David:
This is the BiggerPockets Podcast show 586.

Andrew:
Do not fall for the temptation of actual cash value insurance policies. In most cases, a lender will not let you do that. But if you’re buying a property for cash or you’re doing some kind of non-traditional debt structure, don’t fall for the trap of, “Cool, I can save a little bit on my premiums,” because the minute you have a loss, that will come back to bite you big time.

David:
What’s going on everyone? It is David Greene, your host of the BiggerPockets Podcast, the show where we show you just how powerful real estate investing can be. Our guests include food servers and firefighters, counselors, and corporate execs, people with a wide range of backgrounds with one thing in common, they got the real estate bug, they got educated and they took action.
Now it’s our job to help you do the same. Now we are going to do that today by bringing in my personal friend and multifamily investing partner, Andrew Cushman. Andrew Cushman has been on this podcast several times. I believe this is his fourth appearance and he is a multi-family investing specialist. On episode 571, we dug into what he calls phase one of his underwriting, where he looks at would this property possibly work if everything went great?
In today’s episode, we get into phase two where we verify is everything actually great and could this deal work? Now, this is a very, very detailed, practical sort of information packed episode where you could take the information and literally create the same system that Andrew runs. And I hope that many of you do. If you’ve ever learned what goes into analyzing multifamily property, this might be the most important episode or piece of information that you watch ever.
This will teach you more about investing in multifamily property than you probably ever heard in your life. And that doesn’t mean that you need to actually go do everything we talked about, but this will give you amazing insight into what goes on that will give you confidence in your own investing and maybe help you understand if multifamily is a niche that could work for you.
There’s all kinds of different strengths and weaknesses associated with each asset class of real estate, and today we dig in pretty deep on what goes in to multifamily investing. Now there’s eight steps that I’m going to want you to follow. And at the end, Andrew and I talk about a deal that we’re going to be putting together that you can get more information on. So make sure you listen all the way to the end to learn about that.
And if this is your first time hearing about Andrew or multi-family investing, please go back and listen to episode 571 after you finish this so you can see what led up to it. Now, if you end up liking this episode and you’re like, “Man, I like learning about something new that I didn’t see coming.” Today’s quick tip is going to be to go to biggerpockets.com/store and check out the books that they have.
There’s books on all kinds of topics, and it’s good to read them just to get a feel for if you would like investing in that type of asset class. And if that’s really where you want to put your focus and attention and learning to grow, the other thing you can do is get on the BiggerPockets forums and ask questions and see how many other people are thinking the exact same things as you, and trying to figure out the same questions that you’re trying to figure out.
So many of us think that we’re on this journey on our own, and we’re really not. Everyone else is taking it with us. So get hooked up with some people on this hike and this journey to the top of the mountain that we’re all taking and will be very encouraging for you. Without further ado, let’s get into it with Andrew Cushman. Andrew Cushman, welcome back to the BiggerPockets Podcast.

Andrew:
Hey, good to see you again. I think it’s going to be a great day. I put the left earbud in my left ear on the first try, that’s always a good sign.

David:
Is that your barometer to tell how things are going to go?

Andrew:
Yes, it’s very predictive, yeah.

David:
I like it. People are getting in behind the scenes look on just how to be successful in real estate investing.

Andrew:
That’s the key right there, yeah.

David:
Now today’s show is going to be a masterclass on underwriting multifamily properties. So heads up if you’re not into multifamily, this is one that is definitely going to be focused on that niche specifically. But I think that there’s value that you’ll get out of this anyways because we’re going to go into really the fundamentals of real estate investing.
The specifics of how to evaluate multifamily are going to be covered but there’s always a why behind what we’re doing. Now, we had Andrew on episode 571 where we went over what Andrew first was phase one of his underwriting when it comes to multifamily properties. Could you give us a brief summary of what those six things were?

Andrew:
The phase one underwriting was just, and we won’t go through all of the different steps, but the phase one underwriting was just a quick and dirty like you’ve got 10 properties in your inbox, you did the screening that we talked about way back in episode 271, I think it was or 279 yeah, 279 and you said, “Okay, well these three look interesting.”
But you don’t want to spend eight hours underwriting them so you just go through and make some fairly positive assumptions about rent growth, expenses, your debt, all of that and look at it say, “Well, okay I spent 30 minutes, 15 minutes underwriting this.” Under the best case scenario, these rosy assumptions, the deal doesn’t work, trash it, right?
But if under those rosy assumptions, it does look like a great deal, that’s when you move to phase two, right? Because you’ve done the screening, you’ve done phase one, the cream rises to the top but turds float there too. And phase two is where you’re going to figure out that if the property in question, which one of those it is.

David:
The turd test.

Andrew:
The turd test, yeah.

David:
Brandon is not here so that’s probably the best that I can do coming up with names.

Andrew:
All right, well, we’ll take it.

David:
Okay, so we also talked about the four levers that really, really make a deal work. Can you go over those briefly?

Andrew:
Yes. And there are other levers, but as we discussed, these are probably four of the most powerful ones. One are your rent growth assumptions. So did you assume 2% rent growth or 3? And over a five year timeframe, that’s cumulative and it has a huge effect. The second one was, what are your cap rate assumptions? Did you assume cap rates stay flat? Did you assume they go up 100 basis points or 50 basis points over your whole time? That changes things significantly. Especially if you’re looking at IRR.
The third one is the time of sale. Are you planning on underwriting for a three year sale, a five year, 10 year? What if you’re going to hold it indefinitely? Moving that endpoint significantly affects how you underwrite and are you looking at IRR or cash on cash? So that’s another huge lever.
And then the final lever we talked about was leverage itself. Are you going in with 65% LTV debt, loan to value, or are you trying to max it out at 80 with a bridge loan? Are you trying to put preferred equity on top of that to get to 90? So those are the four levers that we went in a lot more in depth and that can very significantly affect your underwriting.

David:
And you really want to understand those levers because if you’re going to invest as a limited partner in somebody’s syndication, they might have fudged the numbers by putting these levers in places that aren’t natural. So for example, we mentioned cap rate assumptions. If you’re not super into multifamily, all that means is a cap rate is a measure of how desirable an asset is in any specific market.
The lower the cap rate is, the more people want it and the lower a return an investor will accept to get into that market. If a general partner or the syndicator is assuming that demand is going to go up, meaning cap rates are going to go lower, they can make the deal look a lot better on paper than it’s actually going to be.
When Andrew does deals and when we do deals, we assume the opposite. We assume cap rates are going to go higher, which means that there will be less demand. And it’s a more conservative approach. If the deal still works under those conditions, it’s much less likely to fail. So that was some really good stuff and just understanding how easy it is for somebody to sort of manipulate numbers when they’re making an offering, as well as you can talk yourself into a deal being a good deal by kind of playing with those levers.

Andrew:
Yeah, you’re a hundred percent right. It applies both ways. If you’re looking to invest as an LP, you want to understand the impact that those things have so that you can dive into their underwriting and make sure that either they are not intentionally pulling a lever they shouldn’t, or just unknowingly pulling it, or be maybe you just don’t agree with their assumptions.
And then yeah, if you’re doing your own, you can make a spreadsheet tell you anything you want. And so you got to be cognizant that you’re not doing that. Well, if I just assume the cap rate doesn’t move, this is a great deal. Real world is often different than spreadsheets so be careful.

David:
And we’ve all been there. That’s exactly right. So phase one like you mentioned is just, hey, if we assume the best does the deal work? Because if it doesn’t work under best circumstances, don’t look at it all. And it doesn’t really take that much time. And another thing I really love about the system Andrew has here is this can be leveraged to other people.
So Andrew, you have two people on your team that for the majority of these deals, they’re actually working phase one underwriting and they’re only coming to you or putting more time into it if it passes phase one underwriting. So anytime you can create something like what you’ve done here, it makes it easier on yourself to leverage anything you want to add on what things have been like since you made that change.

Andrew:
So it used to be me looking at everything and doing every step and it was brutal. And I started to get burned out on it where a deal would come to my inbox and I’d be like, “Oh geez, another deal I got to underwrite.” And I lost the excitement, right? Whereas now we have a virtual assistant that’s worked with us for a couple years now who does that screening process that we talked about way back on 279.
Then I have an acquisitions person who does that phase one underwriting that we talked about in our last episode. If a property looks like it’s cream and not a turd, then he sends that to me, we talk a little bit, he then goes into phase two and then he proceeds from there. So when you go to phase two is it’s screened well, it passed phase one underwriting and it looks like a property that you want to own and, or you think is at least worth putting an offer on.
And that’s a whole nother topic to get into on another time but there’s a lot of different reasons you’d want to put an LOI on a property even if you might not necessarily want to win the deal on the first bet. This is the process phase two that helps you decide what price in terms that you would consider doing that. And so this is definitely more time intensive. So you don’t want to do it on every deal, only deals that have high potential or properties that you think you’d really want to own.

David:
All right, everybody. So buckle your seat belts because you’re about to get some high level practical information that you can actually take away from the podcast and apply the minute that you leave into evaluating a deal. There’s going to be eight steps to underwriting phase two. Anything you want to add before we get into those?

Andrew:
Yeah. So if you’re used to listening to podcasts on 2X speed, don’t do that because I’m already going to be talking fast.

David:
That’s a great point. All right. So what is step number one?

Andrew:
Step number one, rent increases. So there’s a number of components to this. There’s market rent growth over time. There’s hopefully you have found a value add deal so there’s a component of bringing the property up to where rent should be today. And then we’re going to talk about actually step two, is loss-to-lease.
And they both factor into rent increases, but we’ll save loss-to-lease for just a minute. So far as regular rent increases. First, we’re going to talk about… We talked actually in phase one about market rent growth over time. That’s where you’re assuming, okay, market’s going to keep going up 2 1/2% or 3% a year. But how you determine where market rent should be today is we use what’s called a scatter chart in Excel.
And I’m going to pull up a visual here. If anyone is just listening and you’re not on YouTube, we try to explain this so it’s understandable but the best thing to do is go to YouTube and take a look at the chart that we’re showing. So what you’re seeing now is a one bedroom rent comp analysis. And by the way, these are real, we didn’t make this up.
These are from deals that we actually have offered on. We did take out the name of the actual property so we don’t have a hundred thousand people going to look at it, but this is real data. And in this example here, we’re looking at one bedroom rent comparables. And you’ll see on here there’s Oceanside, East Park, Laurel Creek, Westview, Whispering Pines, these are all comparable properties to the one that we’re looking at.
And on the chart, there’s a bar that’s labeled in red called one by one unrenovated. That is an unrenovated unit at the property that we are doing our phase two underwriting on. And how the chart works is the bottom access is the square footage, right? So as you move from left to right, that means a smaller unit to bigger unit. The vertical access is rent. So on the low end, this chart starts to 800 and it goes up to 1200.
And so what we do is you take all these… When you get a bunch of data from Axio or CoStar, wherever and all this different floor plans and different sizes and rents, it’s kind of hard to just look at all that and figure out, “Well, okay, where’s my rent?” Right? So you make it visual. And so what we do is we take all those data points, we put it into Excel and we create this scatter chart.
And then if you look there’s a blue dotted line that kind of goes from bottom left to upper right it’s called the regression line. There’s a nasty statistical definition of what that means, but basically it’s just a visual line that shows how the different data relate to each other. And what you’ll see is the reason the line goes up from left to right is because rent tends to increase in that market as the unit size goes up.

