box is, based on your own costs.
So buying deep for us, based on that is… What we’re doing is, we’re packing our performa. Is where we’re taking right now because we see that the treasury yield’s higher, the economy’s not loosening up and the Fed’s going to keep increasing rates. And so, we think that the market is going to keep coming backwards a little bit. And that’s okay, as long as we build that into our metrics. So buying deep for us, we’re using our ARV values at comps that are only 30 to 45 day sold and pendings, at this point. So it’s very current, recent data. In addition to, because we think rates are going to increase, we’re knocking 5% off that number because if we think that there’s an annual 6% slide coming, if we are in and out of our flips in six to seven months, we’re going to knock 5% off that value at that point.
In addition to cost of money, we’re running this with extension fees already built into our performa because it could take longer to sell these things. We’re adding two months of debt cost, of whatever our debt cost is going to be. And that’s why it’s so important for you to understand what the actual expense is. If it’s 12% money, that’s fine. In 2008 we were borrowing 18% money from a loan shark, essentially. And that was okay. I always talk about this guy because he really did…

Henry:
Was it Jamil?

Jamil:
It wasn’t me.

Kathy:
It was me.

James:
Yeah, Kathy. Should have known. Well, speaking of sharks, Jamil, I still have our Snuggie shark outfits, by the way. So, those have to come out. But it doesn’t matter what your interest rate is, as long as you build it into the deal. Even when it was 18%, I wasn’t sweating the 18%, I just had to put it in my performa. And then, as we think the market’s going to slide down, we’re adding two months to our whole times and we’re adding in extension fees because usually, we’re getting a six month term. And we’re just accounting for that upfront. So that goes into our deep buying process. In addition to, we’ve increased our margin expectations by 10% than what we were buying nine months ago. So if we were targeting to make 30 to 40% with leverage on a deal, we’re now targeting 50 to 55%. So we’ve increased our margin expectation, we’ve taken the juice out of our ARBs with actual logical information to us, that we think there could be another 5% slide.
And then we’re over budgeting for a financing and debt cost, because it could go longer right now. As the market slows down, transaction slow down. And lastly, we’re putting 10 to 20% contingencies on our construction, just to pad that deal a little bit more. Even though we have seen a sudden drop in construction costs over the last 30 days, I’ve already clipped down my budgets by 10%. And so for me, defining what buying deep is, yes, buying deep is buying cheap, but you really want to think about what are all your expenses, pack those expenses and then that will give you the defined buy box of what you should pull the trigger on.
And that’s really what we’re focusing on, is just putting the metrics in, padding it and as long as it clicks out that way, we’ll buy that deal. We just bought three homes in the last two weeks. There is good buys out there but you really need to define it. They just don’t gut check them anymore. The last couple years, you could kind of gut check a deal, buy it and make some money.

Jamil:
Yeah.

James:
Not going to happen anymore.

Jamil:
I love what you’re saying right now. In fact, you gave me insights that I haven’t been using either. Like baking in the extension fee, that’s something that I completely missed on all of the flips that we’ve been purchasing recently. Now, I feel like I need to be texting my team and letting them know, “Hey guys, bake in an extension fee as well.” I think what you just said right now was magical. Everybody needs to be taking notes. He is baking in added construction costs, he is increasing his profit margins, he is baking in a slide of 5%. He’s only using data that’s 90 days or newer and checking pendings.
All of the things that James is saying to you right now, are as good as of a crystal ball as you could possibly get. The data is the crystal ball, guys. And if there’s anybody on this panel and a panelist used to be a host, but a panelist that is tied to data and understands data better than anybody else that I’ve ever met in my life, Dave, what the heck is happening out there and what do the numbers say is going to happen?
I mean, if there’s anyone that I know is studying the trends, I feel you have an insight beyond any of us on this entire episode. So, what do you see as going to be coming around the corner Dave?

Dave:
Well, I was going to just sit here and not talk because this is kind of my day off but you flattered me enough so I’ll respond to this.

Jamil:
I love it.

