Richard

In an excellent article on early-stage venture capital (VC), former VC Andy Rachleff notes that the top 20 VCs, i.e., about 2%, earn about 95% of VC profits. Is this true? Why? What are the implications?

Here is why few VCs earn most of VC profits:

· Home runs are key to VC returns because VCs fail on about 80% of their investments. Only about 19 are successes and one is a home run, and these profitable ventures have to pay for the failures and offer a return. VC portfolios that do not have home runs will not be in the Top 20 (Designing Successful Venture Capital Funds for Area Development: Bridging the Hierarchy & Equity Gaps Dileep Rao, Applied Research in Economic Development, 2006. Volume 3. Number 2).

· Due to the high level of losses in its fund, Y-Combinator (a noted Silicon Valley incubator) is said to have earned a mediocre return in its fund that included an investment in Google.

· Noted VC Marc Andreessen of Netscape and Andreessen Horowitz notes that about 15 ventures are said to account for ~97% of VC returns. VCs who fund these ventures are likely to be in the Top 20.

So, whether it is 20 VCs or 40, and 15 home runs or 30, the reality is that there are very few home runs, and VCs need to invest in these few VC home runs if they want to be in the Top 20.

Here is how the Top 20 VCs invest in potential home runs and earn most of the returns:

· They hunt where the home runs roam. VCs do not start home runs. Unicorn-entrepreneurs do. And unicorn-entrepreneurs have mainly been in Silicon Valley. That is why VCs have mainly succeeded in Silicon Valley.

· Importantly, the Top 20 VCs invest at the best stage of the venture for VCs. VCs need to see evidence of potential, i.e., Aha, to earn high returns and reduce risk. Rachleff notes that the Top 20 VCs finance after the Value Model (Strategy Aha) and before the Growth Model (Leadership Aha) for better value and reasonable risk. After Strategy Aha, venture leadership is the key goal. This is one key reason the Top 20 VCs often replace the entrepreneur, like Pierre Omidyar (eBay) was with a professional CEO, in order to grow faster and increase the chances of leading the emerging industry. Risk-averse VCs (an oxymoron) invest after Leadership Aha. But by then the venture’s potential is evident for all VCs to see and the high interest from VCs to invest puts entrepreneurs in control. Entrepreneurs such as Jan Koum (WhatsApp) and Mark Zuckerberg were able to select their VCs and dictate the terms. The high demand also increases valuations and reduces annual returns.

Implications for VC-Based Ecosystems Outside Silicon Valley

· The belief that there is a VC shortage because so many “deserving” entrepreneurs are rejected, and the assumption that everyone can succeed as a VC just by starting a fund, has led to the launch of many targeted VC funds. Few seem to be asking the right question: if there was such a shortage, why do so few VCs succeed and so many VC-funded ventures fail? To earn high returns outside Silicon Valley, VC-Based Ecosystems need to develop Unicorn-Entrepreneurs to start potential unicorns.

· Without home runs that can go public, VCs cannot earn the huge returns that public valuations offer during euphoric times. This means that VCs outside Silicon Valley have to mainly exit via strategic sales, but few of these strategic sales give home-run returns.

· Areas outside Silicon Valley that are starting VC funds should instead focus on developing Unicorn-Entrepreneur-Based Ecosystems if they want sustained success.

Implications for Entrepreneurs and Entrepreneurial Ecosystems outside Silicon Valley:

· Entrepreneurial ecosystems (EE) outside Silicon Valley need more Unicorn-Entrepreneurs who have the skills to start and launch home runs without VC. They can learn from the 94% of Unicorn-Entrepreneurs who avoided or delayed VC.

· Areas that use VC to develop high-growth ventures have another problem. For their ventures that are successes, but not home runs, the most likely exit is going to be via strategic sales where the venture is sold to a corporate buyer who may move the venture and its potential growth elsewhere. The area does not gain.

Implications for Sustainable Development

· Any constraints that are added to the development of ventures reduces the range of investment options. This means that VCs that fund “sustainable development” have a smaller universe to fund, with a lower probability of home runs. This also means that sustainable developers need to reduce risk and increase potential by developing Unicorn-Entrepreneurs who can grow more with less. .

MY TAKE: Few VCs outside Silicon Valley do well because they try to build unicorns using venture ecosystems, which is a frontal assault on Silicon Valley. They would do better by building the entrepreneurial ecosystem and launch a guerilla attack.

Wealthfront BlogDemystifying Venture Capital Economics, Part 1 | Wealthfront
NytimesVenture Capital Firms, Once Discreet, Learn the Promotional Game (Published 2012)
TechCrunchWhy Angel Investors Don’t Make Money … And Advice For People Who Are Going To Become Angels Anyway
MORE FROM FORBESFlips, Flops And Unicorns: Where Will You Fit In The VC Portfolio?By Dileep Rao
Wealthfront BlogDemystifying Venture Capital Economics, Part 1 | Wealthfront

Dave:
What’s going on, everyone? Welcome to On The Market. I am your host, Dave Meyer, here with James Dainard today. James, how’s it going, man?

James:
It’s good, man. I’m excited to talk about dirt. It’s actually one of my favorite business models is sourcing building lots.

Dave:
Is it something you’ve been doing a long time?

James:
Yeah. Well, we’ve been doing it for about 10 years, but then we really started sourcing a lot of dirt a couple years ago, or I’d say three years ago because we were working with so many fix and flip clients, it’s the same general process. But honestly, as a wholesaler broker it’s a little bit easier because when you’re selling dirt versus a fix and flip house, a lot of times they’re just a professional company buying it. And so it’s a lot more of a smooth transaction rather than the learning curve of fix and flip.

Dave:
Yeah. It seems like an interesting time to get into this business, which is why for everyone listening we’re bringing on a guest, Dan Apke, who is going to teach us and inform us about a pretty interesting strategy I had not really heard much about prior, which is basically land flipping. And we wanted to do it because, James, you’ve said a lot on the show recently that land prices are going down a lot and obviously that presents risk. But it also could present opportunity if land prices are falling so dramatically. I’m curious to hear if you and Dan think that it’s a good investment or there’s going to be some attractive price points in the near future.

James:
Yeah. There’s a great opportunity for people right now buying that kind, at least in our metro area. Dirt has fallen 30, 40%. And so what it’s allowed us to do is actually buy some rental… Rather than just buying land cheap, we’re actually buying rental property with zoning upside to where that property can be worth a lot of money down the road.
And so I know in our market there’s a substantial opportunity. Anytime you can buy it 30%, 40% cheaper in a nine month period, that’s usually a good idea. I’ll be curious to see how it’s going in the rural market because I know the more expensive product has came down more, but that cheap investments, they have a lot of velocity right now. They’re still moving. People still want to buy real estate, but they want to buy the cheap stuff.

Dave:
All right. Well let’s bring on Dan, because I think that you make a great point. We’re going to bring on Dan, who’s going to teach us all about a very interesting business model for buying land that maybe many of our listeners will want to consider. But I think even if you don’t, learning just about… We’re going to talk a lot about an area of the country and a part of the country that we don’t talk about a lot in the show, which is rural America. And Dan has some really interesting insights into what’s going on with real estate in general in rural America. So you’re definitely going to want to stick around and check this one out. But first we’re going to take a quick break.
Dan Apke, welcome to On the Market. Thanks so much for being here.

Daniel:
Thanks for having me, Dave.

Dave:
Well, why don’t we get started by just having you introduce yourself and telling our audience a little bit about your involvement with real estate investing.

Daniel:
Absolutely. Originally, I got started in e-commerce. I had an e-commerce electric bike company. I was trying so many different businesses. I had drop shipping businesses, I had Amazon FBA businesses. And along the route, I bought my first round of property about five years ago. It was a commercial salon. That was my first introduction to real estate as a whole. So it was a salon on the bottom, apartment on top. I bought it for $82,000. That was my introduction to real estate. That’s when I fell in love. And ever since then I continued to buy real estate along the way. I was involved in all these different businesses, like I said, 10, 12 different businesses. And I just saw lack of sustainability in a lot of these kind of get rich quick schemes, a lot of different things that will not be around in 20 years.
And I sold my electric bike company to an investor out in California. And during the process of that, one of my mentors kind of showed me buying undermarket land and I dove full force into that with my brother. He is my 50/50 business partner. We looked into the business model. I loved the sustainability of it. I loved how just wasn’t competitive like a lot of the other real estate industries I was seeing at the time, just lack of competition, sustainability. We dove full force into land investing, started buying anywhere between 20 to 50 properties in our first few months of getting into that. And ever since then, it’s been history. We’ve been hiring transaction coordinators, salespeople for our team. We dove into land investing, really full force. I love the sustainability, I love the lack of competition in the space and just something that’s going to be around for a long, long time.

Dave:
That’s great. Congratulations on your early success, or all of your success. I do want to get into the land, that’s obviously why you’re here. But given all the side hustles you’ve done, what was the worst one you did? I’m very curious.

Daniel:
I had a ghost-writing business. So I was publishing books in the romance sector.

James:
Whoa.

Dave:
I’m so glad I asked the question.

Daniel:
I don’t read a lot of books in general, for the most part. I’ve always had trouble struggling reading in general, just from lack of attention. And then I started writing romance books using an author and publishing those on Amazon. It was actually good money, just I hated it. I hated the business model.

Dave:
You got out right before ChatGPT too, I’m sure you’re writing all the romance novels now.

James:
Yep. So Daniel, how’s your dating life, if you’re a romance novelist?

Daniel:
I put a lot of emphasis on the editing. I never even got around to really reading one of the books to be honest.

Dave:
All right. Well let’s get into the real estate side of things. So you said someone introduced you to the concept of land investing. Is that right?

Daniel:
Exactly. His name was Mike Brusca. He was doing e-commerce with me, my mentor in the e-commerce and drop shipping space. And he had a lot of success and he saw this business model. The key, what he was doing, I think at the time he was buying properties under market value and then reselling them I think on notes or seller financing and things. And I saw the objective of buying properties under market value. And we switched up the business model a little bit, but that was the name of the game at the time and he introduced me to that.

James:
And Daniel, because land acquisition is a huge market and there’s all different type of land that you can source, whether it’s track home spot lots or affordable lots nationwide. What segment are you in, and then why did you go to that segment of the market? Because there’s so many different businesses inside land acquisition and disposition. Which ones did you guys focus on immediately? Because getting going on 20 to 30 deals in your first couple months, that’s a lot of moving. You’re moving a lot of land, or dirt at that point. What made you focus on the specific area and what do you guys target?

Daniel:
So we were targeting at the time anything from two to 50 acres that were really laid back with zoning. We want someone to be able to put a mobile home on it. Very, very little restrictions. We didn’t like HOA properties just because they were more difficult to sell a lot of times if we didn’t know the market and have a buyer’s list and things like that. So we were going across mainly the south. At first we were in Tennessee and Georgia. Those were two main markets and we’re really outside of those, the Nashville areas, Memphis areas and Atlanta. And we’d go one to three counties away from those areas and target anything really between two to 50 acres with very little restrictions because the lower restrictions, without knowing a ton about the market when just entering the lower the restrictions, the safer it is. And that’s kind of how we scale to that number. We just got nice pieces of land, we get drone shots on all of our land. We get really nice pieces of land with very little restrictions and they sell pretty well.

James:
Okay. So you guys focus on path of progress areas. Is that naturally what you’re looking for, those core? Because that’s where you can get big hits is that path of progress, metro areas are expanding out. Is that why you guys focus on the fringe with low regulations, but is it also just because the growth is naturally as the market gets better, it expands out? Is that been kind of the reasons you started with outside Nashville or major metro cities?