David:
As the property gets bigger.

Andrew:
Yeah, as the units get bigger. People generally are willing to pay more money for larger units. And the steepness of this line kind of tells you how much that submarket values a bigger unit. But the most important thing that we’re trying to show here is if you look at our one by one unrenovated unit, it is sitting at $900 a month in rent. Every other property is a thousand dollars or higher, right?
So by plotting these, you can immediately look at this and go, “Well, okay, I should be able to do a light renovation and at least get the rent from 900 to 1,000.” All right? And if you look at the chart, you’ll see that we actually have the one by one renovated is the one that’s in green at 1,025, which is slightly above two of the other data points.
Well, all right, Andrew, why is that one higher? Right? If the regression lines right at 1000, why do you have it as 1,025? Because part of our analysis is we looked at those other comparables and saw what the interiors were like and said, “Okay, well, if we spend $6,000 or whatever the number was, we can meet or exceed those plus our professional management with a lot of experience in that market, we have high confidence that we can get to 1,025.”
So that is what we’ve found to be the most effective way to quickly and accurately at the same time determine how much rent bump you can get, right? Again, there’s more like if you’re buying a property, you’re going to go visit these property and actually tour these comps and all that. But when you’re sitting at your desk doing phase two underwriting saying, “Okay, I assumed in my phase one that I can raise rents a hundred bucks a month or 150, is that true?” This is where you’re verifying if that rosy assumption was true. And based on this chart, these units should pretty easily get to about 125.

David:
Now I see you have several different complexes that looks like all the different names of them. How did you go about gathering the data that you put into this chart for what Whispering Pines gets Westview, Laurel Creek, et cetera?

Andrew:
Good point. So we try to get it from as many data sources as possible. So we’ll get it from Axiometrics, CoStar. And anyone who’s tried to sign up for CoStar is like, “Andrew, that costs an arm and a leg.” You’re right. So we don’t pay for it. We go to brokers and property management companies that do and say, “Could you please send us a report for this submarket or for this property?”

David:
Nice.

Andrew:
ALN is another source of data. But also what we do is we perform our own surveys. We will get online and look up every property just using Google, apartments.com, rent.com and get every property in the area, call them, get it off the internet, get all own data, and then ideally we have two or three sources for the same data set. We compare them and try to get them to line up as much as possible, and then plot them on this chart.

David:
Wonderful. Okay, so tell me how you would… Let’s say that you had a rosy assumption and then you pulled up this chart. What would let you know, “Hey, stop right there. We’re not going to be able to get the rent bump that we’re going to need”?

Andrew:
Yeah, right on. So if it’s one of those things where we had a call with the broker and they’re like, “Oh yeah, you can easily get these things to $1,200 a month. The seller renovated one unit and he leased it for $1,200 a month and you should be able to do the same.” So, okay, cool. In phase one, boom, $1,200 a month. Oh, this property looks great. We do this, sorry, no. It’s only going to be 125, maybe 150 best case scenario. So we go back, change the underwriting and it might kill the deal. So then that’s what you’ve… Again, you look just like in phase one, you’re looking for reasons to say no.

David:
There you go. This is the verify part of trust but verify.

Andrew:
Exactly. Yes.

David:
Okay. Anything else you want to cover before we move on to the next step?

Andrew:
Yeah. You know what? Just to get it all in, let’s go ahead and keep on moving. So the next part of this that I want to talk about is number two, is loss to the lease. And to be fully transparent, I was in the business for several years before I even fully understood what that actually meant. All right? So here’s what loss-to-lease is.
Let’s say you’ve got a tenured apartment complex, and you are advertising that your rent is a thousand dollars a month. But when people walk in the door, for whatever reason, maybe you’re asking too much, maybe you didn’t hire the right leasing person, whatever, when people walk in the door, you’re actually leasing it for 950, right? You’re marketing it for 1000, but when that lease is signed, it’s 950. So how that’s treated is you are losing $50 a month to that lease, right? So market’s 1000, but your lease is 950 so your loss-to-lease is $50 a month, right?

David:
Okay. Let me see if I can make sure that we understand here. What you’re saying is if you’re being told that the unit will rent for a thousand dollars a month, you’re putting it in to your rent estimator at a thousand dollars a month.

Andrew:
Right.

David:
But recognizing that’s not accurate, you looked and see, well, what is it actually renting for? Only 950? So you have to subtract that $50 from somewhere and you create the category called loss-to-lease to do it. It sounds very similar to how vacancy is used. When I was new at investing, I would say, “Well, it’s going to rent for $1000 a month, but I have a 10% vacancy rate so I’ll just put $900 a month in for rent.” That’s actually not the right way to do it. You should put in the full thousand and create a separate category for a vacancy where you take off a hundred. Is that the same principle working here?

Andrew:
Yes, it is. And so what happens is loss-to-lease sounds like a negative thing, and it is if you’re an owner, but if you’re a buyer, it’s an opportunity that you’re looking for. And candidly, loss-to-lease is my favorite value add because it has the lowest execution risk. We talked about the situation where you got 10 units, you’re marketing them for 1000, but you’re actually signing leases for 950.

David:
Can I interrupt you again real fast?

Andrew:
Yeah.

David:
What’s a reason why somebody would put a tenant in at 950 when they’re marketing it at 1000.

Andrew:
We saw this a lot during COVID. People were just nervous and like, “Dude, if I can get someone that’s actually going to show up and pay, I’ll give them a discount.”

David:
So maybe for whatever reason, they had a special running that month where they said, “Hey, get X amount off your rent or something,” that they don’t have to do all the time, but they were trying to lease it up. So they gave that person a discount off of what they normally would get for market rent. Is that accurate?

Andrew:
Exactly. And sometimes you’ll see where the entire tenant base in a property has it, other times you’ll see just a couple of exceptions because it was a friend or they felt bad or they were nervous because of COVID or maybe it was December and traffic was slow and there’s all kinds of reasons.

David:
Okay, thank you. Go ahead and continue.

Andrew:
I’m going to pull up another visual. And this is another scatter chart, looks somewhat similar to the one that we had on the previous slide. And this is another one where you’re looking for a visual to give you a quick reading of what the data is saying. So I started to mention before that loss-to-lease sounds like a negative thing, but in a up trending market like we’ve had for the last 10 years, as a buyer, loss-to-lease is a huge opportunity, and again, probably your easiest value add.
So what we have here on the screen, this is for a property that we actually purchased back in March of 2021. So again, this is real data, real property. And what we did is on the horizontal access, which if I remember from high school as x-axis, we have the date of every lease on the rent roll, right? And then on the vertical access again, is the rent starting at 1150 going up to 1400 in this case.
So you say, “All right, well Andrew, why would you organize the data like this?” Right? So the older dates are on the left, the newest dates are on the right. And then again, rent goes up from bottom to top. So what we did is we’re taking the actual rent roll from the property that has the lease rates and the date that that lease was signed.
And what happens when you plot that on this chart so that you can see the date and the amount that the resident is paying, it becomes very clear when you look at this chart, “Hey, wait a second. Every lease that was signed in the last six weeks, they’re getting 1,350, but the older leases all averaged 1,264.” Clearly, now you need to dig into it a little bit to find out well, did they do renovations or were not?
In this case, and I can tell you this because we bought this property, in this case, they had not done any renovations. They were just finally starting to catch up with the market. And I mentioned before, you might see one lease that’s kind of high, that doesn’t prove a trend. But when you have six weeks consistently of every lease that was signed is all of this is significantly higher, that’s a sign that you can probably buy that property and take all of those other leases, which are represented by very low dots on this chart and get them up to that 1350.
So what you’re looking for are two numbers. You take the rent roll and you average and again, do this by floor plan so this is a one bedroom. If we take every dot on this chart, the average in place rent, meaning people are actually paying it is 1264. But the last 8 to 10 dots on here were all 1350. So what that tells us is we can almost do nothing, just buy the property and manage it well, and then get the rent up from 1264 to 1350. That’s an $86 increase just for managing it and catching it up to market.
Now the reality was now that we’ve owned this property for nine months and the market has continued upward, we are multiples above this level, but this right here not only gives you a huge insight into the opportunity at the property, but it also gives you kind of a backdoor insight into how the overall market is trending. And we have found this chart to be one of the most powerful tools in our underwriting analysis.

David:
Yeah, this is brilliant. Let’s talk about a couple reasons why this is something that should be focused on a lot, but often isn’t. The first thing is like you mentioned, loss lease is the easiest thing to correct. It’s the least expensive and the fastest. You can walk in there and immediately see, “Well, we should be getting this rent so we can bump it up to this before we do anything.”
And you always want to take care of your easiest things first. So if you’re buying a unit that has a very small loss-to-lease or it’s insignificant, in order to increase the rents, it’s going to take a lot more work. You’re going to have to do something like add amenities or upgrade your units, you’re have to spend some money and some time to get there.
Looking for something with loss-to-lease if you were going to compare this to single family properties would be like, you’re getting it significantly under market value. There’s a lot of room to get up to the ARV but even before you do a rehab. Another thing is like when you mentioned, this shows you what’s going on in the market. What you’re referring to is that the higher the loss-to-lease across an entire market, the faster rents have been rising and the leases haven’t expired fast enough to catch up with it. And that’s where you want to be if you’re assuming that that trend is going to continue, which in most cases it is. Go ahead.

Andrew:
Yeah. And I was going to say for those listening who are afraid to buy right now, there is a window of opportunity I’d say for probably the next six to 12 months. There are so many property owners, especially in the, I’d say under 50 unit space where because of COVID fear, whatever, they have not kept up with the rent increases of the last year. And we keep seeing property after property where rents haven’t been raised in two or three years and they are 20% below market now. I don’t think that’s going to last forever, so again, this reveals a huge, huge opportunity.