Dave:
Thank you. I think this point about buying deep is excellent and it’s kind of just returning to being what an investor is. When I started investing back in 2010, you never paid what people were asking for. That’s just what investing is. You try and get a deal every single time. And so, I think that there is a lot of downside risk in the market that property prices are going to drop in a lot of markets. And my advice and what I’m trying to do is to head that off by basically saying, “Okay, my market might decline five to 10%. So that’s what I would offer, under the asking price so that if it does go down five to 10%, that you are protected.
You’re not going to get it exactly. And honestly if you’re off by a few percentage points and it goes down on paper, if you’re a buy and hold investor, it’s not a huge deal. So the question is, how much is your market going to go down and no one really knows. I think the best way I’ve heard it described is, we had John Burns on the show recently, and he said that he expects all of 2021’s appreciation to be wiped off the board.

James:
That’s what I been saying for the last year. I think we’re going back 2020 pricing.

Dave:
Which is still up from pre-pandemic. So I think that’s still important for people to know, depending on how you define a crash. But you look at markets that popped 20% last year, they’re probably going down 10 to 20%. But if it went up five to 7%, that’s probably the ballpark, at least, you should be considering for how much below current values they might go. But I mean, again, Kathy mentioned this, so this is a whole different story, but if mortgage rates do come down and a lot of people are forecasting that, the downside might not be as bad as I think a lot of the more bearish forecasters are calling for right now.

Jamil:
So, that’s really great news because that means that if you essentially, just for back of the napkin math, if we erase the insane appreciation that happened for that little short period of time, if we take that off the table and we get back to fundamentals of underwriting and really get out there and use the negotiation techniques and leverage what’s happening in the market right now, if things don’t turn out as bad as we might think they might get, we’ll be actually doing really well.
And so, guys, there’s an opportunity here for you to continue to participate by being hopeful and knowing that the market could rebound or could come back to a normality here, sooner than later. But even if it doesn’t and we lose the gains of 2022, there’s still a massive opportunity for you to take advantage of motivation. Guys, when people need to sell, they need to sell.
I’m in a deal right now, where an appraised value on a property was 1.7 million and I’m under contract at 1 million dollars. The seller needs to sell, there’s nothing that they can do. I’m the only person that’s willing to come in and take the deal. And so, this is the opportunity that I get to take advantage of and I’m seeing this day after day after day. Guys, the next strategy that I want to dive into is being more creative. When we find ourselves in situations like the market now, where rates are seven, maybe even 8%, we want to take advantage of the cheap money that trailed into this market. And again, there are so many people that have motivation, that are ready to trade their property and have incredible financing attached.
So for those of you that are not familiar with creative financing or subject to, that’s when we are leveraging existing financing. Where we are having a seller provide us their existing financing on a property and we take over that property or control of that property, with the existing financing in place. Now, if we look at the rates that trailed into the current market, we had rates at 2%, 3%. So there’s thousands of homes out there right now, that have incredible financing attached to it and we can leverage that financing as an asset. Henry, are you taking advantage of any creative solutions right now? Are you buying any properties subject to? And how can people participate with that strategy?

Henry:
Yeah, man. Creative finance is super fun. I’ve actually been spending a lot of time educating and re-educating myself on different creative financing strategies just to have that additional tool in my tool belt, to not only use it to make money, but you use it to provide your sellers another solution to their problem. You’re right. People still need to sell and the problem or the opportunity is that, there’s less people that are willing to buy these deals that need to sell. And there’s less real estate agents who are willing to take on tough listings because it’s harder to sell properties right now. And so, if they’re going to spend their time, they want to spend their time on the deals that they feel like are going to be easier to get over the finish line. So that creates this opportunity. Yes, we’re absolutely looking at creative finance, I am looking at any deals that I am offering on.
I’m also looking at what would the terms be on an owner finance and offering an owner finance solution as well, because if that deal needs to sell, I can typically pay a little more on an owner finance and it creates this win-win situation cause I don’t have to go get expensive money from a bank or a hard money lender.
Also, we are taking a look at deals that we looked at 3, 4, 5 months ago. Specifically, commercial deals that we’ve looked at 3, 4, 5 months ago and maybe the numbers didn’t work, maybe the seller wasn’t quite ready to work a deal yet. And what we’ve done is, we’re looking at who’s got the debt on these deals, we’re calling those banks and asking them, “Are you good with us assuming the loan, or taking on the loan with the current debt in place? And then, what would you need from us to bring to the table additionally, for us to do that?” And we’re reworking the numbers on deals that have still been sitting there and the sellers are now a little more desperate, a little more willing to negotiate and now, we can work a deal because we’re taking over a loan at a lower interest rate, we’re getting the deal done or sold and we know there’s some motivation because these are things we’ve looked at several months ago.
So, that’s two of the strategies we’re using to look at creative financing.