Daniel:
So for us it’s about finding that balance. We don’t necessarily want to be in the hottest markets in the United States, but we also don’t want to be in the slowest markets. We like to find that balance. That’s why we take those hotter areas, the path of progress, take the Nashvilles of the world, that Atlantas of the world and bounce a few counties out. That’s kind of the name of the game. We want to make sure, yes, we can sell it on the backend, but at the same time we don’t want them being overwhelmed with other people’s offers, extremely competitive. So we try to find that middle ground in this business model.

Dave:
Speaking of business model, that’s actually the question I wanted to ask you, Daniel. Can you just give us a basic rundown of what the business model is for buying land?

Daniel:
Absolutely. So the first thing we do, like we were just talking about, we actually need to select a county. We go by countywide. We’re not in zip codes or anything. We usually select a county outside of an area. We’re talking about one to three counties outside of a city of our choice. And let’s say example is Atlanta, we’re going around Atlanta market. We choose five to 10 different counties to analyze. And then we’re actually analyzing what we do. We analyze, okay, what’s the days on market? What’s the population density? We don’t want overly populated areas. It doesn’t work well for this rural vacant land business model. So we also want to see another major thing to look at is what properties are for sale on the market now. Are we going to be competing against 25 other five acre properties on the market? So we want to look at the competition.
But then we also want to look at the sold data. Make sure the for sale to sold data ratio is okay to make sure, okay, we’re going to buy this five acre lot, we got to put it up and we got to be able to sell it. So we start diving into things, how long did this five acre lot take to sell? How long was it on the market? How long was it pending and actually going through on the sale?
But then what we actually do, talking about the business model specifically what we do, we’re pricing all of our offers. So we’re sending blind offers, that’s how we acquire. And we typically send blind offers to purchase their land in cash for about 35 to 45% of market value on average. And there’s a lot that goes into that. But that’s what we’re doing in bulk, right? We’re pulling a lot of data. So say Macon County, Georgia, we want all the records from two to 50 acres we discussed before. That spits out 5,000 records. Now let’s go into the county and figure out how to price it, look at the competition, and then really just bulk price that 5,000, send them direct mail.

Dave:
But how are you making money off it? Who are you selling them to? How are you reselling them?

Daniel:
Yeah. So we’re buying these in our own names. We have a group of investors in our land community, and they actually will put up the upfront capital to buy the deal. So we’re buying them in our name and then we’re putting it on the market. If it’s an area we do a lot of work in, like around Atlanta, Georgia, we have really, really good land realtors we work with that know us and work with us very closely, we’ll give it to them. We’ll just hand it over to them, they’ll put it on the market, do the showings, handle all the leads for us. If we’re in an area we can’t, like we’re talking rural America. Where’s majority of our land? It’s in rural America. And sometimes there’s just not a lot of land agents out there. And then you take the small amount that there are and there’s not a lot of good ones as well.
So if we can’t find a good realtor, what we do, we will put it on the MLS using a flat rate broker and we’ll put it on a website called land.com. It’ll get to Lands of America, landwatch.com, all those. And then last is Facebook marketplace. We actually sell a ton of land on Facebook Marketplace and that’s kind of our strategy. So we always get on the MLS, so it’s on the Realtor and Zillows of the world, and we’ll always get on the land.com and Facebook Marketplace. Those are our three key areas to sell. So we’re selling to the mass public. We personally don’t really utilize buyer’s list because we’re not doing the whole infill thing. We’re selling the end users who are putting a cabin on it, putting a house on it, whatever, just hunting on it. And that’s kind of our business model. When we get more into in infill lots, that’s when we utilize our business or our buyer’s list and all of that.

James:
And Daniel, what kind of feasibility, as you’re buying land, because you’re buying in all different types of areas and counties. So before even if you’re targeting 35%, you want to make sure that you’re buying something that’s sellable. What kind of feasibility do you guys run on these properties before you close on them? Because if there’s setbacks or anything like that, it can kill a deal really easy. Or if the topos out of whack, which is the topography, if there’s a lot of hillside. What do you guys do prior, to find that deal?

Daniel:
So for every five purchase agreements, so that’s what we’re sending out, we’re sending out purchase agreements in the mail, blind offers. So for every five we get back, we usually buy one of them just because like you’re saying, the feasibility. We call it underwriting the deal. We’re looking at the wetlands, the slope, the typography. We get drone out to every single lot before we buy it to check everything. We look at the pricing, make sure… Sometimes we’ll weigh overprice mail by accident. It just happens. We’re sending out such a large volume of mail, some pieces we’re just overpricing. Sometimes we got to go back and negotiate down.
There’s a lot of things that come up. But in general, yes, slope, wetlands, floodplain, and then we look at attributes, things like that. Then we get a drone guy to walk out there. We have a set of things that we send the drone where he actually goes and walks the property, gets ground photos of it, aerial photos of it, walks the property, give us a report, and then gives us the pictures. And then if we’re using a realtor as well, we’ll send them their prior to purchasing it as well. So those are our steps. We have a very heavy underwriting process before we actually wire the money.

Dave:
So you’re going out and buying these, you said like 30 to 40% of market value, is that right?

Daniel:
On average, 35 to 45%.

Dave:
Wow. That’s amazing. And then how long are you holding these on average and what kind of holding costs do you have?

Daniel:
Yeah. So on average, we get it under contract on average in about three weeks. And then one of the bottlenecks we run into is just land loans. It’s hard for people to get land loans in rural America, and that’s where it’s either okay, they have to have cash or they have to have some sort of banking relationship. And that’s kind of the holdup is on the loan a lot of times. So usually, on average, we get it under contract within three to four weeks, and then it’s usually an average of five to six weeks to close after that.

James:
What kind of debt? Because land loans are very tricky, especially in the last nine months, they’ve tightened up quite a bit. There was a lot of raw lot loans going out. I know we were sourcing a lot of dirt where people would buy well before permits, right? Because typically builders, like in infill lots, which is a little bit of a different business model, they want to close with permits because they can get better debt on it and have less liquidity in the deal. You’re targeting lots that are a lot more affordable, so you can kind of move, flip, it’s a different sale. You’re going after that discounted lot where the cash outlay is not as heavy. What kind of loans do you guys usually get? Because as the market tightens and the rates go up, lenders want more and more down. Have you had to change recently? And what kind of debt do you guys usually try to get and what’s the average rate on those?

Daniel:
The average rate, and there’s specific banks, especially in Georgia, there’s a company called, I think it’s Finance Land Georgia or something like that. And they work with a lot of our buyers in that state. Really state by state. There’s a lot of local banks who will finance land. Their average rate is probably around 10%. A year ago, probably 60 to 70% of our sales were cash, cash closes. But obviously things are changing, debt’s getting more expensive, money’s getting tighter.
So we’re starting to really have to look in that direction. How are we going to move land quicker without having the debt side such an issue? So we’re starting to look at things like seller financing, offering our own financing as well and then just selling the note. The good thing about selling seller financing is you can get things under contract really, really fast generally for land in these desirable areas. But the bad thing is on the back end we got to maintain it, it’s more work, or we have to sell it off for 75% of the total unpaid balance. So you take a hit on profit. I’d rather personally drop the price enough to be able to get someone with cash or a loan. That’s kind of our business model right now.

Dave:
So in recent months, Dan, have you seen the time it takes for you to resell properties tick up?

Daniel:
Yes, yes. Used to be, we used to put 50% of our properties used to sell same day or day after almost.

Dave:
Whoa.

Daniel:
Now it’s starting to, okay, it sits and some we’re seeing more price drops for sure. It’s definitely here for sure. Things are slowing down.

James:
Yeah, I know in our local market, we’ve seen… We sell a lot of spot lots. We were talking about this before we hopped on, where we’re focused on core metro areas. A lot more expensive dirt that we’re usually trying to plan and permit out the site prior to even closing on it because the cost of the dirt. Our average lot where we are is going to be seven to $900,000 just to buy the lot.
And what we’ve seen is that because of the debt, local banks and lenders are being very aggressive on land acquisition, or give permitted site to where they were asking for… We did a town home site where the bank financed us 90% of the deal. It was 10% down with the buildout in there. But that’s drastically changed over the last nine months. These banks, especially the local banks, as some are starting to have issues, their regulations in underwriting has really stepped up to where now, they’re not really doing raw land or they want to be at a 50% LTV on it. And so we’ve seen the demand for dirt. Dirt pricing has fallen 40% in our market in a nine-month period, just because access to debt. The resale values have only compressed like five to 10%, but the cost of the dirt has fallen dramatically. Are you seeing that in these raw lands too, in these outskirts areas or because it’s so cheap you haven’t seen as much movement on it?

Daniel:
Yeah, we haven’t seen movement in the price you’ve seen in that area. That makes sense, especially with building getting tighter and tighter and debt getting tighter and tighter. Out in our markets, we haven’t seen price drops like you’ve seen, but what we are seeing is more and more buyers backing out of the deal because they can’t get loans. So they’re getting pre-qualified or whatever a month or two ago they come to us, they put the offer in. We have to be really, really picky on the front end, kind of analyzing the offers because what happens is people are underqualified saying they’re getting a loan and then like you said, these loans, their underwriting process is changing significantly. So yeah, we’re seeing that as well, just not on the pricing side.

Dave:
Dan, you said that one of the things that attracted you to land investing is that there is relatively little competition. Why do you think that is? The way you’re describing it, it sounds like a very interesting profitable business. Why do you think there’s not more interest from other real estate investors?

Daniel:
It’s picking up for sure. You’re starting to see there’s certain areas we target where the landowner will get three or four different offers. Most of the time it’s not that way. But I think it’s just a newer emerging business, model to be honest. It is picking up the competitions rising, but it’s still greatly lower than going to wholesale property in Austin, Texas or something like that. So I think it’s just a newer business model that people are starting to understand and see. So what we’re seeing now, there’s a lot of wholesalers coming to try to wholesale land as well and they’re starting with the infill lots and then they’re coming to us and seeing our business model as well. And they’re starting to come to more rural land and get outside the infill lots as well. So I think the wholesalers are starting with the infill lots, they’re coming in and now they’re starting to expand out. It is a really, really fast-growing niche right now, the land investing model, especially in the rural America aspect.

Dave:
And if someone listening to this is interested in getting into this model, what type of investor or what skills do you think are needed to get into land investing to be successful?

Daniel:
The biggest obstacle that we see is mail. We’re sending direct blind offers. That’s what’s worked best for us. We do text, we cold call, we have services for that as well, and we’ve emailed. We’ve tried all that. It’s good to get people on the phone, but blind offers filters out all the BS. They call you and they actually want to sell their land.
So the biggest obstacle with that, blind offers, is the upfront capital. It’s like 62 cents to send a piece of letter. So the biggest thing is people coming in that are kind of fearless, they understand we’re going to reach people through blind offers. So that takes upfront capital and you have to believe in the business model to do so. The people that succeed are people who come in and they’re more fearless, they’re ready to go, they’re ready to send mail, they’re ready to acquire properties. And the biggest scale I see payoff in this business model is great salespeople, right? Because they get on the phones, they’re not scared to talk, they’re very confident. They negotiate down, they negotiate with these sellers because a lot of the sellers that we send a letter to call us, they want more money or they want to make sure they can trust us to sell us their land. So they just want a conversation. So the people that come in with good sales experience, I think, do the best.