David:
Yeah. You and I are still finding those deals if you know what to look for. And this is the big red flag that shines, it says, “Hey, come look at me. I am worthy. There’s something here where people are not taking advantage of me.” It kind of reminds me of that old movie She’s All That where you have the nerd that no one’s paying attention to, but really they’re the beautiful princess underneath it.
This is one of those things that you can see, man, this deal would clean up pretty nice. So understandably so that’s why you have it so early in your underwriting process. Because if there’s not a lot here, there’s got to be some that else about that deal that makes it really appealing, that makes you think that you could improve it. This is definitely the best to look for.
And I can’t highlight enough that metrics like this help you understand what’s trending in a market in general. So just imagine that if most leases are signed for 12 months and rent goes up over a 12 month period, let’s say it goes up a hundred dollars over the year, many of those units that signed 10, 11, 12 months ago are going to be at rents that could be going up. And sometimes the apartment complex just extends them on the same lease that they have, right? They’re afraid of vacancy or whatever’s going on. So this is how you can identify that there’s something juicy here. Anything you want to add before we move on to the next step?

Andrew:
Two things. One, if you’re looking for low hanging fruit, this is picked in a basket, sitting under the tree, waiting for you. And then, okay, well, how do you use this? In this case, there’s $86 loss-to-lease, right? That’s no renovations. So if you’re going to renovate the unit and bring it up to a higher level, you take your loss-to-lease, you add your renovation bump to that, that gets you your total rent increase that you are putting into your underwriting. And ideally, your underwriting model should have these as two separate items, loss-to-lease and renovation increase, and you want to be able to toggle and adjust those independently.

David:
That’s a very good point. This goes down to the principle of levers in real estate, which I don’t know if anyone else talks about but when you get into investing pretty significantly, you start to recognize. Like Andrew, you mentioned the four levers that make a property worth more. Cap rates going down might be the biggest lever of all. You can improve your net operating income to make the value of a property goes up.
But that pills in comparison to the power of cap rates significantly going down. It’s just a bigger lever that moves things more. I say the same thing with the BRRRR method. If you’re looking at ROI, you want to get a higher ROI. Well, you can improve your cash flow, that’s one way. But if you can decrease the amount of capital you put in the deal, that lever is way bigger and it makes your ROI skyrocket.
So the deeper you get into investing, the more you’re learning on where do I get the most bang for my buck? What lever do I want to pull on? The rehab bump versus loss-to-lease are both levers that make your rent go up. But loss-to-lease is the bigger lever that’s much easier to pull on. And you’d rather find properties that have that kind of opportunity. So there’s always going to be both, but this is ideal. You want it to be on the loss-to-lease side as opposed to having to manage an entire rehab to get the same result.

Andrew:
Yeah, again, it’s all risk reward. This loss-to-lease generally carries the lowest execution risk of any value add strategy.

David:
Love it. Okay, number three. What do you have for us?

Andrew:
All right. Let’s jump onto debt quotes. And I have another example here, and this is, again, this is real life. This is a debt quote that we received actually on a property that we are under contract to purchase. I did redact some of the specific information for the asset. But when you’re looking at debt quotes, what you don’t want to do is just get… Or I shouldn’t say you don’t want to do.
But in generally what we have found to yield the best results and the highest chance of you being able to perform and close on the deal is to work with a competent and trusted loan broker who will take all of the stuff that you’ve gathered on this property, package it together really well and put it out to multiple lenders to help hunt you down the best deal, right?
Now, you’re not going to do this, you’re not going to actually send this to a broker every time you kind of get interested in the deal. This is, I’d say a deep phase two where you’re actually going to send it to them. But I want to have an example to actually show people some of the key terms to watch out for.
But when you’re doing the, I’d say an initial phase two, you want to at least have, if you don’t feel like you already have a really good grasp of what current debt terms are, then you want to at least run the deal by a competent loan broker and say, “Hey, I’m looking at buying this for 5 million, I want to get a loan for 70% of the purchase price. And here’s the P&L and I think I can get rents up this much. Could you just give me a rough idea of what we might expect for loan options?” Right?
That’s what you want to do in the beginning. Because again, you don’t want to waste your time, but you definitely don’t want to waste anybody else’s time. You want your team members to know that if you send them something, odds are it’s going to go through and everyone’s going to get paid. So again, so the initial phase two is either you already have a sense of what your debt term’s going to be, or you do a quick email or phone call.
If you’ve done a phase two and now, oh, hey, this thing looks good and we’re negotiating an LOI, or we really want to strengthen our offer, that’s when you might have your loan broker send you what I’m about to go over. So you know once you get into it kind of what the terms are going to be. So if you look on the visual, and again, make sure you go to YouTube, BiggerPockets YouTube channel so you can actually see this.
You see three different options on here, and I’m not sure why it’s labeled 1, 2, 4, but it should be 1, 2, 3. So the first is an agency fixed rate, agency floating and then debt fund floating. So agency, that means Fannie Mae and Freddie Mac, which are your government sponsored agencies, debt fund, that’s kind of everybody else. That’s bridge lenders, life companies, actual debt fund, et cetera.
And we could do an entire episode on just structuring your debt properly. But the main things you’ll see here or the main things you’re going to want to take into consideration when you’re doing your underwriting is number one, the term, right? So if you look on this, you’ll see agency is 10 year and the debt fund is three year. Especially right now, I won’t say don’t do bridge because there are appropriate times to do that, but be very careful with loans that have short maturities, right?
Long term multifamily, I strongly believe is going to continue to do phenomenal. But what you don’t want to do get a loan that is completely due in two years or three years and you have no other option other than refinancing or selling. Because what if the debt markets aren’t favorable at that time? Right? You always want to give yourself a little bit of exit.

David:
So what you’re saying is that the shorter that the loan term period is, the less time you have to get things squared away where you’re safe and the less things are able to go wrong before you get hurt?

Andrew:
Exactly. The longer the loan term, the more flexibility you have to adapt to and overcome any adverse scenarios that pop up.

David:
In general, it’s a safety feature to have a longer term loan. And I think one of the mistakes that newer people make is they always assume, “Well, everything’s going to go right and on that timetable, this is where we are.” And that is never the case. Nothing ever goes right.

Andrew:
Yeah. You will never, ever exactly hit a proforma. You will always be a little below or hopefully a lot above, but you will never, ever exactly hit it.

David:
Well, the reason that you come out ahead a lot of times is give yourself this runway. All of your assumptions are always negative. You’re like, “Well, this is going to go wrong and this is going to go wrong and this is going… And if all that goes wrong, I’m still okay under these circumstances.” I think when the market gets hotter, it gets harder to stick to that sort of a discipline approach that we take when we’re buying.

Andrew:
Yeah. I’ve definitely missed a lot of good deals over the years because of that, but I also sleep well. So to me, it’s an acceptable trade off.

David:
Nice.

Andrew:
So the next big thing you’re looking for is loan amount. Different lender, size things in different ways, but you want to know, am I… And so on this particular deal, they were giving us a range of, okay, with agency, you’re going to get anywhere between 13.7 and 13.9 million.

David:
Can you define what agency debt is briefly?

Andrew:
Yeah. That’s the government sponsored agencies, Freddie Mac and Fannie Mae.

David:
Fannie Mae, there you.

Andrew:
Which are fantastic commercial lenders. In fact, they kept the market alive in March of 2020 when COVID shutdown down all the bridge lenders.

David:
I’m glad you say that because we rarely ever say anything positive about the government. But that doesn’t mean that nothing positive ever happens, we just tend to not give credit to that.

Andrew:
And it’s more fun and easier to complain, right?

David:
That’s exactly right.

Andrew:
Than it is to give credit. But no, yeah. Well, that’s the thing. So bridge loans are great, but especially since you brought it up, that is another risk, right? This is going to sound negative, but I love bridge lenders, we do use them occasionally. But bridge lenders are like roaches when you flip on the kitchen light at night, they scatter as soon as danger arises, right?
So you look back at 2008, you could not get a bridge loan anywhere. March of 2020, bridge lenders, every single one of them left the market. If you were going to get debt, it was going to be Fannie or Freddy, that was basically it. So they tend to come and go. And what you want to be careful of, okay, I’m going to get this great bridge loan or I’m going to refinance into one and if something happens like March of 2020 or 2008, those bridge loans may not be there.
So again, just something to be aware of, that’s in the additional risk. So I should think of a better analogy, because I don’t like to call our bridge lenders roaches because they’re great partners. But this is the idea of scattering into their…

David:
They’re fair weather friends, so it’d be a great way to say.

Andrew:
There you go. Fair weather friends. There you go, there you go, there you go. So again, and then if anyone who’s on YouTube, you’re going to see there’s probably about 15 terms on here. So we’ll hit the really high ones or most important ones. So the next one is implied rate. And basically what that is saying is what all the lenders do is they take some kind of index, might be the 10 year treasury might be SOFR, it used to be LIBOR.
And they’re going to add what’s called a spread on top of that so it might be 2% or they’re going to have a number. And they’re going to say, “Well, okay, the interest rate that we’re implying you’re going to get is X,” right? So if we look at this, it says, “Okay, fixed agency is between 3.25 and 3.35. If we go floating rate agency, which means the rate can go up and down as the market interest rates go up and down, because that protects them from getting locked into a low interest rate loan, they will give you a lower interest rate to start so that’s between 2.8 and 2.9.
And then the debt fund is 3, to 3.6. So you can see, depending on which route you go significantly affects the interest rate. So that’s something you’re going to want to know what those rates are. The next one is max as is loan to value. This is one of the downsides of agency right now. If you look on here, the agencies are only going to give us 63% of the loan to value.
So if you’re buying a $10 million deal, they’re only going to give you a loan for 6.3 million. Whereas the bridge lenders are willing to give 75% on a 10 million and deal 7.5 million. In today’s highly competitive market where everyone’s fighting to get the returns that are needed, that extra 12% leverage can be huge in whether or not your deal is appealing to investors or not or whether it hits a certain IRR. But just be aware higher leverage, generally speaking means higher risk.
So again, which route you go depends on your source of capital, your tolerance for risk and your business model. But these are all terms that you want to know. I have heard many horror stories of somebody assuming they were going to get 75% or 80, they get down close to closing and the lender comes back and says, “Oh, sorry, it’s actually 63 or 62,” right? You need to know that upfront because if you’re planning on 80 and you get 63, your deal just blew up. So you got to know this stuff in advance and properly underwrite it.
Another key one to help prevent that is to know what’s called your DSCR, that stands for debt service coverage ratio. So if your property makes $10,000 in net operating income a month and your mortgage payment is $10,000 a month, that means your ratio is 1, right? 10,000 divided by 10,000. You won’t get a loan on that from the agency. What they want to see is generally speaking is a minimum of 1.25.
And again, that changes based on market and property size. That’s the number you want to know. You want to ask your loan broker or whoever you’re working with, what is that ratio need to be? So if they say it’s 1.25 and you’re estimating your mortgage payment’s going to be 10,000, then that means your property needs to have a net operating income of 12,500. 12,500 divided by 10000, 1.25, right? That’s the number you need to know.