Jamil:
Guys, to highlight something here that Henry just said. A lot of people have this irrational fear of the due on sale clause being evoked when somebody takes over a subject to property, and Henry is running in front of that situation, by calling the institution and getting permission. Understand that you will never get what you don’t ask for. And there are lots of institutions out there who do not want to lose the loans if it can be a performing note, and if they can find somebody to come in and take control of the property and do better with the asset than the current seller, they would love to have that person.
Now, that might mean that you have to re-qualify or add additional security or something, for that institution, in order for them to allow that assumption to take place but guys, that money is so cheap, we’re talking low, low, low. One, 2%, 3% loans. You guys could really get and take advantage of those opportunities. Dave, what are you seeing there?

Dave:
Jamil, I’ve seen, in the last week, two deals for commercial, like 12 to 20 plus units in Colorado, where the seller has arranged that with their financier. Because they’re motivated to sell, and they know how difficult it is for you to find a loan, they are going to the banks and advertising that the loans are assumable by the buyer, which is just incredible. One of them I was looking at was at 3.2%. So they’re going and doing the work for you right now because they know how hard it is and they’re offering these incredible financing deals that… I mean, this is just unheard of over the last couple of years.

Jamil:
So people would actually be crazy not to take advantage of this, right? I mean, when would you ever be able to… Again, I don’t see rates coming down to 3%. I don’t. Even with the market rebounding and turning around again, I do not think we’ll find ourselves in money that cheap again. So these opportunities guys, if you look at an amortization table and you see how much you spend in interest, how much you pay in interest. If you can take advantage of this cheap financing, it doesn’t matter if you’re paying a little bit more for the building. Over time, you are going to win. And I see that smile Kathy, and I know that that just tickles your fancy. How are you guys taking advantage of creative opportunities right now, in your business model?

Kathy:
Well, it really is important to have banking relationships because there are a lot of commercial properties that are in trouble right now. I don’t see that so much with residential, but we’re obviously seeing an uptick there. But with commercial, a lot of people got into bridge loans or they didn’t do proper underwriting and having those banking relationships, I have banks contacting me all the time saying, “Hey, do you like this deal? Do you want this deal? Will you look at this one,” Because banks are not real estate investors. That was how we did our first syndication.
We were able to just take over the bank loan. It was 26 town homes, riverfront, waterfront in Portland, that were 70% complete but not finished, and the bank failed. There was a 3 million dollar loan on it, the value was about 20 million. We just took over the note. And we were able to finish out those properties because a bank’s not going to do that. They’re not going to finish out a 70%, almost finished, product. So banking relationships are a great way. And I mean, mostly with the portfolio lenders, the private lenders because they’re maybe stuck with some stuff they want to get rid of and don’t know what to do with. So that’s one way, for sure. It’s a good time for that.

Jamil:
I couldn’t agree more. Relationships are incredibly important. And when we’re talking about getting stuck with and holding property, I mean, holding and being creative and expanding our thought process on how we can hold property if we end up having to wait out a market cycle.
And James, I’m fixing and flipping right now and I’m holding some of these luxury flips that I have to be creative on how I can refinance these properties and cash flow to hold them until the market takes some kind of rebound. I know you to be one of the most incredible fix and flippers in the entire country. How are you holding property that you got stuck with? And are there any creative solutions? Like possibly, corporate rentals or nursing homes or sober living? Are there any things that you are doing to hold property more creatively, to generate increased cash flow for some of the stuff that you might get stuck with?