James:
So you kind of referenced that a lot of wholesalers, and I’ve been seeing this too, wholesalers was kind of a big deal. Wholesaling dirt was a big model for the last 24 months and actually guys were getting paid really well because builders were being so aggressive. I’ve never seen builders buying like this in infill. They were paying 50% of value, which typically they’re 25 to 30%, 35 to 40% with a permanent hand. But they were just breaking all their rules at the time. And then as it’s gotten trickier, I think I’ve seen the migration, like you’ve said, from these wholesalers sourcing infill because it’s a lot more complex on those lots to go into these more affordable markets. And just all investments right now, people are chasing that, affordable deals. If you have a really good fix and flip property that’s more expensive, people are still wary of it because it’s expensive, the debt costs more, you got to have more capital outlay, but then the cheap fix and foot deals are still flying off the shelf.
Are you worried that that space could get a little bit more crowded since wholesalers are having a lot hard time moving dirt in these infill areas? I know for us we had to switch our model from us tying it up, doing the analytics to going, “Hey builder, where do you want to be at?” And we work it backwards at that point because it’s just to lock the deal in because of the different variances that come in with infill lots like the city, the jurisdiction, the permitting. Do you think that your space could get more crowded with the complexity that’s happened in these more expensive markets?

Daniel:
Yeah, it’s going to. They come in and they see the simplicity of it and the profit potential. They come in and they see the… Yeah, it’s a matter of time before it gets more and more competitive. It’s going to happen. It’s much, much more simple of a business model, flipping rural dirt, rural vacant dirt without any restrictions on it than what you’re seeing in those more metro areas with the very expensive lots. So naturally, it’s going to get more crowded. That being said, the business model will change over time just like business models do. In five years, we might not be able to buy a piece of dirt for 35 or 45 grand and resell it for 100, 110 grand. In three weeks, it might not be that way.
But we might have to change the business model. Right now we’re doing a lot of different projects, improvements, repurposing, rezoning, things like that. It’s not that complicated too. You can take a 50 acre lot, split it five times down the middle and sell five 10 acre lots and get 310, 350%. So I think naturally as it gets more competitive, which it will just because the simplicity and the profit potential in the business model, naturally the business model will change a little bit and that’s where these different niches are going to get more and more important and specializing in these different markets are going to get more and more important.

Dave:
Can you explain some of the specializations in the market? You’re talking about sub-dividing land. Are you selling those to a developers, to farmers? Who’s buying these?

Daniel:
So we’re not selling to developers typically, and we’re talking minor subdivisions. Splitting something up five times for a 50 acre lot, it’s extremely easy to do. We’re not talking about putting roads and sewage and plumbing and all that stuff in it. We’re talking about just minor subdivisions and our future buyer typically someone who just wants five acres outside of a city or they’re sick of living in a city or they live in the area, they just want to move and have land and have space. I, personally, that was one of the biggest obstacles I had to overcome is understanding there’s actually a demand in rural America for these rural lots. But there is, there’s so many people out there looking for five acres, 10 acres, 20 acres.

James:
And with these people looking in high demand and what we were just talking about, kind of lack of access to capital are you guys looking… I know for us sourcing dirt, we’re always looking. Anytime we’re working on any type of investment, it’s how do we maximize it? And for us, we’re actually starting to take these lots in and entitling them ourselves because we can then sell these lots for typically 30% more than we’re selling them for, raw.
As you scale your business, you’ve had a lot of success, you’re moving a lot of different dirt. Are you guys looking at getting into any other types of things, like entitling your property? And entitlement, just for everybody, is when you grab the piece of raw land, you permit out the site. Permits are ready to issue, which then a builder can get better financing on. Are you guys going to be doing any of that just to kind of expand the business model, or is it you focusing on the dirty cheap lots? You’re obviously buying them at great spreads. You’re getting 100% return on your investment, on each lot, but what’s next on the scaling as far as sourcing dirt and selling it?

Daniel:
Yeah, we are looking into doing that. We haven’t done much of it so far, to answer your question. But for us, our target this year is let’s do more expensive lots, more six figures, some seven figure lots that we’re buying. And with those lots, you have a lot of different opportunity to repurpose them and rezone them or subdivide them like we’re saying. So what we’re looking to do, we’re just looking for bigger, more expensive lots. So far this year we’ve already bought probably five to 10 different six figure lots, which is big in this space. We weren’t doing that a year ago.
We were buying 20, 30, 40, $50,000 lots. This year so far we have a lot of different six figure lots we’re buying. And a lot of the times, they’re that much more expensive because one, the area, but two, a lot of times we’re just buying bigger. Tomorrow we’re closing on Sumter County, South Carolina, we’re closing on a 75 acre lot for I think around 70, 80 grand. So we’re really looking for more expensive properties. It’s still cheap compared to the Seattle market, what you’re seeing, 700 grand for a lot. But for us, we’re trying to scale our numbers up and we’re doing that by doing more projects and buying in more desirable areas.

James:
And so you guys are going to be developing those out and that kind of blows my mind. You’re saying, “Oh, we can make these subdivisions in a quick amount of time.” For us, it takes 12 months to get a permit for a single family house, nine to 12 months in Seattle. Town homes are like 12 to 18 months. So when I hear buying a raw lot and doing a subdivision, I’m naturally like, “Ugh, this is such a long deal.” What is the timeframe for that? You can take 70 acres, let’s say you want to split it up into four parcels, what does that look like and how long does that take? Because the debt cost can erode a deal very quickly. What’s the timelines on that?

Daniel:
Typically, you’re on the surveyor. You’re just waiting on the survey and then you just need to file. That’s why we’re focused on low restriction areas because of that. We don’t want to have to get all the permits and do all that work, like you’re saying, and wait 12 months. We’re waiting on the surveyor at the time. So right now, six to 10 weeks to get a survey done and then you need to file and do all that. So usually, within eight to 12 weeks, we can have a full survey done. A lot of times quicker than that. It’s just really depends, the area and the surveyor’s availability.

James:
And then how long does it take for those cities to issue those lots? Because that’s where we get jammed up. We’ll have our surveyor out to a site in five days, but then it goes into this abyss of waiting in the city. Do these counties just really approve it that quickly?

Daniel:
Yeah. Typically, no, there’s not much hold time on that. Within a couple weeks, we should have that all ready to go.

Dave:
Are you jealous, James?

James:
I am extremely jealous because the timing and the waiting is what kills you on these deals.

Daniel:
Absolutely.

James:
We have a town home site that we’re doing, and we got a good price on it, but it’s so expensive. We paid 4.7 million for this site in Bellevue, Washington. We’ve been waiting on permits for three and a half years.

Daniel:
No.

James:
And granted, if it had permits, the site would’ve been worth 8 million because it’s in a prime, prime location. But it’s like when you get to that two, three year mark, you’re like, what is going on?

Daniel:
That blows my mind because I’m not used to the… And that’s part of the reason our business models outside of cities. The people that come looking for this business model are the people who want quick cash flow, quick way out of their nine to five. And you’re not going to do that by repurposing and rezoning. You can buy these. That’s why we’re so focused at first on buying the 40,000, selling them for 80,000 because it was a quick way out of our jobs, quick way to get good cash flow and all of that. We’re not used to the city ordinance like that, waiting on city.

James:
There’s a lot of politics that go on there. And so it just goes slower and honestly, I think I need to get into your land business because I think every year that goes by with a permit, it knocks a year off your life too, because cause you’re just so frustrated. I was at the city yesterday like, how do we get this moving forward? And it’s been even worse lately because with the labor market issues, these cities are having problems hiring people too.

Daniel:
I’m sure.

James:
So it’s like they’re understaffed, it’s taking forever and it can become very detrimental to your deal. If you think it’s going to be a year and a half permit and you’re putting 50% down, it turns into three, your cash on cash return just drops dramatically over the life of that deal. And so I’m extremely jealous right now of your timelines.

Dave:
Dan, thank you so much for joining us. We really appreciate you teaching us a little bit here. Is there anything else you think our audience should know about land investing before we get out of here?

Daniel:
Like I said, it’s really for the people who are stuck in their jobs and want a quick way out, or just want a way out. It’s a cash flow heavy. Rental properties, you’re in it for a long term investment. You’re not going to get out of your job first year, generally. For me, land flipping was that income. It was that way of doing that, getting out of my nine to five job. And I think that’s who it’s for, for the people looking for a nice, steady, really, really lucrative way out of their nine to five job, looking for that freedom. And that’s kind of what we preach.
Now, from this podcast, it might sound a lot easier than it is. For every 2,000 mailers we send out, we get one deal back. So that’s about 12 to $1,400 cost to acquire one property. Given our average profit on a deal is about 20 to $23,000. But that’s the biggest hurdle, Dave, is people who come in and they’re scared to spend money. But how do we get in front of these landowners? We have to send them mail. We have to target them through marketing aspects like mail and texting and that’s where the biggest hurdle, is people fearing to put out that money for that.

Dave:
Well, thank you so much, Dan. If people want to learn more about you or your business, where should they do that?

Daniel:
You can learn more about the land investing business model on my website, landinvestingonline.com, or I’m very active on Instagram. It’s @DanielApke. DM me, I’m happy to help with any questions you guys have.

Dave:
All right. Thanks, Dan, so much for being here. We appreciate it.

Daniel:
Thanks for having me.

James:
Thanks, Dan.

Dave:
James, what’d you think?

James:
Man, I think I’m working too hard fighting with these cities. And I have experienced that before. I remember we actually did a big site where we were working with the builder. We were doing a big 1031 exchange for one of our clients and we bought five raw lots that had permits the builder was going to build out for multi-family, and it was a great cash flow deal. And I remember walking out with the builder and I’m talking about the planning and we really wanted to change two units. And the guy’s like, “Well, we can get that change done.” I’m like, “Is that going to be nine months out?” He’s like, “No, no, no, just give me one day.” He goes over to the city, walks in this more rural area, they approve the plans right there on the spot. He comes back, he goes, “No problem.” And I was like, I am working in the wrong markets. We have big spreads in our markets, but there’s big headaches to come with it.

Dave:
Yeah, no one’s buying two or 3 million flips in these rural markets. You’d have to cut out that

James:
Business. No, but I do love the model because it’s very scalable as a wholesaler or investor because it’s really a numbers game. There’s so much raw lots in middle America. You’re just targeting, you’re going out, you know what your spread is, you know what your target is. And then people are, like you said, there’s less competitions, so you can just name your term. And if the guy’s ready to sell at that time, he’s really going to entertain that offer.

Dave:
Yeah, I guess the part that gives me some hangup is the demand side. I know Dan was saying people just want raw land. But I’m curious in an economic downturn if people are still going to be buying raw land at the same price and with the same fervor. If you’re buying it 30 or 40 cents on the dollar, it’s probably not that risky, but I would just be curious how this unfolds over the next couple of years.

James:
Yeah, I think it would be good to have a backup plan for each site if I was doing that model, like okay, I’m buying this thing raw, I know what my spread is. But as financing and all these small banks are having a little bit more issues, I think the lending requirements are going to tighten up even harder.

Dave:
Especially on stuff like this.

James:
Yeah, so if you’re selling $100,000 lot, people are going to have to come up with 50 grand, and that might be a lot for that specific area. And if it was me, I’d put a backup plan with maybe you’re just putting a mobile home on the property, septic, well, mobile home, and at least have that in your back pocket. Because even if the lots are 30 to 40 grand, but you buy 10 of them, that’s 300 grand you got a service and cheap can get risky really fast as well.