David:
Basically that means a lender’s looking to see, “Can you repay the debt we’re about to give you? Can you cover the debt service on this deal?”

Andrew:
Exactly. And they want to make sure you have a minimum of 25% cushion in case something goes wrong.

David:
Yeah. You want to know something crazy? In the residential space, there’s such a demand for lenders that want to be investing in there that a loan company can do a 0.8 debt service coverage ratio. And it’s a 30 year fixed rate loan. That’s how much money is floating around there in the residential world that needs to find a home, that they’re basically saying, “Hey, if the property brings in $8,000 a month, it’s going to cost you $10,000 to get this loan, we’ll still give it to you.”
Now that doesn’t mean that you should ever operate it where that is the case, but they’re looking at it saying, “Hey, they can make up the rest of it with their income.” So these standards are definitely… I’ve noticed they’re tighter in the commercial space, but that’s okay because nobody is buying commercial property assuming it’s not going to make money.
The reason you’re buying it is because it makes money. A lot of residential properties purchase for different reasons. You use it to vacation, you use it to live in, you can kind of make it work as an investment. But residential real estate was never intended to be income producing property like commercial property is.

Andrew:
Well, yeah. And yeah, geez, we could probably do, like I said, a whole podcast or a whole Q&A on this. But just keep it moving. I’m just going to kind of hit the next ones really quick. The next one you want to know is how many years of interest only, right? Is it three? Is it five? Is it 10? Most bridge loans are interest only for usually the full term so the first three years.
The next one is what’s the amortization schedule look like after its no longer interest only? So you mentioned residential loans are typically 30 years. Fannie Mae and Freddie Mac are often the same thing, 30 years. A lot of bridge loans don’t amortize. It just stays interest only. Some bank loans might be 20, 25 years.
So you need to know what the amortization looks like because it doesn’t sound like much. But the difference between a 25 year and a 30 year amortization can have a significant hit on your cash flow because you’re paying more principle. It builds equity so that’s good, but it’s not loose cash flow that you can use. Okay?

David:
So let’s clarify that very quickly. If we’re talking about an interest only loan, basically they’re going to… You’re only paying the interest on the money you borrowed, you’re not paying down any of the principle. So the downside is that if it’s interest only, you’re not building equity by paying the loan down, the upside is you’re actually keeping more money in your pocket. Is that a great way to summarize it or a good enough way?

Andrew:
Perfect. You got it.

David:
So it can make you… This is why I want to highlight it. It can make you feel wealthier than you are when your cash flow is very high, but your loan isn’t being paid down, right? It’s usually better for you and less risky because cash flow in the bank can be used to get you out of tough times rather than paying the loan down if you’re disciplined with your money. And that’s why I want to bring this up, is everyone’s always excited about interest only loans, but it can create this false sense of security that you have more wealth than you actually do because that balloon payment is still building and you’re not creating equity as you’re paying down the loan.

Andrew:
Yep, exactly. If you save it, it’s an advantage. If you spend it, might not be the case.

David:
And the reason most of these loans are structured with interest only first is they’re trying to give you that cushion, right? To build up your reserves, to handle things that could go wrong that you didn’t foresee. They’re making it easier for you and they’re kind of like training wheels for the first little bit. And then after the three or five years, whatever it is, that’s when the amortization schedule kicks in and your payment goes up because you’re also paying down the principle.

Andrew:
Yeah. And also, especially if you’re doing value add, they know that yeah, cash flow might not maximize until three years down the road. So another huge one is prepayment penalty. And this has caught a lot of very experienced operators off guard the last five years. Because we all thought rates were going to go up and they never did, they went down.
Prepayment penalty means if you buy a house, you can pay off your mortgage basically anytime you want, right? David, I mean six months, 12 months doesn’t matter. And you just pay it off, you’re done. In the commercial world, the lenders say, well, they’re taking that loan, they’re selling it on the secondary market and they’re promising investors that those investors are going to get a return.
So if you want to pay off your loan early, Fannie or Freddy will say, “Okay, Mr. Greene, you can pay off your loan early. But by the way, we promised our investors a certain yield so you have to pay us all that extra interest we are no longer going to receive so that we can keep our investors happy.” And that’s an oversimplification. It doesn’t quite work that way, it really is nasty stuff, all these symbols that I haven’t seen since my advanced engineering classes.
The idea of it is if you pay off that loan early, you’re going to have a large fee or penalty that you are going to have to pay. So if you’re going to sell the property in three years, don’t get 10 year fixed debt because you’re going to have a huge prepayment penalty. They also call it yield maintenance.

David:
There’s always fancy words to describe very simple things when you’re dealing with multifamily. You and I should make an article, right? Like yield maintenance, Dutch interest, even agency debt sounds much cooler than Fannie Mae loan. Loss-to-lease is a cool thing to say. There’s a lot of it. When you get into this space, there’s definitely words that get thrown around and you’re like, “What does that mean?” Even cap rate like, “Oh, that’s just the return you get if you didn’t take debt.”

Andrew:
Yeah, if you bought it for cash. So the other two things are, what kind of lender fees are you going to have? Is the broker going to charge you a point? Is the lender going to charge you a point? Is there an exit fee? Most bridge loans while they don’t have prepayment penalty, they will have an exit fee. Meaning like when you repay it off or refinance, oh, we’re going to charge you a point on the back end, right? Or a half a point or something like that.
Again, nothing wrong with it. You just need to be aware of it and make sure that you underwrite for it. All right, next one is insurance quote. Don’t have a visual on this just because it gets pretty dense, but we’re just going to touch on a couple of things. Number one, never ever, ever use the seller’s number for insurance, right?
I can’t tell you how many times we find sellers that are either underinsured or improperly insured or their brother’s sister’s cousin has given them a discount that you’re not going to get. There’s all kinds of reasons not to use the seller’s number. Another reason is a lot of times you’ll come across where situation where someone is ensuring based on ACV, which stands for actual cash value. You want to always ensure for replacement value.
I made this mistake in my first deal, fortunately it worked out okay because we didn’t have any claims. But if you have replacement value, it’s going to cost you more upfront because what the insurance company’s going to do is they’re going to say, “Okay, if your building burns down, it’s going to cost a hundred dollars a square foot for us to rebuild it.” All right?
And if your building does burn down, basically that’s how much they’ll pay you. Again, we’re simplifying. If you do actual cash value saying, “Well, geez I can cut my premiums in half if I go for actual cash value.” Then what the insurance company’s going to do when you’re building burns down is they’re going to come in and say, “Well, yeah, you know what? This was built in the ’80s and the roof was 10 years old and this was five years old.”
So they’re going to apply depreciation to it and they’re going to say, “Well, the actual cash value of this is 50%. So here, your $5 million building, here’s 2.5 million, good luck.” Now you got to come up with the extra 2.5. So do not fall for the temptation of actual cash value insurance policies. And most cases, a lender will not let you do that. But if you’re buying a property for cash or you’re doing some kind of non-traditional debt structure, don’t fall for the trap of, “Cool, I can save a little bit on my premiums.” Because the minute you have a loss, that will come back to bite you big time.

David:
Well by calling it cash value, that’s misleading.

Andrew:
It is.

David:
Oh, I’m going to get the cash, right?

Andrew:
Yeah, that’s why I did it the first time. Like, “Wait, my premiums are half and it’s cash value?” I’m like, “Okay, cool.” And then a little bit down the road, I figured out what that actually meant. Again, this was 10 years ago, we know this stuff now. I said, “Oh, you know what? Let’s go ahead and make this replacement value, thank you.” And again, I got my one year of premium savings and considered myself lucky and moved on, never did that again.

David:
It’s one of those things that in multifamily, there’s big words that can be used that can be misleading. I’ve said this before. I have a general rule that if anybody says finance, instead of finance, I have to look very closely at everything they say because I assume they’re going to try to pull the wool over my eyes. So don’t be that person at the cocktail party that tries to sound smart by saying finance. We all know what it’s actually referring to.

Andrew:
So we’ll speed through a handful of these other things. So they’re a little more self-explanatory. The two main things you were going to need to get an insurance quote are the total rentable square footage and the annual revenue, right? Those are the two main you’re going to get. And you send that to your insurance broker, he should be able to give you a good rough ballpark idea of what that’s going to be.
Some other things you’re going to want to know, the next biggest thing is is there a history of claims? Right? If they’ve got three other insurance claims, that’s called a loss run, which is the history of losses, your rates are going to be higher. Because the insurers, understandably, they’re going to be nervous about that at building.
You also want to find out, have there been any shootings or assaults? Right? So if you go on Google Maps, grab the little yellow man, drop him on the property and he runs away, you should run away too. Because what that means is if there’s been shootings or assaults or any kind of violent crime, you’re going to have an extremely difficult time getting insurance in the first place.
If you do, you’re going to pay more for it and they’re probably going to exclude incidents of violence, which means if someone gets shot in your property, it’s not covered by your insurance company and they go to sue you for 10 million because the shooting was of course your fault as the landlord, the insurance company’s going to say, “Well, good luck, David, that one’s on you. We excluded that.”
That’s part of your screening too, or hopefully you’ve already screened for this and you’re not looking at a property with shootings, but again, you’re going to really, at this point, you want to make absolutely certain. Now some other questions. Does the property have aluminum wiring if it was built especially ’60s or ’70s?
Is it sprinklered? That doesn’t mean it has nice irrigation for the landscaping. That means does it have those little sprinkler heads inside the units? And is it in a flood zone or not? Flood zone is a completely separate policy. And again, if you go back to our screening, we don’t buy in flood zones for a host of reasons. Doesn’t mean you can’t, that’s a business decision for us, but we don’t. And here’s the tip David, what do you think is one thing that flood insurance does not cover flooding from in the commercial world?

David:
Maybe your own fire sprinklers when they go on?

Andrew:
Actually we’ve had that happen, that’s covered. Rain. Flood insurance doesn’t cover flooding from rain. And you say, “Well, okay, where else would flooding come from?”

David:
A dam breaking [crosstalk 00:48:10].

Andrew:
Yeah. And here’s the thing. So we learned this a few years ago, fortunately, not the hard way, just by asking enough questions. So when you’re getting a flood… So what flood insurance covers, it covers flooding from a body of water, the lake overflows, the river overflows, the ocean comes in on storm surge with a hurricane.
If it just rains 12 inches and the water piles up in your parking lot because it can’t get away fast enough and floods units, that often does not count and often will not be covered. Most cases you have to specifically get that written into the policy that that is covered. And that saved our butts this year. We had a property in Florida we bought, we specifically made sure that was written in there.
One month after we closed on it, tropical storm came through, 17 inches of water in the parking lot because of rain not tied to a body of water. If we hadn’t had that clause inserted into the insurance, again, not in the flood zone, it’s not in a flood zone, it just rained too much, then we would’ve been out of luck some big bucks. So that’s a really big one. All right, so moving on to property taxes.