James:
A lot of people aren’t going to like what I’m going to say, but I’m a firm believer, if I bought that inventory to sell it, it’s getting sold. And I’m not afraid to lose money if I need to lose money because one thing I don’t like to do is force an investment into something that it’s not supposed to be in. I would rather take a clip. I just lost 300 grand on a house and it was just, the deal went sideways every different… It just went wrong on all avenues and breaking even in a good market would’ve been okay. And that happens. If you buy a lot of property, you’re going to get clipped on a minimum one out of 10 properties. That’s just the way it goes. You can’t hit every stock, you can’t hit every investment.
There is no magic crystal ball where you’re a hundred percent accurate. So, there is going to be those times you get clipped. So for me, a lot of times, I’m looking at how much am I going to bleed on it or how much can I break even on it, is there the equity position. I’m looking at the core metrics. I’m okay to keep some properties and take a little bit of a hit every month and ride out a bad market, and I can look at doing things like short term rentals. We can do corporate housing, we can just do a straight traditional rental or we can add a kitchen in the basement and maybe just add a couple more units in the building to kind of subsidize down the cost. But majority of the time, when we’re doing luxury stuff, it’s not going to pencil well.
I’m going to have to put that up at a high end Airbnb. Like where you got to [inaudible 00:29:25] two flips that we’re listing that are going to be four and four and a half million dollars in the next 60 days. Those are expensive properties, we’re into them for 2 million. My debt cost on that’s going to be 15 to 16,000 a month on a traditional rate, if I refinance that deal in. That’s not healthy. That is not good to do. I would rather sell that money, get the cash back out and I could rent those out probably, for four to five grand a week, actually more than that. I could probably get seven to 8,000 a week for these properties, but that’s not what I’m doing. And if there’s a vacancy and if we’re going into a recession, people are spending less disposable income. Those pricing could come down, and at the end of the day, I have a substantial amount of cash in each one of these deals.
Seven to $800,000, sometimes a million bucks. I would rather get 400 grand back and lose the four, and go buy a smart investment with a big kicker down the road. That’s just short term paying, long term game. If I got to take the clip, I want to get my cash back and then go buy something better because the buys out there now, are unbelievable. We are ripping deals right now. Large multis, small multis, single family, development sites, we are getting really good buys. So I’d rather just take the loss now and reload, and keep to my same basic principles. I don’t like to force a plan. And if it needs to be sold, it needs to be sold. And I know that’s a hard thing for a lot of people to hear because on these luxury flips, when the market compresses 15%, it hurts. No matter what you do, it’s going to hurt.

Jamil:
A hundred percent.

James:
And so, I’d rather just take one in the teeth and move on to the next one.

Jamil:
Well, I mean James, that is very astute and I agree with you. There’s going to be some deals that we’re going to have to just lose money and write a check on. And forcing a business model that’s not your core competency, is also problematic, right? Because you take your eyes off of what you do, to generate capital. When you do that, when you pivot and you do other things, you take your focus away. But I still believe that there’s a way that we can, at least not lose the entire bank. We don’t all have your jaw line, so we can’t all take it on the chin. Henry, what would you do creatively, to hold any of the stuff that you get stuck with?

Henry:
I run a much smaller operation than James, right? And so, that means I need to manage my risk a little differently. Partially, I do that by, I’m not in million dollar flips because A, my market doesn’t have a ton of them. I’m in a whole different area of the country, and B, my margins are slimmer. And so, what I am doing when I need to pivot is, I am planning in my underwriting, for buying it at a price point that I know I can cashflow as a long term rental, if I have to pivot. So my strategy typically and still is, I market heavily direct to seller. I buy everything that’s a deal. I sell the singles, I keep the multis. But I am also a believer in, you know, “You take what the defense gives you.” And in 2020 and 2021, 2022, the market was saying, “Hey, you can take a lot of your cash flow in the form of a sale right now and then reinvest that money into better cash flowing assets.”
And now the market’s telling you, “Hey, it makes a lot of sense to buy some of these properties that you’re getting great deals on, and just sit on them and hold them.” And so now, when I’m making offers on my single families, I’m writing in to my underwriting.
In other words, I’m not going to offer at a price point that’s only going to work if I flip it, I’m offering at a price point that’s going to cash flow very well, and will make me a good amount of money if I sell it, so that when, and if, I have to pivot, I’m totally okay with it because the numbers say I’m going to cash flow well. So it’s just a matter of understanding where your properties are, what they’re going to be able to rent for, and then what you’re going to have to put into it. And I won’t buy a property that doesn’t have one exit strategy right now.