Dave:
Yeah, I would just be worried about getting stuck holding the bag for longer than I want to. When you buy land in Seattle, is it mostly for your own development or are you flipping it also?

James:
We do both. Because builders, like in infill, we stick to what we know and we build based on what our resources are. So your typical builders in your metro areas are going to be your town home, density guys, which that’s what we buy. And then you have your single family, the one for ones building a brand new house. And then now with all the upzoning and the density chasing, there’s, we call them a three pack where people can build a single family, an ADU and a DADU, all on the same site. And so if it hits our buy box, we buy it because that’s what we’re good at building. But if it doesn’t, we work with other builders. But the reason I like the metro is we’re not buying based on speculation, we’re buying based on performance.
So we know what our bill costs are. When we’re targeting land, we’re acquiring it for this. We know we have to build. Our average bill cost is 325 in Seattle. We can build this product for this and this is what it will sell for. So I think it’s a little bit more of a package. And we know that that will always trade. In addition to if we build that out, let’s say the market comes down, we at least can rent it out, we’re not sitting on a raw lot. Because the problems with raw lots is they don’t pay you money and your income goes down. And so that’s why it can be a little bit riskier to just land bank. I always say land banking’s for rich guys. They don’t care about the return.

Dave:
It smells like speculation to me. I know if you know what you’re doing, there’s more to it than that. But isn’t that what land banking is, just speculating that someone’s going to pay more for it in the future? There’s no real fundamentals behind it, is there?

James:
It’s 100% speculation. And I think as the market gets harder to get financing, you’re going to want the biggest spread. I may buy a piece of raw land just to sit on it, but I’m going to want to pay 15, 20 cents on the dollar because I like income coming in and I like to know what my disposition is.

Dave:
Yeah, exactly. Yeah, that’s why I think it is a little bit, that’s probably why there’s less competition because with wholesaling, like you said, yeah, there’s competition, but you know what the dispo is, so there’s a lot less risk for you than there is in this model.

James:
Yeah, it’s when we’re buying land, it’s a buildable plan in the next 12 months, no matter what. And when we’re sourcing to other builders, they’re businesses, so they have to keep their engine going. And pricing just comes down to what the market conditions is. And so in metro areas, the land kind of follows the market more. What’s the availability of capital? How are things selling? What’s bill cost? Speculation is you’re just buying it cheap and you’ll sell it in the future at some point for more.

Dave:
All right, cool. Well, this was fun. I learned a lot, and I think honestly, this kind of model is not what I invest in personally, but I think it’s really interesting for people who are trying to earn more of that transactional type income, like flipping or wholesaling. This is a really interesting option with less competition than probably either traditional like house flipping or wholesaling has. So yeah, check out, learn more from Dan or it sounds like there’s some information on the Bigger Pockets forums about this as well. So if you’re interested in learning more, you should check out those resources. James, thanks a lot for being here, man. We appreciate your time.

James:
Always.

Dave:
All right, well, thank you all for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett. Editing by Joel Esparza and OnyxMedia. Researched 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.

An engineer, social entrepreneur, and Baltimore native, Brittany Young is on a mission to show young people how brilliant they are, so that they can be their own geniuses and problem solvers. Via B-360, the Baltimore organization she started in 2017, Young is solving for two seemingly disparate challenges: the lack of meaningful STEM education and the stigmatization of Black youth culture in Baltimore, as embodied in the culture of motorsports (dirt bikes). Ashoka’s Angelou Ezeilo sat down with Young to learn about B-360’s work to unleash young people’s brilliance, create safe spaces for learning and belonging, and build the nation’s first dirt bike campus, now with $3 million in new funding.

Angelou Ezeilo: Brittany, you and B-360, the organization you founded and lead, focus on motorsports for a few connected reasons. One is education and job skills. Tell us more.

Brittany Young: Right. Bike riders, young and old, learn mechanical engineering just by repairing their bikes. This is true! And I’m saying this as an engineer myself. It’s better than reading a textbook. So not only is dirt bike riding embedded in Black Baltimore culture, it’s teaching skills that can literally pay the bills.

Ezeilo: But dirt bike riding is criminalized in Baltimore, right?

Young: Yes, but the reason people ride dirt bikes in traffic is that there are no dedicated spaces for it. For basketball, you go to a rec center. For swimming, there’s a pool. But for people who ride dirt bikes in Baltimore, there’s only the streets. So that’s why we’re excited to build the nation’s first dirt bike educational campus in the heart of the city — for which our first federal investment is in, a $3 million grant just announced with support from our Senator Van Hollen and Senator Cardin.

Ezeilo: Great news, congratulations! The announcement also recognizes B-360 as Baltimore’s only diversion prison program. What is the link there?

Young: Well, in the early days of B-360, we saw that a lot of our students were getting charges for dirt bike possession. So I was calling judges, talking to lawyers, putting together paperwork. Then in 2020, our Baltimore City state’s attorney’s office reached out to us. They wanted to take a new approach to dirt bike-related offenses. Out of that came the B-360 diversion program. So now when people get arrested for any nonviolent offense, they can opt into our programming, for a minimum of 20 hours. Once they complete the training, we submit a letter to that judge, and charges are dropped. The young people can also become employed with B-360 to build transferable skills.

Ezeilo: You’ve said that some 122,000 STEM jobs exist in Baltimore that don’t require a four-year degree. How do you connect Black students with these jobs, and what barriers are you finding?

Young: If you tell a student, “Hey, read this physics book,” they’re going to ask, “Why should I care?” But if you say, “Hey, you pop a wheelie going down the street at this angle, and you have to figure out how long it takes to get down there and at what time,” that’s actually a distance equation — which is physics. And you’re now talking about Newton’s second law. Now, we also need the dynamic in educational institutions and workplaces to be culturally competent because access isn’t the only barrier. For example, I grew up knowing I wanted to go into STEM. I went to the number four high school for STEM in the country and had great grades. But when I got into the industry, people had never met a Black girl from Baltimore who worked in chemical engineering. The culture in a lot of STEM institutions is white male-led, or white-led, period. You can be ready for STEM, but STEM isn’t always ready for you. And so we want to get more Black people to not only go into STEM but to stay there. That’s when the virtuous cycle truly starts.

Ezeilo: You draw young people in through dirt biking. But are they now starting to see that there are so many other jobs that are unlocked through your program as a vehicle?

Young: Yes. Lots of our very first students are now pursuing entrepreneurship and contributing their own ideas. Daron wants to open up his own auto body mechanic shop to make his own dirt bikes and then to go into business. Treasurer is a girl who just turned 16. She wants to be a traveling psychiatric nurse. A STEM career is cool, don’t get me wrong. But we want to make sure young people have cognitive reasoning skills so that no matter what they become, be it a chef, or an entrepreneur, or an astronaut, they are well-equipped. And then when we look at the data, 100% came for dirt bikes, and more than 90% leave wanting to go into STEM careers because of our programming. Not to mention the 43 point increases on their standardized tests.

Ezeilo: When you started helping young people access STEM careers, were they aware that these possibilities existed?

Young: You know, as a teacher some years ago, I remember asking my fifth graders, “What do you want to do?” And no one had ever asked them what they ever wanted to do in life. That’s heart-breaking. But when you look at the links between professional stunt riding and Black street riders, you see that this industry would not exist without us. Just look at the Bessie Stringfield Award. The American Motorcyclist Association gives out this award, which is named after a Black woman and the matriarch of stunt riding. If you ever watched “Lovecraft Country” and saw that woman riding the Harley, that’s Bessie Stringfield. She’s the reason Harley Davidson is popular today. She rode through the Jim Crow South to spread the radical vision of a Black woman on a motorcycle. Yet in the history of this award, I was the first Black person, in 2021, to have ever won it! Point being, we need to elevate new role models.

Ezeilo: Brittany, you’re not a dirt bike rider yourself, right? So how are you involving people close to this problem to be part of the solution?

Young: I had a whole conversation too with local dirt bike riders to get consent, to get buy-in. And from that group, we also got riders who signed on with us to be a part of programming as educators. These riders are really idolized by the young people.

Ezeilo: When you look at the statistics, Baltimore is around 68% African American. Yet most of the wealth is held by white residents. And then the unemployment rate for young Black men is 37%, compared to 10% for young white men.

Young: Yes, this is all true. And it’s also true that negative framing is unfortunately part of the problem. When people think about Baltimore, they could also think of Billie Holiday, all these great people that come from the city, or the fact that we’re the number five tech city in the country. And then there’s also a lot of Black wealth in Baltimore, too. The importance of an organization like B-360 is that we can start to shift that narrative and lead with what’s working, the bright spots that show a new way forward, something to aspire to.

Ezeilo: Your idea lands with impact for education, talent, jobs, criminal justice. When did you know that this idea was working?

Young: Ha! It was the fact that our program kept growing. With my older students, I knew we were doing it right, when they kept coming back. One of the riders we have now, Derek, has been riding his whole life. He knows how to put together a dirt bike by hand. And what I like about Derek is that he’s motivated and ready for more. He says, “Let’s get more people involved.” And he’s barely 20 years old, so his potential is enormous. But it was also seeing the change in how students spoke about themselves. Of course, they had never done dremeling or soldering or worked with CNC machines, so that was a transformation. But hearing them say, “We love Baltimore. We know that we’re smart.” That was the most important shift.

Ezeilo: Last question: How does it feel to be recognized — by Ashoka and in your TED talk with some 1.5 million views to date — as a leading changemaker?

Young: To me, a changemaker is just a fancy word for a survivor. Black people in America have always had to be innovative, we’ve always been people that have to go against the system, even though it is assumed that the system is never wrong. The power in the work we do is igniting and exploding the genius of our community. And what B-360 has been showing is just how smart these students already were and will continue to be.

Brittany Young and Angelou Ezeilo are both Ashoka Fellows. This interview was edited for length and clarity by Ashoka.

Do Americans really vote with their feet, leaving high-tax states in favor of low-tax states?

While most people don’t move often—and many never leave their home state—we can look at trends and patterns among those who do move across state lines.  

I’m not interested in the politics of it. I’m interested in the actual migration numbers compared to tax rates. Set aside your politics for the next five minutes, and let’s focus on the raw population numbers. 

After all, population change is the foundation of demand for real estate. By understanding where people are moving, we can understand where real estate markets will boom over the next few years. 

Measuring State Tax Burden

First and foremost, how do we compare taxes between states? 

Some states charge high income taxes but no sales taxes, and vice versa. Others go heavy on property taxes but light on sales and income taxes. 

Fortunately, WalletHub already does the heavy lifting of combining state taxes into one total state tax burden number. It includes the typical percentage of income that residents pay toward state income taxes, property taxes, and sales and excise taxes. If you’re not familiar with excise taxes, they’re additional taxes on items such as alcohol, tobacco, or gasoline.

Mapped: Tax burden by state

You can see how every state ranks on tax burden in the interactive map below:

We’re mostly interested in comparing the highest-taxed states to the lowest-taxed states, however, to see whether more residents are moving in or fleeing. Without further ado, here are the 10 highest-taxed states:

Likewise, check out the 10 lowest-taxed states: 

As an additional perk for real estate investors, two of those states—Wyoming and Delaware—top MarketWatch’s list of best states for forming an LLC.

Population Growth and Migration Patterns

It’s worth pausing for a moment to separate two concepts: population growth and interstate migration. 