David:
Number five, property taxes.

Andrew:
Yes, number five. This one’s absolutely critical. This is another one where sellers and occasionally some brokers will try to get this past newbies and say, “Oh taxes are really low.” Especially in again, in markets that we’re seeing now where prices have been trending up significantly that property taxes are lagging, right? And this is something that is very unique to each county and state.
So we’re going to go over some general processes for estimating property taxes, but you’ve got to dig in and find out how your local municipality handles this. Everyone is different. So I’m going to go ahead and pull up an actual tax statement to show this. But basically the gist of it is you want to go to your county assessor’s website, download the current statement, right? And then use that to determine how and when they’re calculating reassessments and then estimate your taxes, future taxes based on your purchase price and how they’re doing that.
So I’m going to go ahead and pull up, this is an actual property tax bill. This is from the Valdosta area or so the Lowndes County in Georgia. And what you’re going to see here in this area, they do a fair market value. So they estimate a value for the land, value of the buildings. They add that together and then they use that value to determine the taxes. It’s not that simple though. For some reason, nobody’s been able to explain this to me.
And if a listener hears this and knows the answer, I’d love to reach out and let me know. They don’t just work from that fair market value. They take that fair market value, they multiply it by 40%, then they take what’s called a millage rate. And a millage rate is again, just another one of those fancy terms for a number that they’re multiplying by to come up with whatever number they want, right?
So there’s two levers that the municipalities pull to change your taxes. One is the value, two is the millage rate. So what they’ll do in this county is they take your fair market value, they multiply it by 40% because I think it’s… I guess it’s fun. Then they multiply that new value by the millage rate and that gives you your taxes.
So in this example, again, go to YouTube, I’ve highlighted these numbers in yellow so it’s a little bit easier to see. The fair market value for this parcel was 2,476,000. Multiply that by 40%, the taxable value is 990,000. They have it broken out, there’s actually multiple millage rates, one for the KIPP school, one for parks and recreation, great show by the way, one for the industrial authority, whatever. And so the total millage rate is 34.77.
Again, would be… You would think, “Well, I will just multiply by 34.77, no millage rate, I think stands for mills, which means you divide by a thousand first.” So you take your tax bill value, multiply it by 0.034, that gets you your net tax on the bottom right highlighted in yellow of 34,439. You say, “Okay, that’s great, Andrew. That just tells me what today’s taxes are, right? So how do you use that?”
Now this tells you how they are currently calculating taxes. So you take that formula, fair market value times 40%, times the millage rate equals taxes. You go in and you put your purchase price in there, right? So now take your new purchase price times 40% to get your new tax bill value times the millage rate equals your future taxes.
Now, what that does is that’s actually telling you your absolute worst case scenario. That’s telling you if the county comes in, says, “You bought it for this, we’re assessing you for that same price.” In most cases, that doesn’t actually happen. What we do is we take our purchase price, cut it to 80% and then put that number into this equation, right?
And again, there’s a lot of other factors. Some areas do this every five years, some areas do it as soon as you buy it. It’s different by state by county. But the gist of it is go pull a tax statement, number one, understand how they’re calculating it and then use their method of calculating with your new purchase price to figure out what your future taxes are going to be. And in many cases, yes, your taxes may double or triple when you get reassessed. And if you don’t factor that in, your deal just blew up two years down the road.

David:
Very good. And if this isn’t making sense because you’re listening on the podcast, check it out on YouTube, there’s a visual aid. You can see exactly what Andrew’s walking through. It actually makes a lot more sense when you can look and see. It looks like the millage rate is basically how the county is splitting up the property tax amongst the different municipalities or organizations that need the money.

Andrew:
Yeah. And generally speaking, you don’t need to worry about how they’re splitting it up, you’re just looking for the total. I did highlight parks and rec on there just as an example, but really all you care about is the total. So again-

David:
Is the total.

Andrew:
Yeah. So you use that total number in your calculations and if you’re interested in where it’s going, that’s fine, but it doesn’t affect your underwriting.

David:
Okay, that wraps up property taxes. Moving on to number six.

Andrew:
Yeah. Number six is property manager’s opinion. And is exactly what it sounds like. You should already, at this point on your team have a well qualified property management company that is part of your team that you can get their opinion. And you’re not calling them on every deal that you look at, but this is phase two, you’re getting serious, right?
So what we do is anytime we’re at this point with a property, we will email our property management company and say, “Hey, are you familiar with this property and are you familiar with this submarket, and could you please give us your opinion?” Right? And typically what they’ll do is and once in a… I mean, in the beginning, before we knew our markets and before we were screening, they’d say, “No, run away, stay out of there. We don’t want to manage that, you don’t want to own it.”
But now with the screening, that doesn’t happen anymore. So many cases, they know the property… A good property management company’s going to know the property and they’re going to be able to give you feedback. And ideally, they’ll send someone over there to drive it for you and be like, “Oh yeah, we drove over there and it’s a great property and a great location, but there’s trash everywhere which that’s an opportunity, that’s really easy to fix.
Doesn’t look like anyone cares, they have no marketing, but it’s on this great high traffic corner and you could put a playground and a dog park. If you added some landscaping based on… And by the way, we manage a property quarter mile down the street that’s getting $400 more a month. This one, not quite nice so you could probably get 200.”
That’s the kind of feedback you’re looking for, someone who’s already an expert in that market to give you feedback on the market and on that asset and give you their opinion of it. What you don’t do is you don’t send them a budget and say, “Can we make this happen?” Because you don’t want taint their feedback. You want them to come back to you with a blank slate.
And again, if you’re screening right, most of the time, that should be at least somewhat positive. Every once in a while you might miss something. But that’s exactly, is you want a property manager’s opinion of the asset. And then once they do that, you might go back to them and say, “Well, geez I’m planning on… My loss-to-lease says I can get $125 rent increases. Do you guys think we can do that?”
And they’ll either confirm it or say, “Nah, it might be 80 or not. Geez, you can get 150, no problem.” Right? So that’s exactly what it is. You want to get a qualified property manager’s opinion of the asset, the location, the submarket and do they want to manage that for you?

David:
Yeah and be careful that you don’t do what you mentioned when you start to fudge things on a spreadsheet to make it work. Sometimes you feed them the information you want them to give back and they of course, want the revenue that’s going to come from managing it. So they regurgitate that back to you and now you’ve tricked yourself into thinking that they are capable of doing it.

Andrew:
Exactly. Don’t feed them anything. Just blank slate ask them in their opinion.

David:
Very good. Okay, number seven.

Andrew:
Yeah, renovation budget. So if you remember from the phase one underwriting, we basically just did kind of a quick guess like, “Yeah, I think we can spend 8,000 a unit renovating this, and we’ll do 200 grand on the outside,” or whatever the number is, right? Because the broker said you can spend this much and it’ll be great so you do that on the first shot.
Page two, ideally somebody on your team, either you or the property manager has toured this property and you’ve walked through and you’ve identified things like… And again, this is an example from an actual property that we purchased. We’ve walked through and we’ve said, “Okay, well, we’re going to spend… And we don’t have time to go into the details of how we came up with this, but we’re going to spend 600,000 on renovating interiors.
And let’s see, we need to do about 25,000 in landscaping upgrades, parking lot needs to be resealed and restripped. We’re estimating that at 63,000. New signage, 31,000, fencing, 35.” So basically if you go on YouTube and you look at this, what we’ve done in phase two is rather than just a guess of eh, a few hundred grand inside and a few hundred grand outside, now it’s really coming down to it.
And again, we’re just underwriting, we’re not under contract. So we’re not having contractors go out and give us bids. We are leaning either on a combination of our own knowledge or if you don’t have that knowledge yet, go to the property managers and say, “Hey I’ve looked at pictures, I’ve toured this. I think these are the eight projects that we need to do. What would be your range of how much this would cost?
How much should I plan for redoing the parking lot? How much should I plan for putting in a nice, pretty monument sign?” Right? All of those things. So phase one, you’re just throwing in some high level numbers. Phase two, you’re breaking it down by project, right? So again, these aren’t hard bids, they’re just getting a lot more granular so that you aren’t going to…
Because you don’t want to underestimate and run short, but you also don’t want to overestimate and lose the deal that otherwise could have worked, right? And two other things I’d really want to highlight on here. You look at the bottom, you’ll see contingency 126,000 and long term CapEx reserve. Two very important things that I often see people leave off. If things go great, you getaway with it. If they don’t, you’re going to be in trouble.
Contingency is exactly what it sounds. That is, oh geez. You know what? Appliances just… Cost of appliances just went up 10%. It’s going to cost me more, right? Or just found a bunch of windows that are cracked and fogged, we got to replace them. Well, that’s not cheap. It’s just adding in some room for finding stuff that goes wrong. Or you might discover, “Well, geez, if we do this additional thing, we can bump rents even further.”
You want to have brought the money in up front to be able to do that and maximize the value of your investment. The second is long term CapEx reserve. For us, it’s just the number we’re comfortable with. It might be different for you. We just do a thousand a unit, right? Because we know we’re typically going to hold for five years. Things happen.
Maybe the roof gets damaged and you have a $200,000 deductible on your insurance policy. Well guess what? That’s either coming out of your pocket from your investors, which you never ever want to have to ask for, or your term reserve that you started this out with in the first place.
So that’s what that long term CapEx reserve is, something happens year three or four or five, or if you’re holding long term, maybe even year 10 so that when that comes up, you’re like, “No problem. I got this.” Your investment’s safe, your investors are good. That’s an absolute key line item. But yeah, lots more we could jump into but I know we’ve been talking for a bit, so that’s kind of the gist of what you’re doing phase two renovating or renovation budget.

David:
And there’s almost always going to be a renovation budget of some sort, because you’re usually looking to buy something that has meat on the bone. And if there’s meat on the bone, then there’s work you’re going to have to do to get there. So this is something that I know a lot of people have questions about, how do I know what the rehab’s going to cost? It’s kind of something you got to look at a lot, speak with different contractors, get a feel for a baseline of what that’s going to look like. But you definitely want to be comfortable with it because anytime you’re buying an asset of this size, there’s going to be some kind of renovation that needs to happen.

Andrew:
Yeah, absolutely. And I said there’s two types. There’s I would say required renovation, like deferred maintenance and then there’s opportunistic, right? Like, “Hey, if we do this, we can attract better quality residents and bump the rents.”

David:
Right, there you go.

Andrew:
And then those are two categories, yep. So all right the final one.

David:
Number eight.