Jamil:
Smart. And that takes a substantial amount of confidence and level of sophistication to pivot exit strategies. But guys, what Henry’s saying is really important. Look at every deal before you get into it and see what are the different exit strategies that I could put into place here, if things go wrong. And Kathy, I seen you do that at a project in Park City. Tell us a little bit about what happened there.

Kathy:
Well, first I wanted to make a comment on what James was saying because I see a lot of the comments that people make and people do DM me and tell me that they’re really struggling with trying to sell a property. And I think knowing that you can take a loss on one property but take all the knowledge you learned and go make more money on the next, is really what makes you a professional investor.
You just have to be able to cut the ties and walk away if it’s not going to work. So I think that’s just really, really important advice. I know there’s a lot of pain out there. I know that we hear talk about how exciting it is to be investing right now because there’s deals out there, but it is not good if you’re trying to sell. This is a hard time to sell and you’re just going to have to either find a creative way to hold and wait, or you’re just going to have to take a cut, in most cases. I know there’s pain out there and I just wanted to address that and let you know, you’re not alone. It’s just part of being an investor. You’re going to be the one who gets the great deal on the next deal if you have to take a loss this time around.
So, with discovery, with our properties in Park City, I’m actually going there this weekend. We’ve had to pivot in so many ways because this is 20, well was a hundred homes that we’re building and selling. We’re down to 20. And the 20, are the ones we’re supposed to make all the profit on. So this is a painful time to be a builder because all your costs are usually upfront, all the infrastructure, the roads, the utilities, and you make your money at the end and if you don’t time it well, it stinks. It means you might have just spent the last five years not making money when the profit’s supposed to be there.
So we’re just working to hold, not build spec homes. Banks don’t even want to build spec anymore. So we’re just holding tight. And I have a very different perspective than a lot of people. I really believe that mortgage rates follow inflation and we’re going to start to see it go in a better direction because we’re just simply comparing year over year and the average of the year. So we know that inflation was really low in the summer of last year. So when we’re comparing, it’s terrible numbers and we knew that, we knew it was going to look bad. But starting in October, that’s going to change but we’re not going to get the results of that till November or even December.
So there’s still going to be pain but right around the corner, unless we have major problems with diesel and energy and gas and that [inaudible 00:36:38], that’s another issue, we’re we’re going to see inflation go down, most likely, and that would bring mortgage rates down and I just think that there’s going to be another housing boom. I know I might be alone here on the panel thinking this, but spring summer of next year, when we’re down to like 5% rates, there’s just not inventory and there’s demand and when we get down to a five or a low six, it’s going to be a boom again. So I don’t think this opportunity’s going to last very long, honestly. So if you can just hold for a bit, that’s great.
Or create a financing. And answer to your question, some of the ways that we’re selling what we will build or that people want to build, is shared vacation rentals. There’s technology that’s bringing in more options. I know people who are using technology to just rent by the room. That’s really cool. The medium term rentals, there’s options to just be able to hold a little bit and not buy into the fear.

Jamil:
I love that.

Kathy:
That’s my [inaudible 00:37:43]

Jamil:
No, that’s a great perspective Kathy. And I think anytime that we allow ourselves to succumb to fear, the result is just more fear. So I think your perspective is astute. I think it’s really good for everybody listening. You’ve got to be able to take the pain. And you spoke about pain and I want to take these last two topics and kind of put them together because they address the pain.
And Dave, I’m looking at foreclosures, I’m looking at short sales and I’m seeing that there is definitely increases in both of those. Have you done any studying to find out how much they have been increasing and where they might be leading or what indicators they’re showing us the market to do or where the market is going in the coming 90 days, with respect to the pain that we’re feeling as sellers?