While inbound or outbound migration does, of course, impact a state’s population, it’s not the only factor. One state could have a higher birth rate, or it could have more immigrants arrive from other countries. Population is easy to track through Census data, despite the delay in the government actually releasing it. 

When we talk about “migration,” we only refer to U.S. residents moving from one state to another. It’s harder to measure but potentially more relevant to whether taxes impact Americans’ decisions about where to live. 

Population changes

One look at the map and you can certainly see similarities between state taxation and population changes:

Low-tax states like Delaware, Florida, Tennessee, Wyoming, South Dakota, and New Hampshire all saw significant population gains. High-tax states like New York, New Jersey, Hawaii, Maryland, and Illinois all saw population declines. 

That said, it’s not a perfect correlation. High-tax Maine, Vermont, and Connecticut saw population growth. The state with the lowest tax burden, Alaska, saw no population change at all. 

Still, the 10 highest-taxed states saw their populations drop by an average of -0.25% over the last two years. The 10 lowest-taxed states saw their populations jump by an average of 1.83%.

Interstate migration

Where did Americans move last year?

Every year, United Van Lines releases a report answering that very question. Check out the map for where Americans moved in 2022:

The top 10 states with the most inbound migration are:

1. Vermont 
2. Oregon 
3. Rhode Island 
4. South Carolina 
5. Delaware 
6. North Carolina 
7. Washington, D.C. 
8. South Dakota 
9. New Mexico 
10. Alabama 

The 10 states with the most outbound migration are: 

1. New Jersey 
2. Illinois 
3. New York 
4. Michigan 
5. Wyoming  
6. Pennsylvania 
7. Massachusetts 
8. Nebraska 
9. Louisiana 
10. California 

The 10 states with the most inbound moves charge an average total state tax rate of 7.91% (that excludes Washington, D.C., as WalletHub provides no tax data for D.C.). The 10 states people are fleeing the fastest charge an average total tax burden of 8.76%. 

Again, there’s a link, but it’s not a perfect one. People keep moving to Vermont, despite the high taxes. And leaving Wyoming, despite the low taxes. 

That said, the data from United Van Lines is much more limited than the actual Census Bureau population data. United Van Lines says people are leaving Wyoming in droves, but the state has seen population growth nearly 33% faster than the national average over the last two years. Take the United Van Lines study with a proverbial grain of salt. 

Are Americans Leaving High-Tax States?

While I have no doubt that taxes factor into where people decide to move, it’s certainly not the only factor. Climate, amenities, job availability, cost of living, and proximity to family all play a role as well. 

In other words, don’t run out and buy up tundra in Alaska just because it charges the lowest tax burden in the U.S. 

But don’t dismiss state tax burden as a factor, either. Sure, people like the warm weather in Florida, but they also love that Florida charges no income taxes. 

The correlation between state tax rates and population change is stark. But you have to be careful about inferring causation from correlation. To prove that tax rates cause people to move, you’d need a massive survey that actually asks them. 

Impact on Real Estate Markets

The impact of taxes on population change is all well and good as an intellectual exercise, but what does this have to do with real estate?

As a real estate investor, I was curious whether state tax burden had any correlation with real estate appreciation over the last few years. The population change data suggests that it would, but there’s nothing like rolling up your sleeves and looking at the actual numbers. 

So, I compared the average three-year home price appreciation (using Zillow data) in the 10 highest-taxed states to the 10 lowest-taxed states. Sure enough, there was a difference:

Between the end of February 2020 through the end of February 2023 (the latest data available), the 10 highest-taxed states saw an average home price change of 33.59%. The 10 lowest-tax states saw an average home price jump of 40.86%. 

I’m no public policy expert and have no intention of debating tax policies or politics. Looking at this data, I believe taxes are one of many factors that Americans consider when moving. These migration and population trends impact where I invest in real estate, and while taxes don’t tell the whole story, they certainly play a role in it. 

Ignore taxes, population changes, and migration patterns at your own peril as a real estate investor.

Close MORE deals in LESS time for LESS money

Wealth without Cash will fully prepare you to find off-market leads, uncover sellers’ motivations, negotiate with confidence, close more deals, build a team, and much more. This book by Pace Morby has everything you need to become a millionaire investor without utilizing your own capital.

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

Jeff Taylor, founder and managing director at Digital Risk, discusses the latest U.S. inflation data and the impact of recent banking volatility on the housing sector.

Since launching on the campus of Miami University in Oxford, Ohio, Mad Rabbit has changed the game in the tattoo aftercare market. They are doing so by bringing change to an industry that is thousands of years old but one that has been largely resistant to innovation until recently. I sat down with Oliver Zak, co-founder of Mad Rabbit, to talk about their journey, community-driven product development process and unique retail strategy that allows them to take a different approach to brand building.

Dave Knox: How did you come up with the idea for Mad Rabbit

Oliver Zak: My co-founder Selom and I got started in business during our sophomore year in college. Selom introduced me to the concept of e-commerce, and we spent the next six months exploring how to build a brand online. We began with dropshipping, which taught us valuable lessons about building a brand and differentiating ourselves through customer service and ambassador programs. We couldn’t compete on product differentiation, but we learned how to succeed in other ways. After a few months, we sold that business for $7,000, which was a big win for us as college students. It showed us that we had a potential interest in pursuing this type of business further.

During our senior year, we were between jobs and looking for a new opportunity. I had a tattoo appointment, and I was frustrated with the recommendations for healing tattoos. Most of them involved petroleum jelly, which I felt was outdated and unhealthy. I asked my tattoo artist if there were any natural alternatives, and there weren’t. That’s when Selom and I decided to create our own natural tattoo care products.

We ordered ingredients from Amazon and local apothecaries and began experimenting with different formulations. Our first product was an all-natural tattoo balm made with seven natural ingredients. We used it for aftercare, and it worked well. Through marketing these products with Facebook ads, and that summer alone, we were able to generate $300,000 in sales. We later in 2021, developed a soothing gel that was more specific for tattoo healing, which continued to skyrocket the brand. This success showed us that we had found a need in the industry and that we had a viable product-market fit.

Selom and I learned a lot about building a brand through our dropshipping business. This experience helped us develop the skills we needed to create and market our own natural tattoo care products. We are proud to offer a safer, healthier alternative to traditional tattoo aftercare, and we are excited to continue growing our business.

Knox: You launched both of those businesses while students at Miami University. What advantages did this give you to connect with your target audience?

Zak: Miami is not known for being a particularly tattooed school. However, it does have a strong entrepreneurial ecosystem that supports and champions startups. Selom and I were able to leverage this ecosystem to launch our natural tattoo care products business. Our recently launched college ambassador program focuses on metropolitan areas where tattoos are more prevalent. This has helped us reach a wider audience and build our brand.

One of the resources that helped us get started was a business fraternity that we joined freshman year. This speaks to the resources available on campus for those interested in entrepreneurship. Outside of my finance degree, which helped me learn the language of business, the biggest value add for Miami while I was there was definitely the entrepreneurial community of students, faculty, and alumni from the school of business. This vibrant entrepreneurial community that helped us launch our business. We are grateful for the resources and support we received from the Farmer School and the larger community, which helped us turn our idea into a successful business.

Knox: What has been the driving force behind the success of Mad Rabbit?

Zak: I never thought I’d be the tattoo guy, but I’ve always been good at identifying areas of opportunity. I noticed that tattoos were becoming more popular, even though they’ve been around for thousands of years. In 2012, only 20% of US adults had a tattoo, but now in 2023, it’s closer to 50%. That’s a lot of growth in a short period of time. This trend isn’t just in the US, it’s global. Japan and South Korea just legalized tattooing, and self-expression is being championed through tattoos.

The tattoo industry was ripe for disruption. It’s historically been a cash-only, under-the-table business. There was never any formal training for tattoo artists, so you had to convince a shop to take you under their wing. This made it a pretty slow-to-adopt and exclusive community. Nowadays, there are tons of resources available online, and Mad Rabbit is passionate about helping aspiring artists.

Our success at Mad Rabbit came from addressing a pain point in the industry. Tattoos don’t always heal well, and a big reason for that is the recommendation of using petroleum jelly. It’s great for scrapes and cuts because it helps build up a scab, which protects against bacteria and dirt. But it’s terrible for tattoos because the ink gets stuck in the scabs, and when they fall off, your tattoo can look awful in week two. That’s frustrating when you’ve spent thousands of dollars and hours of pain on your tattoo.

We saw an opportunity to innovate and offer a better solution for tattoo aftercare. People resonated with our clean and natural tattoo care products because they worked, and they addressed a real problem. We’re proud to offer a safer, healthier alternative to traditional tattoo aftercare, and we’re excited to continue growing our business.

Knox: Why did you decide go on Shark Tank and what’s been the impact on the business since then?

Zak: I wasn’t the one who applied to Shark Tank, it was actually my partner Selom. I grew up watching the show with my family every Friday since I was 13 years old. My dad is an entrepreneur, and I always knew that I wanted to do my own thing one day. So when we got the call that Shark Tank was interested, it was like a childhood dream come true.

Being on Shark Tank gave us access to a huge audience, even if they weren’t necessarily our target customer. The people who watch the show aren’t necessarily heavily tattooed, but they might have nieces, nephews, or grandkids who are interested in tattoos. That goes a long way for gifting during the holiday season and overall brand awareness.

It was an amazing experience, and we learned a lot from the sharks. We were able to secure a deal with Mark Cuban, who has been a great partner for us, and still is. He’s been very supportive and has helped us navigate the retail landscape. We’re grateful for the opportunity that Shark Tank gave us, and we’re excited to see where Mad Rabbit goes from here.

Knox: Since launching the original healing balm, you have expanded across multiple products. What drives that product innovation strategy in deciding something’s the right product to launch under Mad Rabbit?

Zak: At Mad Rabbit, we’re proud to say that a lot of our product ideas come from our community. We’ve become an umbrella for a bunch of different subcultures who are passionate about wearing their hearts on their sleeves. We have surfers, chefs, hairstylists, tattoo artists, and more. All of these people are brought under the Mad Rabbit umbrella, and they connect on things like sharing tattoos, best tips and tricks.

Most excitingly for us, we get to leverage conversations between the brand and our consumers. Most of our products have actually come from ideation within our online communities. They’ve asked for soaps, lotions, and other products, which is really exciting because it extends beyond the aftercare period. We’re able to focus on daily care and maintenance, which is really important for long-term care of tattooed skin.

A lot of the CPG giants out there are formulating for the mass consumer, and until the number of US adults with at least one tattoo passes 51%, they don’t see it as a market worth formulating for. But we’re small and nimble, and we listen to our customers. We can ideate and innovate accordingly.

Once we have those ideas, we move on to the prototyping and product development stage. We get samples from our chemist and our manufacturer. And then one of our final checks is with Dr. Elliot Love, who is on our advisory board. He’s a tattooed dermatologist and skin cancer surgeon. He’s a strong point of authority that we’re able to leverage from a scientific ingredient perspective to put the cherry on top, if you will.

Knox: Your retail strategy is also unique in that you sell not only through direct to consumer but also places like Urban Outfitters, GNC, and tattoo shops across the country. What led you to this strategy versus chasing a mass retailer initially?

Zak: We definitely want to be wherever our customers want to buy us, including mass retailers. But our initial strategy was direct-to-consumer online only, through Shopify, Facebook, and Amazon. That’s how we reached our million customers today.