Andrew:
Yes, number eight for today, final one for today is follow up on P&L items on the T12, which stands for trailing 12. That’s a profit and loss statement that is broken that shows you an entire year snapshot by month, right? So it’ll show the income and the expenses for each month, 12 months lined up in columns right next to each other.
Property P&Ls are like fingerprints, snowflakes and penguin mating calls, right? No two are the same. You’ll see stuff from handwritten on pieces of paper to beautiful Yardi printouts with every single account perfectly lined up and everything in between. And you will see stuff on P&Ls that’s sketchier than a photo of Ozzy Osbourne at church, right? And this is where phase two, you ask questions about that kind of stuff.
And I think we’ll… We didn’t want to do this on YouTube because those 12 month P&Ls are so dense, but we will provide one in the show notes for everyone to go look at after the fact. But some examples of things you’re looking for is anything that’s unusually high or unusually low, right? If you expect insurance to be $300 a unit and it’s 450 a unit, that’s a red flag. You want to find out why.
Maybe they just have a bad insurance broker or maybe they’ve had three fires and a shooting, right? And again, and some of this stuff gets redundant, but that’s on purpose, right? You want redundancy so that if something important gets missed on one step, you’ll catch it on another. So missing payments. I can’t tell you how many times we see the landscaping bill suddenly doesn’t get paid for two months.
Well, where did that go? What happened? Why? Or the utilities go way up and go way down. Does that mean they’re having underground water leaks all the time? What’s going on there? Often times you’ll see strange accounts, large credits are another big one. You’ll look at, “Oh wow, the repairs and maintenance on this property is really good. It must be a great property.”
But then you look closely at the P&L and wait a second, there’s a $30,000 credit. Where did that come from? Because if you just look at the end number, it’s going to be wrong. Because they’ve reduced that expense by 30,000. And there’s lots of legitimate reasons for that, but this is where you go ask, right? You’re looking for opportunities and traps.
So again, if their insurance is 450 a unit because they maybe have a, not a great loan broker and you can get it for 350 legitimately, that’s an opportunity. If it’s 450 because they had three shootings, that could be a trap especially if you assumed you could get 350 in phase one.
These are the things you’re asking questions for. Other things that you might run across are things like HOA fees. We’ve actually owned an apartment complex that had HOA fees. It’s not a problem as long as you underwrote for it in the first place, right?
Usually, you’re not going to assume that, you’re not going to automatically underwrite for it because most don’t have it. But if you’re on the hook for $20,000 a year for HOA fees and you don’t put that in your underwriting, all of a sudden you’re behind the eight ball when it comes to hitting your proforma. We actually saw a T12 one time that was a T13, meaning they had 13 months of data in 12 months, which means all the income and expense numbers were inflated.

David:
Artificially inflated, yeah.

Andrew:
Yeah, artificially inflated. I don’t know if it was intentional or not, but it was not accurate. Stuff like cell phone tower income.

David:
And I should probably say when we say T12, we’re talking about the trailing 12 months of profit and loss, right?

Andrew:
Yeah. And so they had for 13 months on there for some reason. You’ll see stuff like cell phone tower income, billboard income, people leasing out units corporately, things like that, all good stuff, but yeah, okay, well, does that transfer to you? Does that stay with you? And does that terminate? When does that lease expire?
Again, things to look into because we have a property with a billboard, it’s great income. But we had to make sure that when we bought the property, that that transferred to us, right? We found one, we had a contra account on it. And then I’m like, “What the heck is a contra account?” Basically, my understanding of the accounting definition in English definition, a contra account is an account that you use to adjust another account up or down to make it look like how you want to make it look, right?
So need to say that was something that we dug deeply into like, “Okay, why are you guys just putting in… Why do you have a contra account and why are you trying to use it to adjust these other accounts?” Right? It was definitely a red flag. And actually we never got a clear explanation and we didn’t end up buying that property.
So again, those are just some examples of the things that we’ve come across and you could probably list a hundred, I’m sure everyone’s listening, is like, “Oh my gosh, you should have seen this thing on here that I found one time.” But that’s what you’re doing. Anything weird or different on that P&L and phase two, you want to ask questions of either the broker or the seller to clarify what that is and find out is it an opportunity or is it a trap?

David:
Beautiful. Okay, that was really good. Like I promised everybody, you’re getting a masterclass in evaluating multifamily property. Can you give us a brief rundown, Andrew, of the eight steps in underwriting phase two?

Andrew:
Yeah. So underwriting phase two, the quick recap. Number one, rent increases. There’s two components of that market rent growth, we talked about last time and then this time we talked about renovation increases, bringing it up to market. Number two was loss-to-lease meaning, hey, you know what? The last five leases were signed for a hundred dollars more.
If I buy this, my research indicates that I should be able to at least get the remaining leases up to a hundred dollars. By eliminating that loss-to-lease, I effectively bring my rents up a hundred dollars so that can be a huge opportunity. Third one is debt quote. When you’re doing phase two, you’re getting serious about hopefully making an offer. You don’t want to just be guessing at your debt anymore because that’s one of the big levers.
You want to at least get a quick verbal or if you’re getting deeper into it, get an actual kind of like quote matrix like we showed where they’re saying, “Yeah, if you go this route, it’s this and if you go this route, it’s this.” Number four was insurance where again, you’re not having everyone go through the full process of getting an entire quote, but you’re going to give them the total square footage and the annual revenue at a minimum and say, “Hey, ballpark, what’s the cost? Is it 300 a unit? Is it 400 a unit?”
Number five is property taxes. You want to find out how does that municipality currently determine property taxes, and using that method after you buy the property, what does that mean for how much your reassessed taxes are going to be? That has a huge, huge impact on your P&L.

David:
That’s for all real estate. Don’t look at what a property taxes currently are, unless the values are going down, I suppose. When I bought my first property now that I think about it, it had sold for 565. I bought it two years later for 195. I paid property taxes in my import account up front on the higher value and I got a refund check.
But we haven’t seen that in a long time. It’s usually the other way where you’re going to get another check after closing that says, “Hey, you owe us more money.” So it doesn’t matter what the person is paying right now, it matters what the value’s going to be based on, which is usually your purchase price when you buy it.

Andrew:
Yep, exactly. Number six was the property manager opinion. Get someone who just knows that market inside and out and get their thoughts on it with… Don’t feed them. You’re hoping for good feedback and so it’s tempting to give them something to hand back to you, don’t do that. Just ask them blank slate.
Number seven is renovation budget. Again, you’re not having contractors go out there, you’re just trying to break it down and get a little more granular and say, “Okay, well here’s the list of projects and here’s how much I think those are going to be and that total’s up to this.” Because best as possible you don’t want to overestimate, but you also definitely don’t want to underestimate.
And the final one is this falling up on P&L items that either don’t make sense or that could be an opportunity or could be a trap. So those are the eight things that we covered and there’s lots of other little sub pieces and different parts that you could dive into. But those are kind of eight key ones that are part of phase two. And determining is this cream or is this a turd? And if it’s hopefully cream, then that’s where you decide, “Okay, am I going to put an offer on this?” And then get into, “Well, how do I write that offer? How do I decide the terms? What’s going to be appealing?” And go from there.

David:
Well, thank you. I actually get to brag a little bit. You made be very proud. Everyone, this is why this is my multifamily partner right here because he’s this good. So thank you for sharing how you put this system together. I’m happy I got to play a small role in encouraging you to leverage some of this stuff out to these other people because that’s grown into this incredibly detailed, very, very accurate way of analyzing properties that is leading into success. Do you mind sharing a little bit about what you’re up to right now? What properties are you looking at? What does your week look like and what success are you having?

Andrew:
Like I said, with this, going back to the loss-to-lease, that’s been created by the last year and a half, two years, there’s a lot of opportunity out there. We’re under contract on a couple hundred units right now and then we actually just got a offer accepted.
We’re not fully under contract so I don’t want to give out any specifics. But we got an offer accepted in a market where it’s one of the strongest, fastest growing markets in the country. We already own multiple properties in that market so we know it well. So we’re super excited about that one. And that is actually going to be our first ever 506(c). Well, I think we’ve done 16 or 17 506(b)s where we never talk about it basically you have to already know us just to find out about it.
But this one is going to be 506(c) and we’re doing that one with you, David. If that property, if we do get it fully under contract is something that you might be interested in, it’s investwithdavidgreene.com. Right David?

David:
Yeah. If they go to investwithdavidgreene.com, you can fill out a form that will basically end up putting us in touch with you where we can share more details about this deal if this is something you want to invest with Andrew and I on. Can you break down what 506(c) means?

Andrew:
That gets down to the SEC regulations. So 506(b) means if you’re raising money for a deal, you can’t solicit. And solicit basically means anything, right? You can’t talk about it on a podcast, you can’t post about on Facebook and LinkedIn. You have to have a preexisting relationship with anyone that’s investing. 506(c) means you are allowed to talk about it but anybody that says, “Hey, I want to invest,” has to be accredited and verify that they’re accredited. So that’s the difference. It’s just a different set of regulations and rules that the SEC puts out for syndicating.

David:
Now, if you don’t know what that means, that’s okay, you could still go to that website, you could register. We will let you know if this deal would work for you and the status you’re in, or if a different situation with me would make more sense. But Andrew’s being a little bit humble here. He found this deal off market, it’s a great area. The property that we bought just before this one has exceeded everyone’s expect times 10. This is the best part about Andrew, is he’s always super conservative as underwriting. He’s like Eeyore when he underwrites but he’s like Tigger when he performs.

Andrew:
I love that, that’s great.

David:
It’s perfect, right? So he always under promises and over delivers and that’s why I partner with him. So if you would like to partner with us, please go there. Now the last stage in the entire underwriting system, we’ve gone through phase one, which is, would this work? Phase two, is this cream or is this a turd? Phase three would actually be when you send the letter of intent and you actually go through the process of putting it in contract, can you share Andrew if they want to learn more about what to do at the last phase, where can they go?

Andrew:
Yeah, go to davidgreenewebinar.com. And I think what we’re going to do is David and I are going to do a webinar on how you put together an LOI. So I say you’ve been through all these steps, it’s a lot of work. Fortunately, you found one that looks really good, you want to own it. And we’ll talk about what kind of terms do you put in the LOI? How do you determine what can you say, do you put in references? Do you not put in references?
What if your offer seems kind of low? Do you still do it? Do you not do it? How do you communicate that with a broker? How do you communicate with that the seller? We’ll go through and talk about crafting the best offer that gives you the highest chance of getting the deal, but at a minimum, gives you credibility and builds your reputation in the market.