Dave:
Yeah, so it does. You will see a lot of dramatic headlines about foreclosures right now, because they’re going up on a relative basis, at a very high rate. So you might see, “Hey, foreclosures went up 200% since last year,” And that is true, but it’s going from one to three. The relative amount of foreclosures compared to even a normal year, not even 2008 to 2018, is still relatively low. And we actually had Rick Sargon on the show recently, who was explaining to us that a lot of the foreclosures we’re seeing now, are actually people who were just defaulting back in 2018 and they just got into the forbearance program. They sort of caught a break with COVID, were able to defer their foreclosure for several years. But I do think it will tick up.
A lot of what Kathy was saying about rates going down, that theory that rates are going to go down is predicated on a recession, right? Because if there’s a recession, bond yields will go down. So, if that happens, there probably will be a slight uptick in foreclosure but I don’t think it’s the point where we’re going to see anything like what was going on in 2018. Generally speaking, Americans are in one of the strongest cash positions they’ve ever been in, and are very well positioned to service their debt. If you just look at credit scores, you look at foreclosure rates, default rates, they’re really low. And that one I’m talking about here, is mostly residential. I think James actually had a really interesting point about defaults in a recent show, in a commercial space.
I don’t really know that much about that data wise, but I think there will be an uptick, but I don’t think it’s going to be this feeding frenzy. And I think one of the things that we talked about, I forget who the other guest was who said this but, someone was saying that they don’t expect the foreclosures to really even reach the auctions because banks are much smarter and they learn to hold onto these assets or not to sell them at such a steep discount as they did last time. I think there will be slightly more opportunity, but it’s not the strategy I would count on.

Jamil:
I love that. But I also really want to highlight that one position where there could be some opportunities in the commercial space. And James, I know that if there’s anybody on this panel that would be able to deploy the capital to take advantage of a possible foreclosure or a short sale situation in commercial real estate, you’d be the man to do it. What are you seeing and are you making any purchases in that realm right now, with what you’ve been seeing in the market? Commercial wise?

James:
Yeah, we come from… I mean, that’s where I grew up when real estate was banging on foreclosure doors and working short sales back in 2006, seven and eight and nine. And I will say about short sales, it’s a miserable process for me. We used to do 300 short sales at a time for servicing. I will never do that business again. It was just not enjoyable. It was very much a pain. But where I do, do short sales is, I like negotiating and targeting foreclosures and short sales with paper that wants to move things. This is not traditional Fannie, Freddie Mac paper. That’s a slow process. It goes into a box, you can’t negotiate, is fluidly with them. And so what we have been doing is, I’ve been calling over the last 30 days and my phone is ringing off the hook. Construction lenders, hard money lenders, private lenders and people that were underwriting deals very… These hard money lenders were asking for so little down on these investments, they were asking for 10% down, funding a hundred percent of rehab.
And now the market has came down 20% in some of these sectors and their paper is overvalued at that point. And they are bankers, they are not rehabers, right? We actually own a lending business in Seattle and we are actually rehabers. So if someone goes wrong, we’re going to come in, fix it, stabilize it, get rid of it. The most operators are not in the lending space and what they want to do is, they want to move paper. That’s how they make money. What they don’t make money on, is sitting on assets that are just compounding and dilapidating as it goes. A lot of these things are half built, they’re not moving forward and they’re going down in value as it speaks. And so, a lot of times, I’m actually targeting more of the business sector… Like a B2B foreclosure situation rather than the homeowner. The homeowners, I do think there is going to be some opportunity there in people that overpaid, that did very little money down, they’re going to walk away.
I think that does happen. I also do think we are going into a recession and I think people, yes, locked in great rates, they worked on their DTI in the now, but I think people’s income are going down right now. People’s income is going to be the [inaudible 00:43:19] over the next two years, or at least that’s what I think. If they were stretched to a 50% DTI, and their income goes down 20%, that’s a problem. I don’t care what your rate is. And so, those are the sectors that I do think there’s some opportunity. And actually, that’s where I think the sub two financing’s going to come into play. If it’s a nice cookie cutter house and they’re at default and you can take it, assume their loan, pay it current and then take over, that’s a great rental for you down the road.
But the short sales and foreclosure, we are targeting B2B opportunities. People moved a lot of money over the last 12 to 24 months. They want to get the paper off their books. A lot of these lenders have… I call them daddy lenders. They’re not the people financing the deals. Their daddy is going to call their notes due and they’re going to have to pay off these lenders that they sold notes to. And I want to step in the middle of that and buy those deals. And for me, it’s a great opportunity. There’s going to be half-built things, a lot of the stuff’s already going to be permitted, which is nine to 10, 12 months of hold times that I can cut right through, and I can go directly to the source, take over the project and usually buy that paper. That was where we were buying our best deals in 2008.
Wasn’t buying property, it was buying paper in distress. They were selling it to us at like 20 cents on the dollar back then. And if you could buy that paper that cheap… It was like, we would buy the paper, take it to foreclosure and a lot of times, it would get bit up to 40 cents on the dollar and we would rack a hundred percent return in a very short amount of time, or we got it back and we got to stabilize it and we would rip those deals. So working with people that don’t want to deal with assets, bankers will get rid of a property a lot quicker than a homeowner will. So that’s actually what we’re targeting right now. Foreclosures in the business and commercial space.