Once we gained some brand awareness, we started launching in “brand accretive” retailers, like Urban Outfitters. Many of our customers are under 35 years old living in metropolitan areas are passionate young people, which is exactly Urban Outfitters’ customer base.

We also saw an opportunity in the health and wellness industry. Health fans care about what they put in and on their bodies, and they want their tattoos to look good too. That’s why GNC saw a great opportunity for us to expand beyond supplements and into skincare.

The tattoo parlor channel is really important for us. It’s point of care, billboard space. We sell aftercare products where they’re needed and when they’re needed, and most importantly, we get the artist’s recommendation on our side. The tattoo artist is the authority on how to heal a tattoo, so winning over their recommendation is crucial.

With the tattoo industry approaching 51% of US adults having at least one tattoo, the artist is really the bread and butter for us. We also have the opportunity to sell in other fragmented retailers like surfers, skateboarders, chefs, hair stylists, and barbers. Tattoos are the common link that can sell across various channels.

Knox: With your recent Series A funding from Lucas Brand Equity, what are the plans for the business as you bring in this funding?

Zak: Part of the funds we raised are for building out our boots-on-the-ground sales team. There are about ~30,000 tattoo parlors in the US, and it’s a really important space for us to win over. We’ve always been a strictly digital brand, so building a big sales team is a new venture for us.

We’re also looking to up our content production. We’re opening a headquarters in Los Angeles this spring/summer that will serve as a content-enabled tattoo studio. Our pro team artist will be tattooing there, capturing 360 content, and providing product testimonials. We’re also giving them a space to record and grow their own personal brand, which is an exciting opportunity for us to empower them and provide mutual value.

Lastly, we’re focusing on additional product development. Most of our products today are consumer-facing, but we’re working on innovations that will give the artist a better tattoo experience. This will go a long way in winning over their recommendation for aftercare and daily maintenance.

Ashley:
This is the Real Estate Rookie Podcast, episode 277.

Tony:
You’ve learned so much on this first deal, Sarah, that I’m sure if we talk to Sarah today versus Sarah six months ago, you’re two totally different people when it comes to your knowledge of real estate investing. Even if you’re able to walk away from this deal eventually down the road at a breakeven, it’s still the multiple, the return on that is 10x, 100x because you’ve been able to learn and give yourself the tools you need to keep growing.

Sarah:
Thank you. I knew that this was just going to, hopefully it’d be just growing in equity and break even for a few years. That’s fine. It’s the digging myself into a hole right now, it’s just what’s-

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. Today, I want to give a shout-out to someone who goes by the name of Andrew. Andrew left us a five-star review on Apple Podcasts. His review reads, “Great host, amazing company, unforgettable information, BiggerPockets is one of the most altruistic companies I know. They provide so much value free of charge, and this podcast does not disappoint. Very knowledgeable guests and amazing host. Definitely worth checking out.”
If you haven’t yet, if you’re a part of the rookie community and you have not yet left an honest rating and review in whatever platform it is you’re listening to, please take the few minutes takes to do that. The more reviews we get, the more folks we can reach, and the more folks we reach, more folks we can help. That’s what we love doing here. I feel like we’ve been getting a string of really positive reviews as of late, Ashley, and it really helps my super tiny ego, my super sensitive ego when I hear all this positive feedback.

Ashley:
Sarah is a special guest today because I did a giveaway on the pre-order that when someone pre-ordered the book Real Estate Rookie: 90 Days to Your First Investment, one person would get to come on the show with me and Tony and we’d get to interview them, but also they could ask us some questions and how we can really help them on their journey. Sarah is completely honest that she bawled her eyes out yesterday and things are not going as she expected with the rehab of the property. We kind of go through what she has accomplished. She was stuck in analysis paralysis for a couple years, finally took action, and we talk about what that action is and how she found that momentum, and now that she’s into the property, something that has come up and how she’s going to work through it and overcome it.

Tony:
There’s one part of the episode where she gets super vulnerable and really just, we go into kind of a deep conversation about the challenges that come along with being a real estate investor. I’m so appreciative that she opened up to us in that way because I think it sheds a light on the part of real estate investing that doesn’t get talked about enough, and that’s the challenges and the doubt and the fear and how do you work through that. We spend, I think, a decent part of the episode just reframing those challenges that she’s going through and positioning them in a way that actually supports Sarah and her long-term goals of building wealth through real estate.

Ashley:
When Sarah first found out that she was the winner, she won this, she declined it actually. She said, “No, I don’t. I just got my first property under contract. I haven’t really done any real estate investing yet. I don’t think this is really for me.”
And so, I had someone email her back and say, just, “You are perfect. You’re in it right now.” We love how this podcast episode came out because she is literally in the nitty-gritty right now, and somebody who maybe did this a year ago or two years ago. There’s things that they’re not going to remember, things they’re going to forget as they’re telling their story, so I think listening to how this is impacting her right now, it can motivate you and inspire you, but also it can show you what some risks are.
Take a listen to today’s episode and take it with a grain of salt is that it’s not always going to be picture perfect. There’s not always going to be this huge win at the end, or maybe there still will be for her. We just don’t know yet. That was why I thought it was so intriguing and interesting to listen to somebody who’s kind of in the trenches of it right now on their first ever deal. Sarah, thank you for purchasing the Real Estate Rookie book too.

Sarah:
Oh, you know it.

Ashley:
I appreciate it.

Sarah:
I got it. I thought it was spam that I won this. I almost deleted it.

Ashley:
Well, we’re super happy to have you here. Tell us about before even real estate as to who you are and maybe what brought you to find real estate investing.

Sarah:
I’m an interior designer in San Diego, and about five years ago I started casually looking into real estate investment just for fun, looking at places I like to visit, and learning about money management and personal finance and mindset and figuring out how I could do it. I didn’t really know, I didn’t have any tools at the time, so I just look at expanders and people who have done it before and how I can do it. Three years ago, I found you guys and just gobbled up as much information as I could. I was buying all the books and watching the podcasts and YouTube and really trying to get as much information and catch up as I could.
Couple years after that, I started realizing I got some analysis paralysis going on here trying to be perfect and get everything and have this fear of failure. It was this mindset balance that I was trying to go through a lot and I watched a couple friends buy properties, and that really motivated me and lit a fire under me to like, okay, let’s get serious. Let’s start making some offers and take some action steps. I was meeting with realtors that I met through BiggerPockets and brokers and getting my spreadsheet lined and my cash flow, figuring out what I could do and what my strategy was. If one strategy didn’t work, I’d pivot and go over to another direction and explore that for a little bit and go over here.
About a year ago, I got serious and ended up, I put one offer in and got outbid by $5,000, but that was good practice. But again, then I pivoted to a different location that had a little bit less competition and it was closer to where I live, and the market started to change and I just kept the big picture perspective and thinking, okay, maybe this is less competition for me, and even though the interest rates are higher, I can re-file later and just made it work with what I had, and then made an offer a week after it was listed and it got accepted.

Tony:
Man, congrats.

Ashley:
I want to touch on real quick, one thing that you said that was really important, and you talked about the analysis paralysis. Then you said you got to the point where it’s like, okay, I have to take action. Right after that, you said you started making the offers, and that right there is just such a huge thing where people don’t even make the offers, they never even make it to that step as to feeling comfortable to putting offers in. Why do you think that you decided to make offers? What are some of the things that made you feel comfortable and confident that you’re ready to put those offers in whether they’re accepted or not?

Sarah:
It was scary, but I had seen a lot of places that I wasn’t really sold on and this one fit and I thought it was manageable and it fit in the cash flow for living in it for a year for me, and then doing a short-term rental after, so just running the numbers constantly. It did feel like a little bit of a stretch at the time. Being in California is a bigger investment for what you get.

Tony:
Congratulations, Sarah, on just taking that action because I think so many people get stuck at that phase, so the fact that you’re able to push through that I think is super impressive. But something else you mentioned outside of the analysis paralysis was the fact that you saw other people in your network who were taking that step, and that was part of what gave you the confidence to do it yourself. I think that’s such an important thing to call out, because for a lot of our rookie listeners, they’re on this island by themselves. They’re binge-watching or binge-listening to the podcast and they’re binge-watching the YouTube channel and they’re reading all the books, but then they look to their left and they look to their right, and they’re the only person that’s doing this in their current circle.
That’s why we stress so much, Ash and I, the importance of building your network so that there are other people around you who are going through that same journey. Whether it’s the BiggerPockets forums, the Real Estate Rookie Facebook group, joining some of the BiggerPockets boot camps, or other coaching programs, whatever you can do to surround yourself with people, that gives you the confidence to say, “Well, man, if Ashley and Tony can do it, I’m just as smart as those guys are, I’m sure I can do it too.” I love hearing that.
I want to talk a little bit more about your buy box, because you talked about shifting markets. You mentioned that before we started recording, that you live in San Diego, California, which is a pretty expensive market for most folks. I guess two questions, a, why not invest in your backyard? Was it just the price point or was it something else? Then, B, how did you solidify, okay, this is the type of market that I’m looking for because the country’s a big place. How did you narrow it down in one specific city?

Sarah:
I wanted to be local, and I felt like that was more manageable for me. But at the time when I was looking around San Diego, I thought, okay, maybe I can get a duplex and BRRRR it with an FHA, but I had my parents cosign with me, so that threw a little wrench in to the buy box. Then, I was just pivoting around condos. I only had about a $500,000, that was pushing it at the time too, limit. I had to make sure that I could cover the mortgage and how I would do that. It started to feel out-priced in my backyard for me. Then, I just went out to a vacation spot an hour and a half away that I love to visit and feels good. You get out of the city, it’ll draw people out to just regroup and get grounded and escape rough reality. It’s fun.

Tony:
Are you in Julian, California? I assume that’s the closest vacation spot to San Diego. Can you just describe what Julian is for folks that aren’t familiar with SoCal?

Sarah:
Julian is I think one of the only places around SoCal that’s four seasons. Right now, we’ve been hit with a lot of snow and a lot of rain, but then we’ll have super blooms in the spring and then a pretty dry summer, kind of like the desert about 95 degrees, and then goes into a beautiful fall where all the leaves change and it’s pumpkin picking and apple picking. It’s really family-oriented. There’s hiking, there’s a dark sky network.

Tony:
Sarah, I love, and I’m kind of leading because I wanted to follow up with this is that the majority of our listeners probably have never heard of Julian, California. Even for me, I’m an hour and a half north of you, and I never really heard of Julian either until I started knowing people in San Diego. But for people that are in south of where I’m at, everyone knows Julian. The reason I’m bringing this up is that every pocket of the country, every state has its own local regional spot where it’s like, “Hey, yeah, if I want to go to the snow, this is where we go.” Or, “Hey, if I want to go to the river, this is where I go.” Or, “Hey, if I want to go to the lake, this is where… If I want to go mountain biking…”
Every state has its own little area that caters to that traveler. And so, many people ask me, Tony, how do I find the right market? How do I know where to invest? Really, I say, it doesn’t really matter. You could pick any state. You could drop a pin on any map in any of the states in the United States, and you’re going to find at least one market that makes sense. The fact that Julian works for you I think is an important thing for us to call out to the listeners.

Sarah:
I heard somebody say that they put a pin where they live and they went out about an hour and then just went around a radius and like, “What’s manageable for me, Mexico, the ocean? Okay, over here.”

Ashley:
Sarah, what’s kind of the plans with this cabin then, this property? Can you tell us a little more about it?