David:
Now we know not everyone listening to this podcast is going to go buy a $50 million apartment complex, you might not even buy a $5 million one. But you do now have the information that you would need if you wanted to do it. So our goal here was to basically show you every step, phase one, phase two, and then a webinar where we can talk with you with more length basically and we can answer more questions and we can actually get out in a podcast about what to do when you want to write an LOI and how you put a property in contract.
I can personally vouch for Andrew. He’s a great dude, he’s super smart, he’s very good at investing, we’ve made a lot of money investing together. And I feel comfortable telling other people this is the person that I invest with because that means a lot to me. So I would highly encourage you to go there and register.
There’s other webinars too. I do other stuff on lending practices or short term rentals. There’s a lot of stuff where I try to get back to the BiggerPockets audience. So I highly recommend everybody listening to this to do that as well as if you would to invest with us, that’s a great place to start. Any last words you want to leave people with Andrew?

Andrew:
Yeah, I would just say I know that was… I guess hopefully everyone’s still awake and I know that was a bit dense. But I mean, that’s the reality of what underwriting even a 5 or a 500 unit property is. In order to do it right, you have to get it down and dirty into the weeds of these numbers and these P&Ls. And if you’re saying, “Oh my gosh, I could do this for 30 minutes, then I’d run away screaming,” go partner with somebody that loves it or hire somebody that loves it.
But in order to properly underwrite, this is the type of thing that you need to do. And yes, there’s other ways of doing it, there’s other ways of looking at the data, this is just what we have found to work exceptionally well for us. But as long as you use the principles that we talked about, then you should be able to hunt down some really good deals for yourself.

David:
That is wonderful. You reminded me of something. When I was first in the field training officer program as a police officer, I worked for an agency that covered five counties. So when we were training, they would drive us through every county and go to the main areas that they thought we would need to know in an emergency.
This is the hospitals in these areas. These are the local police departments that if you ever need backup or you’re trying to figure out like, “What can I do in emergency?” Here’s places that you can go. Here’s places where the county stores equipment that we might need in the case of a flood or something like that. And they knew that we would never remember all of these places that way.
It’s impossible to remember that much information. But the thing is, they also understood when I was trying to find that place three years down the road, I would remember little landmarks that I saw or I would spot the building and say, “That’s the one that I’m looking for.” It sits in the back of your head.
Now I couldn’t walk you through turn right here, turn left here, but when I got close, I recognized I’m on the right path. That’s what a podcast like this is. You are never going to remember all eight steps plus the four levers we talked about before, plus the six steps in phase one underwriting, you don’t need to. No one is going to learn it like that.
It’s getting the concepts in your head and as you take this journey, those will stick out like milestones. Just like when you’re in the woods on a hike and you’re not sure exactly where you are, but you remember a certain mountain peak or you remember a tree that’s in a certain place and it’s like, “Oh yeah, going the right way.” That’s what information like this functions.
So don’t beat yourself up if you’re listening to this and you’re thinking, “I’m an idiot, I don’t get it. I’m never going to understand this.” Andrew didn’t understand this when he was first putting this together, I don’t understand this stuff. It’s something you have to do over and over and over like everything else in life. So don’t beat yourself up.
Instead think if you thought that was interesting, that was fascinating, that’s a good thing. That’s your fire. Add wood to that fire, build that fire, pour into that fire, invest into that fire. Build up that desire to learn more and as you stick with it and you stay in this world long enough, this stuff will start to make sense and you’ll start to get confident.

Andrew:
Yeah, that was an excellent recap. This doesn’t come on the first… This was built and honed out of looking through literally thousands of deals and properties. It’s not something that I or anyone else starts off with.

David:
Well, I’m really glad that you shared that thousands of properties expertise and experience with us here today. And I hope people join us on our webinar where we can talk about it my more and consider investing with us and getting some experience and making some money in the process. Anything you want to say before we get out of here?

Andrew:
No. Like I said, in the beginning, I put the earbud in the right ear first and so far, that’s working. It’s been a good day and it’s good talking with you and hopefully we do it again here soon.

David:
How can people get in touch with you?

Andrew:
LinkedIn, that’s probably the only social media platform where I am somewhat active, and then our website vantagepointacquisitions.com. There’s a couple of different tabs on there. If you want to connect, fill out the little form and that comes to my inbox.

David:
All right, you can follow him there. You can follow me at Davidgreene24 on social media. I also have a brand new spanking and website up, Davidgreene24.com. And I will be, or maybe by the time this releases already have released a free text letter that kind of explains what I’m doing, what I’m up to, what kind of properties I’m buying, where I’ll be speaking and how we here at BiggerPockets can help you to grow in your own education to achieve your goals.
So please consider following me there. And if you like this episode, go back and make sure you listen to episode 571 where we break down phase one of this process. And then do you remember your other episodes you’re on Andrew? Was it 170?

Andrew:
Yeah, it was 170 and 279.

David:
So this is your fourth time on the podcast. That’s how good you are.

Andrew:
Wow, I guess that’s a pretty small group. I feel honored.

David:
Yeah, if you’re on the Mount Rushmore.

Andrew:
Well, thanks.

David:
I have a really funny meme that says the Canadian side of Mount Rushmore and it has a bunch of the butts of the president, says they’re sticking their head on the mountain from the reverse side.

Andrew:
Oh, that’s awesome. I love it.

David:
Oh, I also thought that was funny. All right, I’m going to let you get out of here. This is David Greene for the BiggerPockets Podcast signing off.

Q: Do you trust “The market” for your real estate profits?

A: Those who trust “The market” are at the mercy of the market. 

I think this is folly. Hopefully, many of you agree. 

Here’s what I’m talking about… 

The real estate syndication realm is awash with new operators showing their investors dazzling returns. Profits that would astound investors from Wall Street to Main Street. 

And these syndicators are raking in massive profits along the way as well. I know many operators who were in high school during the Great Financial Crisis and working W-2 jobs just a few years ago who have joined the multi-millionaire club in this current rush to riches. 

But this scares me to death.

You see, the same “Market” that made them and their investors rich could also destroy them. The streets of history are littered with such casualties. 

Here’s how it looks in the real estate world…

The value of a commercial real estate asset is based on two variables: 

1. Cap rate
2. Net operating income

Value = Net Operating Income ÷ Cap Rate

If this formula is unfamiliar, check out this post. 

The cap rate is the market’s evaluation of the value of an asset. It is based on the interest rate, a risk premium, the desirability of that asset type, the location, and more. Factors outside the operator’s control. 

And of course, the net operating income is the gross operating revenues minus expenses. And this is largely in the control of the operator. 

As you can imagine, a seasoned operator focuses on the latter. They see intrinsic value hidden in an asset. They acquire the asset and do their magic. They put their team and technology to work to raise the income and create value for investors. 

Seasoned syndicators don’t count on “The Market” to do the heavy lifting.

(If The Market cooperates, their investors get a double win. But their “hope” lies elsewhere as we’ll see.) 

But rookie syndicators trust the market to do the heavy lifting. They hope for various circumstances to line up perfectly to turn a profit. Factors like: 

• Continually compressing cap rates
• Continuous low interest rates
• The end of eviction moratoriums and other pandemic fallout
• The continuing rise of inflation

Take away one or two of these factors, and their house of cards comes tumbling down. Because trees don’t grow to the sky. And hope isn’t a sound investment strategy. 

Newbies trust the uncontrollable market for their profits. 

Pros trust the market, too. They trust the market to lower their profits. 

Seasoned pros assume the uncontrollable market will lower their property values. Pros focus instead on the more controllable acquisition process and Net Operating Income. 

They trust their talent, team, and technology to create profits in any market. And they plan to hold assets through market ups and downs to provide investors a more stable and predictable source of true wealth. 

Warren Buffett’s folly?

Do you remember the late ‘90s tech bubble? Investors made billions in this runup in tech values. I can see some similarities between what is happening today, though the excesses were even more extreme then. 

Buffett seemed out of touch. He and his Berkshire Hathaway investors missed out on stupendous profits as the dot-com bubble ballooned to staggering heights. 

Buffett was only in his late ‘60s, but he was called senile. At his annual billionaire’s retreat in Sun Valley, Idaho, his colleagues wondered if he’d lost his touch. 

Buffett addressed the group, assuring them he was well aware of the differences between investing and speculating. He was happy staying on the course that had served him so well over many decades.  

In his 2000 letter to shareholders, Buffett stated this: 

“By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates) … Speculation is most dangerous when it looks easiest.” 

Of course, we all know what happened. The bubble burst…and Buffett emerged as the hero…yet again. 

Check out this graph showing the NASDAQ’s rise and fall. 

Wikipedia described it this way: 

The dot-com bubble, also known as the dot-com boom, the tech bubble, and the Internet bubble, was a stock market bubble caused by excessive speculation of Internet-related companies in the late 1990s, a period of massive growth in the use and adoption of the Internet. 

Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 400%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble. 

During the crash, many online shopping companies, such as Pets.com, Webvan, and Boo.com, as well as several communication companies, such as Worldcom, NorthPoint Communications, and Global Crossing, failed and shut down. Some companies that survived, such as Amazon.com and Qualcomm, lost large portions of their market capitalization, with Cisco Systems alone losing 86% of its stock value. 

Self-storage can be a profit center!

Are you tired of overpaying for single and multifamily properties in an overheated market? Investing in self-storage is an overlooked alternative that can accelerate your income and compound your wealth.

So, are you saying we’re in a bubble, Paul? And what can we learn from Mr. Buffett? 

I am not saying we are in a bubble. 

But I am saying that we need to learn from Mr. Buffett here. Buffett didn’t care about the price of NASDAQ or the billions his pals were making speculating. He didn’t care that his portfolio had underperformed the market for years or that people were calling him senile. 

Buffett cared about sound investing fundamentals. He cared about the same thing he had since he acquired Berkshire Hathaway in the mid- ‘60s. 

His goal was to invest in undervalued companies with sustainable businesses and products managed by competent management teams. That didn’t change because the market changed. 

Buffett wasn’t relying on THE MARKET to tell him how and where to invest. 

And I don’t think we should either. 

We can count on the market for one thing: to be the market. Just like the wind blows wherever it wishes. It is not in our control. 

Good sailors reach their destination in any weather. They are not dependent on wind or waves or temperature. 

A dozen recommendations for investors who believe this post 

If you are a Syndicator… 

Don’t overpay for assets. 

Don’t count on the market to make a profit. 

Don’t believe “it’s different this time.” 

Don’t count on the next decade to be like the last. 

Don’t overleverage with the belief that you can be just like the last guy who did it and repeat their success. 

If you want to speculate, do it with your own cash. Don’t drag investors in and call this speculation an investment.  

If you are a passive investor… 

Don’t invest with any syndicator until you’re sure they’re not a speculator. 

Don’t put all your eggs in that one basket. Diversify. 

Don’t swing for the fences. Slow and steady wins the race. 

Don’t invest before conducting careful due diligence on the syndicator and the opportunity.  

Don’t invest in overheated deals in overheated asset classes in overheated markets. (Remember, hope isn’t a sound investment strategy.) 