Jamil:
Incredible. Guys, I brought to the table five ways that I believe we could all benefit or at least pivot in this down market, but just listening to you guys talk for the last 40 minutes, I can tell that I’m definitely not the smartest guy in the room. So I’d love to turn it over to you guys and ask, where you are personally making changes. Henry, I know that you’ve got a lot of great opportunities for you up there in northwest Arkansas. What do you got going on?

Henry:
Yeah, I think a great thing for people to be doing in this down market is, working your network hard. Shooters shoot, right? Investors invest, it doesn’t matter the market, they find opportunity. So there are people that are buying, we’re all actively buying. There are investors in every single market right now, that are actively buying. I think there’s a great opportunity to find really, really good deals and sell those deals or assign those contracts to the shooters, the buyers.
I think your competition is going to be less because as things get more difficult, economic times get harder, I think you’re going to see less wholesalers active, less deal finders active. Especially the ones who haven’t developed a strong buyers list, because that’s the part that’s going to be hard to find. Now the deals are going to be out there, but if you don’t have a strong buyer’s list or a strong way to dispo your deals, you’re going to be stuck with telling people you’re going to put their property under contract and know where to take it.
So, if you can develop that strong list of buyers, I mean, you can make money hand over fist right now because the buyers are still buying. If you find that right network… I think it was Kathy who alluded to it earlier, about finding private money, talking to your network, find the people who are still investing regardless of what’s happening. Let them know, “I’ve got deals coming for you.” And then you can take advantage of buying deep and then assigning those contracts to the buyers who are out there, active in these markets, looking for those deals.

Jamil:
Great. Great advice. Kathy, what do you got going on that’s different?

Kathy:
Ooh, I mean it’s not different, it’s what we’ve been talking about. We’re syndicating. We’re back into syndicating heavily and that means, again, raising money to raise cash to go be a cash buyer without competition and not having to pay high interest rates to a bank. I’d rather just give that to an investor and part of the profits.
So it’s where we’ve got a 20 million dollar, single family rental fund. It’s actually one to four units and we’re doing exactly what James just said, finding builders who couldn’t complete. My partner has operations in Dallas, so she’s got property management, she’s got all the repair teams, she’s got the acquisition people. So we’re able to just go in where somebody just got a little too aggressive, didn’t understand how to build or how to do a reno and we’re able to pick it up for cheap, finish it off, but we’re keeping it, we’re not selling because this to me, is not a seller’s market.
I mean, yeah, it’s just a time to be buying and holding, in my opinion. When it’s time to sell, we’ll sell. But these cash flow. So it’s a little bit different than what James is doing because he is actually cash flow really well. So we’re just going to hold. We’re sharing the cash flow with the investors and sharing the profits with the investors.

Jamil:
That’s great. Relationships win all the time. James, what do you have going on?