Sarah:
One of the selling points was it was a two plus one upstairs and a studio downstairs. Having those two incomes eventually really helped the cash flow and made the price point worth it for me, and it just evenly balanced. As soon as I move out, then I hope to get a long-term renter in there just because I’ve listened to the communities where everyone’s investing and I want to provide some kind of local housing for people as well as using part of it for a vacation spot for people and create that balance.

Tony:
You’ve got the 2-1 upstairs, a studio downstairs. You’re currently living in the property, correct? Then, the plan is to rehab or how are you-

Sarah:
Yeah, I got a rehab. It’s more than I thought. There were a couple issues. There was an active leak when I put the offer in and they were dealing with their insurance. I was under the impression that everything would get fixed as they were going through and get the insurance to clear off. Then, they whittled it down to the cause of the leak being these upstairs doors upstairs on the patio and the basement studio is below it.

Ashley:
Oh, so it was coming in through the doors like the doors weren’t sealed and then coming down as a unit.

Sarah:
Well, Whoever put these doors in, wood doors without an overhang, so the wind and the water and snow just seeped in. They give me credit to replace the doors, got the property, ordered the doors, have them ready to be installed, and there’s still a leak. There’s so much water on the mountain, it’s just soaking wet. On my first day I got the keys, I shoveled two feet of snow off that 20-foot patio with a huge heavy shovel and was just… over them. Really, it was a mountain welcoming to me.

Tony:
That’s got to be one of the best welcome to real estate investing stories that I’ve heard on this podcast in a while. Like the day that you close, you have to shovel two feet of snow. That’s awesome.

Ashley:
Especially when you live in San Diego. For me, that’s normal to go to a property to do that.

Sarah:
No, I don’t do snow, really. Last time I was in Telluride for a friend’s wedding and I fell. Anyway, so it’s a learning curve and it’s fine, but it’s just now in the discovery phase of other things that I’m starting to need to put some more focus on and pivot my budget.

Ashley:
Are you having to remodel both units?

Sarah:
I was only planning on the upstairs. That would be like, because that’s the cabin vibe, it’s got the wood ceilings and the beautiful fireplace and really cozy.

Tony:
Just really quickly, Ashley, I just want to pick your brain. Obviously, Sarah, this is your first investment. Every time we buy a property, we learn something new. For me, I feel like, and it depends on the property, but I often try and get the seller to repair depending on what our goal is, but to repair certain things. If it’s something like aesthetic demos, I know I’m going to change that stuff myself anyway, so I’m not going to ask the seller to put a new flooring or redesign the bathrooms.
But for example, we just bought a property and we had the seller replace the septic tank because we knew that the septic tank was bad and it could’ve been on us. He just would’ve given us a credit to go out there and have it done ourselves post closing or to have the seller do it. We push really hard to have the seller repair it because there is that unknown of, okay, what if it’s more than the septic? What happens after that? Ashley, I’m just curious, when you’re buying deals, how do you determine what you’re going to solve and fix versus what you want to push towards the seller?

Ashley:
All of my properties are pretty much as is. They are so bad that you can’t even pick and choose for me to say, “I want this fix.” It’s just, come on Ash, look at this property. That’s not going to do anything to improve it. I never asked for anything to be done. Maybe if I started to focus more on things that weren’t as big of rehab projects, maybe I would ask for things, but I’m putting in my offers knowing that I’m going to have to be doing a lot of work and a lot of different things. The probably one thing I would ask for though is the septic and the well to be done. I think that is a great example.
When I flipped a house in Seattle, Washington, we purchased the property with no inspection, but we did ask for a sewer scope because in Washington, or at least in Seattle, if there’s some law or regulation where if the sewer line needs to be fixed to your house, if you are the new owner taking it over, you’re not grandfathered into some kind of thing or whatever. But if you are the current owner of the property and you go and make that repair that it’s a lot cheaper because you don’t have to do something, I don’t remember exactly what the law was. That was something the person I was partnering with, they always asked if there was something wrong with that sewer line connecting to the main. They would always ask for the seller to make that repair, even if they had to add on to the purchase price to cover the cost of it because it was so much cheaper to have the current owner purchase the property or repair that thing than to have you, as a new owner, do that.

Tony:
Cool. Awesome, Sarah. Obviously, that first deal is where you’re going to learn a ton, so I’m glad that we’re getting some good learning lessons from this one. I wanted to circle back quickly to the numbers on this deal. If you wouldn’t mind just walk us through what your purchase price was, what your total cash to close, and what you’re projecting for the rehab costs.

Sarah:
It was $500,000 and I did 5% down. Here’s where I messed up on my numbers. I only allocated 1.5% for closing costs when I should have probably put 3% down. I had spoken to probably four different lenders.

Ashley:
Why was that, Sarah? Was there something else that came up in your closing costs that made it double?

Tony:
Because I’m in California too, and I usually budget about 2% for our closing costs.

Sarah:
I don’t think I knew to pay a year in advance for insurance, and then four months for property tax or whatever that was. But what was good is I got a $9,500 credit from the seller that went right into closing costs, so it made it really even. After the inspection report, which raised some eyebrows, I called in a contractor to do a walk just to see, is this thing going to fall off the hill? Is this worth it? Am I going into a money pit? He’s like, “No, but there are some fixes that you’re going to want to do, and you could probably do it for $30,000. Then, furniture would be on top of that.” That’s what I broke down and I was constantly going back to these numbers, like each part that needed to be upgraded, what that cost would be, and then it made sense, but now that I’m in it.

Ashley:
Did you have an actual inspector come or you just used the contractor? You had both the inspection report and then the contractor. I think that’s a great mix to do if you can do both of those to get two different points of view. At this time, were there things that were different that the inspector said that should be done that maybe the contractor didn’t or anything like that?

Sarah:
A lot of the leak was pointed again to these French doors on the patio. They voluntarily put in a French drain behind the house at their cost of $11,000 to keep the water going away from the house. When I got in there, water was still coming underneath the house in that location. It could be the water heater, it could just be water coming from who knows what direction. I don’t know, but it makes me wonder because they didn’t disclose any subterranean water intrusion, why did they voluntarily put in an $11,000 French drain that wasn’t really done properly? It wasn’t down as deep as it needs to go either. It’s getting one plumber in, it’s just like, “Sell it immediately,” and one guy says, “Okay, let’s figure out what we can do to just keep moving along and take it in stages,” but it’s been overwhelming.

Tony:
One question I just want to ask because you kind of glossed over this, but as a first time investor, you were able to find a contractor to come walk your property with you, which is a challenge for so many new investors is finding the right contractor-

Ashley:
Even the experienced investors get someone to come.

Tony:
It’s good to get someone to actually show up. Can you walk us through, Sarah, how you found that person and what they charged you, if anything, to do that walkthrough with you?

Sarah:
Yeah, thank you for asking because when I pivoted over to Julian, I really wanted to use a local realtor, and she has been invaluable because she’s had bread and breakfast two or three different spots since the ’90s, so she knows people, she knows all the subs, she knows the best contractors. It was her high reference of a really good local contractor. He came out, I paid him $350, and then he gave me a report of here are things to address. Then, on the side he told me the estimate of what it would probably run, which is about $30,000. I know, I come from interior design and construction, I know those numbers just get out of hand. Part of me is just kicking myself for being naive or I don’t know.

Ashley:
What would you have done differently in that situation looking back now?

Sarah:
Yesterday, I was wishing that I was having buyer’s remorse and a lot of regret, and that was in the morning when that one plumber said, “I’ve dealt with people who just throw money into this situation and spend $70,000 and it’s just like you’re chasing your own tail.” But then, I talked to three other people later that day and I ended up talking to one guy who was trying to find the positive in the situation, say, “Look, let’s handle these three things. Let’s get the flood under control and get a wall up there and start to finish up the upstairs.”

Tony:
I just want to pause on this for a second because first, Sarah, I totally appreciate the transparency and the vulnerability here on the show, because these are things that so many of us struggle with as investors is like, “Man, am I making the right decision. Am I going down the right path? Did I just royally mess up?” These are all things that we struggle with at times. Just first know that you’re not alone. Let me ask this question first. How much cash flow annually were you anticipating to make on this first deal?

Sarah:
Upstairs, it’s probably only 52 because ballpark for the upstairs was like 250 a night at 50% occupancy, usually Thursday to Monday, it’s not as much as Joshua Tree area. That was just cutting it close a little bit with the long-term renter eventually, I thought that would be something stable, but when I move out and fix the downstairs, I got to short-term rental the downstairs just to recoup some money and have some pause, just have some pause down there that I have some days to come in and fix things if something’s going on.

Tony:
Here’s the reason I ask that question, because even if you’re able to break even on this first deal, even if you’re able to break even, in my mind, it still achieves its purpose because Ashley didn’t retire off of her first deal. I didn’t retire off of my first deal. David Greene didn’t retire off of his first deal. Beardy Brandon didn’t retire off of his first deal. Rob… I haven’t met a single person that did one deal and they were just like, “I’m done. I’m riding off into the sunset.”
The purpose of the first deal is to educate yourself. The purpose of the first deal is to give you the foundation and to give you the structure, to give you the confidence so you can go out and get your second deal and then your third deal and then your fifth deal, and then your 10th deal. You’ve learned so much on this first deal, Sarah, that I’m sure if we talk to Sarah today versus Sarah six months ago, you’re two totally different people when it comes to your knowledge of real estate investing. Even if you’re able to walk away from this deal, eventually down the road at a breakeven, it’s still the multiple, the return on that is 10x, 100x because you’ve been able to learn and give yourself the tools you need to keep growing.

Sarah:
Thank you. I knew that this was just going to, hopefully it’d be just growing in equity and break even for a few years. That’s fine. It’s the digging myself into a hole right now, it’s just what’s-

Ashley:
Well, I think too, you talked to that first plumber and he was like, “Sell it, get rid of it.” But you went and you talked to other people. There are people that would’ve just given up right then and there and just like, “It’s over. I need to list it. I need to basically give it away. I’m going to lose $50,000 on it, sell it for less than what I got it for.” But instead, that same day, you talked to other people, and I think that is such a major takeaway is don’t always rely on one opinion, one person that you went and you had other plumbers come and look at it. The fact that one of them was saying, “Let’s tackle these things first. Let’s get into it and take it steps by steps,” where maybe it’s more like taking it in these little parcels, these little segments can break it down for you and build out a plan.
And just like doing a full rehab, you want to have a plan in place, where myself, and I’m sure Tony too, where we have both done rehab projects where it’s like, “Okay, let’s just get it started. Let’s wing it.” But really, the best ones go where you have that plan in place, and I think that you’ve found a contractor that knows that too, where he can help you, let’s take it step by step and try to mitigate the damage. One thing that we have done is look at an issue and to see, okay, where’s something that we can, not even stop the bleeding, but slow the bleeding, so slow down the water that’s coming in and then work on actually stopping it. Then, what’s the actual solution to solving this complete problem so that it doesn’t happen again? That may take a little bit of time, but if you can keep working on the upstairs, because there’s no water coming into the basement, is there?

Sarah:
It’s in the basement.

Ashley:
I’m sorry, the upper one?

Sarah:
No, there’s no water coming in to the upstairs. It’s only the downstairs basement and it’s either the water heater, a subterranean, or maybe a leak from the patio into the storage unit next door.

Ashley:
I think part of it too is that you can still continue to work on getting that short-term rental operational, so then you have that income coming in to kind of offset some of these rehab costs that you may need to do to get that basement unit finished.