James:
It’s all about restructuring deals for us right now. As the market, one thing I’ve learned is… We’ve been through five different little market cycles since I’ve been doing this in… We started in 2005 and we’ve seen all sorts of things go on. And one thing I have learned is, you have to pivot and change your whole… Structure your business and how you operate with every market change. And one thing that I like to do in transitionary market is, we’re actually engaging… We can find the deals right now. Finding the deals isn’t a problem. I have lots of properties coming in, they’re large multis. We’ve done a couple syndication deals recently. Small multis for development [inaudible 00:49:07], we’re looking at fix and flip, we’re still buying development, we’re buying with only permitted sites now, to cut the cost down. So we kind of know that strategy.
But how we reduce risk and what we’re doing right now is, we’re actually meeting with our strategic partners that we’ve known for a long time. And a lot of these people, we’re looking at different ways to joint venture deals. Because half it is, we know that time is a killer right now. There’s two things that are killer on deals, time and debt cost. And so what we’re trying to do is address those two items. The first thing is time, is we started engaging. We know that our contractors are actually low on work right now and pricing’s coming down, they need work and they need a better kickers on them. So we’ve actually met our best three contractors and we have proposed joint venture deals with them to where I can operate, focus on my business, focus on getting the deal flow and then we are giving them 30% of each deal but they are getting these projects done 25% below budget and it’s moving extremely quick and that’s going to reduce my exposure to a bad market.
I’m happy to give money away to make sure that I’m staying in and out and fluid in the market. That’s the first thing is they’re doing. Finding joint venture deals with operators that can reduce our risk through professionalism and good strategies. The second thing we’re doing is, instead of looking at the same way that we always look at it, “Hey, find a deal, get whatever debt cost we can get,” Right now, short term bridge cost has gone up three to four points in the last 90 to 120 days. You used to be able to get money at seven, 8%, now it’s 11 to 12. And that is going to consistently keep going up for a little bit. So what we’ve done now is, how do we reduce that risk? Well, we can go find bigger money partners that are not great operators because what we’ve seen over the last two years is, a lot of people bought assets, they made a bunch of money but they didn’t really have the right plan but they still made money anyways.
And these people know that they went a hundred percent over budget. They got a little bit lucky but they’re cash liquid at that point. So what we’re doing is, we’re proposing and looking at deals and bringing in JV partners, where we’re giving them a pref return and an equity split because it reduces our carry cost. No matter what, it mitigates the risk down. So we’re focusing more on the strategic partnerships and how can we operate and mitigate risk during transitionary time, rather than just trying to buy cheaper and do those things.
And so, really lean into your partners, figure out where the synergies are, figure out what everybody’s good at, and then put the puzzle together. And then we’re buying based on what puzzle pieces we put together. It’s all about the resources and the bench. And by doing this, by having this, it gives us like… I can go still do luxury flips if we’re very liquid on cash because, what kills us on a luxury flip is, our payments 10 to 15 grand a month to carry that house, it’s expensive. And if we can reduce that, wipe that off, we can still get in those deals and we’re buying them for substantially cheaper, mitigate the risk and still rack the good returns. So we’re just looking at deals differently.

Jamil:
That’s mind blowing, James. I had not renegotiated with my contractors yet, either. So again, another insight that I’m going to take back to my team and implement immediately. Dave, what are you doing differently out in Amsterdam right now, to help your investing over here stateside?

Dave:
Well actually, this is the first time since I’ve moved to Europe that I’ve actually been pretty seriously considering buying individual properties. I’ve been just doing syndications and funds over the last couple years because I couldn’t play the game when you had to bid and respond to a seller in like four hours, because I’m asleep when you guys are all doing that stuff.
But now, since things are sitting on the market and you have time to actually consider some deals, I’ve actually been… In addition, I’m still doing syndication investing, but actually looking at buying in Colorado again, it’s starting to make sense for the first time in two or three years for me. So I’m super excited about that.

Jamil:
That extra time also just gives the seller a little bit more anxiety because you’re sleeping and there’s…

Dave:
Like, “What is he doing? Why isn’t he signed yet?”

Jamil:
“Why is he taking so long? How aloof.”

Dave:
Yeah.

Jamil:
Guys, this was really fun. Dave, thank you so much for letting me win that bet. I know it happened guys. You guys felt sorry for me and you wanted to give me a win, so you’re like, “Hey, let’s just let Jamil win the debate and let him have a takeover show.” I know it was all a conspiracy behind the scenes to love on me a little bit, but thank you so much for giving me the chance to take over the On The Market show today. Dave, how did I do?

Dave:
Oh, you did great, man. Now I get to go on vacation. I’m going to call you and you can do all the planning and research too. This would be great.

Jamil:
This is a lot of fun. Guys, again, if you have not yet subscribed to this channel, please like and subscribe and leave us a review on whatever platform you’re listening to this podcast on. It’s really important and it helps our numbers. And from myself and the rest of the panelists here and our old host, Dave Meyer, we will see you On The Market on the next show.

Dave:
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media. Research by Pooja Jindal and a big thanks to the entire Bigger Pockets team.
The content on the show, On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

CNBC’s Diana Olick joins ‘Power Lunch’ to discuss the impact of rising intrest rates on home affordability, the causes of buyer pullback in the housing market and the compound effect of high home prices and high mortgage rates.