Sarah:
Exactly, and just wait for it to dry up next month. We have a couple rains coming in again. The good thing is that I came in knowing what this problem was going to be if. I would’ve bought it in the summer when it was dry and then this came and out of the blue, I would’ve been rocked, at least it was like got thrown in the deep end right away.

Tony:
Sarah, and there’s a reason I’m asking this question, but what are your long-term goals? Are you hustling to replace your income from your interior design business as fast as possible so you can exit that? Is real estate more of a long-term play where you’re looking to supplement your retirement? Help us understand the context of why you got started.

Sarah:
I will still work. I love doing interior design, but this is definitely a retirement goal. It’s figuring out how to diversify my assets and I’m in my 40s, I’m single, and I’m looking forward to what am I going to do for some stability in 25 years and collecting a portfolio that I can eventually have as passive income would be good, and some stability for me, I’d like to have my own home, but San Diego is… During COVID, it just got out of control. Everybody moved here.

Tony:
The reason why I ask about your goals, Sarah, is because I think that helps align or frame this first deal in an even better perspective because you don’t need this deal to work out today for you to feel financially stable. I think what you need to start asking yourself is, does this deal still make sense 5 years from now or 10 years from now or 15 years from now? Just the fact that you bought in a Southern California market, that by itself, assuming history continues the same trend it’s been on, it’s going to appreciate over the next 5, 10, 15 years. Even if you just hold onto this and it’s just break even for those 10 years and it’s just paying for itself, you’ve got an asset that’s wildly appreciated over that same timeframe, now you can refinance and now you can sell it and you’ve got so many different weights to happen to that equity. There are lots of ways to frame this, Sarah, where even though it seems scary in the moment, I still do think that there’s a lot of upside for you.

Sarah:
That’s what the contractor told me because I was looking at him, I’m like, “Am I buying a money pit? Tell me straight up.” He’s like, “No, get yourself in the market. Get your foot in the door and then just deal with it as it goes.” He’s like, “Look, this house has been here, it’s lasted this long. All of us are up here on the mountain.”

Ashley:
Well, Sarah, we really appreciate your honesty and also sharing what your experience has been like. There is nothing better than hearing someone’s story as they’re going through it instead of years later where if you were telling this same scenario two, three years from now, I bet there’s a lot of that that you would just forget about. It’s like childbirth. You have that first child and you’re like, “I’m never doing it again. That was so painful. That was awful.” Then, a year later like, “Oh, the baby fever.” It’s like, “Oh, that wasn’t so bad. I’m going to do it again.”

Tony:
I can totally relate to that feeling.

Sarah:
I might get a partner next time. I’m going to get a partner next time so everyone can have some [inaudible 00:32:31].

Ashley:
Was my first deal was with a partner because I was scared something like what you’re going through would happen. The partner I chose had a really good network of people who could help us and he also had a lot of cash savings. And so, I think for me, that was my security blanket when I first started is having somebody else to go through it where it wasn’t just me that if I fell down, there was someone else to fall down with me, I guess, in a sense, and just having those two minds to figure out what’s next. What’s your plan going forward and what can we help you with on this property or the next property?

Sarah:
I think getting the management software organized so that I can just get the flow and take a little stress off of me because now I’m having to focus a little bit more on rehab and staging it. I think you talked about Guesty or Hospitable, I’m not sure which one you guys, what works the best for you.

Ashley:
Tony, you can probably answer the short-term rental one better, and then I can touch on the long-term side.

Tony:
Absolutely, Sarah. There’s a few pieces of our software stack. I think the first piece that you need is some kind of channel manager or property management software. There are several out there. We use a company called Hospitable. Another big one is called Guesty. OwnerRez is another big one. I think just kind of finding the one that you feel is most intuitive to you, they all pretty much do about the same thing. I think it’s just the interface and usability that makes the most sense for you to choose one.
The second thing you absolutely need is a dynamic pricing tool. We use PriceLabs. AirDNA is another big one as well. There’s a couple other ones out there. Wheelhouse I think is another one that folks use, but if you want to maximize your revenue, typically you don’t want to use the pricing suggestions that Airbnb and Vrbo give you because Airbnb and Vrbo want their prices to be competitive, whereas us as the host want to maximize our revenue. Those goals are kind of at odds with one another.
Then, the third thing that we use just to help reduce some of the management workload is our digital guidebook. Giving guests both have written and video instructions on how to use the property, we found tremendously reduces the amount of questions that we get from folks and it reduced the amount of time we have to manage the property. Just quickly recapping, you need property management software, you need dynamic pricing tools and you need a digital guidebook.

Sarah:
Do you have a program that you use for the guidebook or do you do Airbnb’s guidebook?

Tony:
I don’t use the Airbnb functionality because we book on both Airbnb and Vrbo. If your guidebook’s only available through Airbnb, then anyone who books through Vrbo won’t have a guidebook. We typically go with a third party platform. I’ve seen some people that just do it in Canva, they’ll create a digital version in Canva that’s really aesthetically pleasing. Then, there are companies that offer digital guidebook services. Hostfully has a digital guidebook. Breezeway has a digital guidebook. I think some of these other PMS have digital guidebooks as well, but I prefer the software version because it’s a little bit easier to update it on the fly. You don’t have to print anything out and just send it to the guests when they check in.

Ashley:
I actually just hired, because up until this fall, I only had one short-term rental and my cleaner just took care of everything for it. She did all the messaging, everything. Then, as they started to add a couple more units, I decided that I should be more like Tony and I should put some systems in place. I actually hired somebody to do the research and I basically just told them what I wanted the software to do for me and they actually put it all together for me. we use Hostfully. We do the guidebook through Hostfully, but it’s also the property management software. We use that side of it too.
Then, we use RemoteLock to set up automated key codes for everyone that integrates into the messaging that we send to everyone as to what their key code is and automatically changes it for each person. Those are really the only two that we use that I know of, at least. She might have something else in there. Tony, for the cleaner, do you use something separate for your cleaner because I think we have that where it sends them an email when a new booking is and then they can accept it or decline it. I don’t know if that’s through Hostfully or not. How we have it set up, I’m not sure.

Tony:
A lot of the channel managers have some limited functionality to manage your cleaning staff and your maintenance staff. Initially, up until about four or five months ago, we handled that all through our channel manager. More recently, we added in a second software, or not a second software, our fourth software that’s specifically focused on our cleaning and our maintenance staff, and it’s called Breezeway. Gosh, I know we have an affiliate link I’ll share with you afterwards. Oh yeah, it’s breezeway.io/robinson. I think if you use that, you get 25% off or something like that.
But Breezeway is really cool because it integrates with your PMs. All of your bookings are populated into the calendar and it forces your cleaners to go through a checklist they have to complete in order to mark a clean as done. It actually requires them to submit photos as they’re going through the property and completing all of those steps. I can see, for example, one of the things that we were getting messages on from our guests was that there were no sponges, but we know that we’ve instructed our cleaners to leave sponges, so now in our cleaning checklist, they have to take a photo of the cabinet underneath the sink open so we can see that there are trash bags, dish pods and sponges underneath the sink. There’s a lot of functionality like that where it can help hold your cleaners accountable. We use Breezeway. It’s been really great for us.

Ashley:
Then, as far as when you turn the basement one into a long-term rental, I think Rent Ready is a great one just for having that one unit or even the first 10 units. They have every aspect that you need in the software such as collecting rent online, doing your bookkeeping, they have leases that you can sign electronically on there, just it’s very basic. You can pay for add-on such as if someone has a maintenance request, you can actually sign up for their call center where you have a dedicated number that the person calls and someone on their team troubleshoots it with them or dispatches a vendor that you would like them to use for whatever the problem is. There’s also Avail, there’s apartments.com, even Zillow has started to build out some kind of rent manager system.
Then, for another piece to doing the long-term management, it’s Rent Ready, Avail, apartments.com. Trying to think. I know there’s one other big one too that’s great for just starting out, but as far as growing and scaling, then there’s AppFolio, Buildium property where these ones have a minimum fee where it doesn’t really make sense until maybe you’re at 20 to 30 units to actually implement that software and they just have more bells and whistles. But the same thing with short-term rental or long-term rental, the software has so much automation in it that it makes it very easy to actually run your units remotely, and then manage them that way.
Also, too, look at just Googling different messaging too. Instead of having to think, okay, what should my message say to the guest when they book, or what should it say to somebody the day they move into their long-term rental unit? You can easily find samples online and then just tweak and tailor it to your property specifically. Then, as you add additional units, you just copy and paste and tweak it. A lot of times, the software will have templates too, at least in the long-term rental side, and so that it will automatically pull the tenant’s name, the property address, and input that, and you can send out everything to all your different units if you need to.
For example, there’s going to be someone snowplowing the driveway on this day and you want to send it to the four units in your quadplex, it will automatically put in each person’s name, things like that and send it out. I think integrating the short-term rental and the long-term rental property management software, it takes some time to get it set up, but the automation that it can provide will really, really help you. Like you said, you need to focus on the rehab side of bit.

Sarah:
Yeah, I would need to de-stress.

Ashley:
Tony, real quick, do you want to touch on just using virtual assistants to run some of these pieces of that too?

Tony:
Honestly, I think virtual assistants are probably one of the most underutilized team building aspects for real estate investors. It doesn’t get talked about enough. Right now, we have five VAs on our team. Three that focus on operations, two that focus on pricing and our software stack. One of my biggest regrets as a real estate investor was not hiring those folks sooner for the amount of cost that you have to pay these folks in comparison to the value that they provide. It’s a really big return on investment there, and they definitely allow you to scale up your business faster with a little less headache.
If you plan to build a decently sized portfolio, if you want more than one property and you know that you want more than one property, hiring those people on that first property makes it so much easier because now, you guys are learning together, you’re able to set those strong foundations so that way, you’ve got really tight processes at one property so when you get to 5 or 10, it’s just a matter of adding more units and not necessarily trying to scale your team at the same time.

Ashley:
The great thing too is that even if you have one property, you can find virtual assistants who are working for maybe 10 different investors with only a few units, so you can easily afford them because you’re sharing the cost basically because they’re working for a ton of other people, where maybe if you found somebody local, they want a part-time job that’s at least 20 hours or something like that. I think that’s a huge advantage too. Going on Fiverr or Upwork are two great places to start to look for the virtual assistants. Well, before we wrap it up, is there anything else that we can help you with?

Sarah:
No, I’m so appreciative of you guys. I’m getting feedback, but thank you guys. I really appreciate you for having me on.

Ashley:
We are so glad that you came on, and thank you again for purchasing the Real Estate Rookie book because it led you to us.

Sarah:
Never thought that would happen.

Ashley:
It was great to meet you and for you to share your journey and where would be the best place for people to follow you and keep updated on what you have going on with your duplex?

Sarah:
Well, I don’t post a lot, but I am on Instagram, @quesarara, Q-U-E-S-A-R-A-R-A.

Ashley:
You’ll have to share your journey. Post more on it. Hey, and before we close out, do you have an idea of when you want to take your short-term rental live?

Sarah:
By the end of May. That’s heavy season.

Ashley:
That’s soon. Okay, great. Well, we wish you the best of luck and thank you so much for taking the time to chat with us. Even though you’re a rookie, you’ve provided so much value to this episode, and I think a lot of people will take away some lessons learned, but also a lot of motivation and inspiration from you. Thank you for coming on. We appreciate it. Thank you guys. I’m Ashley, @wealthfromrentals, and he’s Tony @tonyjrobinson, and we will be back with another episode. See you guys soon.

Speaker 4:
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