Don’t trust the market to generate your returns. Do trust a great operator with an excellent track record, a veteran team, and proven processes. 

Final thoughts

It’s possible to trust the market as a commercial or residential real estate investor or in any other asset type. Did you hear about the great Dutch tulip bubble of 1634 to 1637? 

Trusting your acquisition and operating skills will serve you well in any market. But please don’t count on the market to do the heavy lifting for you. 

BiggerPockets exists to help you grow in your analysis capabilities and make wise investment decisions, so you won’t have to rely on the unpredictable market. This includes bolstering your skills to navigate good markets and bad, plus connecting you to great investment managers and opportunities. Has this post helped you clarify these issues?

Mindy:
Welcome to the BiggerPockets Money podcast show number 285, where we interviewed JL Collins and talk about losing money in real estate.

JL Collins:
My lawyer, Wayne, pointed out that there was no real practical way to enforce that because of the cost of litigation that it would take. So when YP said, “You don’t like it. Sue me,” he knew my hands were tied. Well, when Wayne was saying to me, “JL, you have to close. I mean, the law says that when essentially it’s done and you’re just down to a checklist, you have to close. You can’t keep canceling these closings like you’re doing,” and you can imagine what I said to Wayne. I said, “Let him sue me.”

Mindy:
Hello, hello, hello. Hello. My name is Mindy Jensen, and with me as always is my smart cookie co-host, Scott trench.

Scott:
Oh, I’ll take that. That’s a pretty crummy introduction, but I guess it’ll work for today.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story even the ones that cause you to lose money in real estate because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting or what kind of mistakes you make in the beginning.

Scott:
That’s right. Whether you want to retire early and travel the world, going to make big time investments in assets like real estate, avoid losing money in real estate by making smart to decisions or start your own business. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Today, we have three-time guest, JL Collins, joining us again. He is going to talk not about the stock market, which is what he is known for, but he’s going to instead talk about real estate and his success is, Scott?

Scott:
Well, well, the success is he got an education in real estate investing based on this. No. What we’re going to hear today is we’re going back to 1979 when inflation’s looming, the economy is looking fairly bleak and the outlook is eerily similar to what I think a lot of folks are worried about in today’s economy here in 2022 and about how a tremendous amount of money was lost on a condo purchase that was intended to be a home and investment.
There’s losses at every step of the journey all the way through a long hold period. I think there’s a lot of information to learn from this. It was a really fun time. JL Collins is really great to talk about it with a sense of humor looking back, but you can imagine how scary and terrible that was going back. I think there’s a lot of lessons that are really important to learn from.

Mindy:
Yeah, absolutely. This is a great retelling of a story that is actually, I’m sure much worse to have lived through, and 40 years of hindsight makes it a lot easier to retell the story.

Scott:
The story we talk about today is fully documented in JL Collins’ new book titled How I Lost Money In Real Estate Before It Was A Fashionable: A Cautionary Tale. I had a chance to pre-read this book. I thought it was phenomenal. It’s a short, quick read. It’s very well-illustrated. It’s a very powerful message, and it gives all of the details and the specific numbers and the timeline behind some of the things we’ll talk about today. You can buy that book on Amazon, on his website, which we’ll link to in the show notes and the show notes, again, will be found at biggerpocket.com/moneyshow285.

Mindy:
Okay. You have listened to this show before more then you have heard our guest on episode 20, on episode 116, and now back again for the third time making up now 1% of our guests that we have had, Jim Collins, JL Collins, from The Simple Path to Wealth, from JL Collins NH. What else do you do? From Chautauqua. What else do you do, Jim? Welcome back to the show, Jim. Tell us all your things. Give us your resume. We only have an hour so don’t give us the whole thing.

JL Collins:
Okay. Well, I mean, jlcollinsnh.com is the blog. You can go there, and from there, I’m on Twitter and Facebook, and I’ve got two books out, The Simple Path to Wealth, which was the first one that I published in 2016, and then last fall, I just brought out the second one, which is How I Lost Money In Real Estate Before It Was Fashionable. Yeah.

Mindy:
The hard path to wealth.

JL Collins:
Yeah, Chautauqua, you mentioned. You’ve been to Chautauqua, and that’s our annual event where we take small groups of people out to some cool place for cool conversations in a cool environment, and that is finally returning for 2022 after two years of COVID-related hiatus, I guess is the word. Yeah.

Mindy:
So you’re all over the board. Where are you right now? Because it looks like you’re in a hotel room, Jim. You’re just tracing around the world.

JL Collins:
Yeah, I’m always in hotel rooms. We’re nomadic. So this particular hotel room is the St. George, Utah, which is in the Southwest corner of Utah. Beautiful area.

Scott:
Awesome. Well, today, I think we were hoping to learn more about how you did lose money in real estate and the full details behind that, and I think that’s-

Mindy:
Wait, wait, wait, wait.

Scott:
What is it?

Mindy:
This is BiggerPockets. We talk about making money in real estate. You can’t lose money in real estate. Right, Jim?

JL Collins:
Oh, I did, and in my experience, it’s surprisingly easy. All it takes is being naive and unaware, which by the way, I applaud you at BiggerPockets for trying to correct investors, but you were not around when I was making this series of tragic errors.

Mindy:
Yeah. Thanks, Josh Dorkin, for not foreseeing the future and being there when Jim needed you.

JL Collins:
I know.

Mindy:
Okay. So let’s set the stage. What year are we talking about?

JL Collins:
So we would be talking about 1979.

Mindy:
Oh, is this the beginning of-

Scott:
Tough year.

Mindy:
Yeah, very tough year, and isn’t this the beginning of really crazy interest rates?

JL Collins:
Well, it wasn’t the beginning of crazy interest rates. It was the middle of crazy interest rates. It was towards the end of a decade’s worth of stagflation, which was the hallmark of the 1970s. I think we finally broke the back of that around 1982 if my memory serves me. By the way, that’s one of the reasons that this particular inflationary environment that we’re entering has me nervous. It just seems very familiar somehow.

Mindy:
Yeah. I just typed that into the notes that Scott and I have. I’m like, “Stagflation? Hmm. That sounds very familiar over the last 20 years.”

JL Collins:
Yeah. Well, I don’t think we’ve had anything like it over the last 20 years, but stagflation was a period of a stagnant economy, which so far, fortunately, we don’t have and high inflation, which at the moment we do have.

Mindy:
Oh, oh, I thought stagnant like there was no inflation, like we have had such low interest rates since-

JL Collins:
Oh, no, no.

Mindy:
Okay. Okay.

JL Collins:
Yes. See, I’m dating myself and thank you for pointing that out, but just for our audience, stagflation was a term coined in the 1970s to describe the economic environment, which is I say lasted for about a decade where you had very high inflation rates in a very stagnant economy. As you pointed out, for the last 20, actually probably closer to 40 years now, we’ve had very low inflation and declining interest rates, so a totally different kind of environment. Right now, we have high inflation, which has sprung on the scene in the last year or so, and fortunately, we have a robust economy still.

Scott:
Awesome. So I think that’s great setting the stage from an economic point of view, but how do we set the stage from a personal point of view? What got you into this first investment and what were your life circumstances at the time?

JL Collins:
Yeah. So I was obviously a much young man at the time. I was in the first few years of my professional career, and I was doing pretty well, and I had a nice little apartment where the rent was cheap and I was perfectly happy, but everybody in the world at the time was saying, “You have to buy real estate. You have to buy real estate. You have to buy real estate,” and because I was young and naive, I thought, “Well, I don’t particularly want to buy real estate, but I guess I’d better buy real estate.”
Because I had zero interest in actually doing this, what it took was my old college roommate who lived in Chicago at the time, who was very eager to buy himself, and he was out diligently looking and he found this building. There was an old courtyard building built in probably early 1900s, 1910, 1920, something like that. The concept was they were gutting this building, this three-story building, and you were going to have this charming old building with brand new apartments in it, and that appealed to me and that appealed to my buddy, Steve.
So my first mistake was I figured, “Well, Steve’s done all the leg work. Why should I go and do any due diligence on this? I’ll just follow in his footsteps, and buy a condo in the same building.”

Scott:
So what happens next? Did it work out?

Mindy:
Yes, from episode 285. Everything was great.

JL Collins:
Yeah. If it had worked out, then I wouldn’t have done a book in it for me, which is the silver lining I had to wait about 40 years for, by the way. Yeah, no, it really didn’t work out very well. Steve’s father was a banker and he was also investing in real estate at the time and eager to see his son and my extension, his son’s buddy, benefit from real estate, which, of course, as we all know can only go up, but what none of us knew at the time was the Chicago real estate market was about to collapse.

Scott:
So your plan going in was, “Hey, this building’s going to get fixed up. My buddy’s interested in it and telling me all these great things. I’m going to buy it. Things are going to go up and I’m going to make …” Did you have a timeline? Did you have any expectations around it or really anything beyond “I’m going to buy it and it’s going to go up” or what was was the framework you were approaching the problem from?

JL Collins:
Well, the framework was, A, again, the advice that went unchecked on my part, and again, first mistake was you should definitely own real estate. Renting is not a good thing to do, and if anybody who reads the book and looks at the math, and it will see that at least in this case, renting was absolutely the thing I should have continued to do, but it would’ve been in January, February, and it’s testing my memory both from the time I wrote the book last year and, of course, 40 years ago, but early in 1979, my buddy Steve had actually put in a contract to buy his condo, and I followed suit and put in a contract to buy one in the same building.
The idea was because the building was being gutted, it would take about six months for these things to be finished. So we’d be closing and moving in sometime around, theoretically, sometime around August 1st. I could go into a monologue and describe the sequence if you want me to, but I’m not sure that’s best for the interview, but I’ll leave that up to you if you want me to do that or just go step-by-step.

Mindy:
I’m going to look into my crystal ball and say they didn’t meet the August 1st deadline. Did they, Jim?

JL Collins:
Well, your crystal is flawless as it turns out. You might have even read the book, which might have given your crystal ball a little polish.

Mindy:
Not only have I read the book, I’ve lived this story, too.

JL Collins:
Well, there you go. So yes, you’re correct. They didn’t meet the August 1st deadline and silly me. I had heard at that point the advice that if you’re involved in building something or doing a major renovation, you spent a lot of time going to the site and checking it out. Again, I was impossibly naive, which, by the way, is the title of one of the chapters. I was impossibly naïve, and I figured, “Why am I going to go to the site? I don’t know anything about renovating a condo. I’m a busy guy.” So I didn’t go to the site. I figured these are competent people. They would get it done. Bad thing to figure out at the time.

Mindy:
I’m sorry. I’m not laughing at you.

JL Collins:
Mindy’s evil laugh there. Wow.

Mindy:
I’m laughing at I’ve been there. I’ve been there.

JL Collins:
You’re laughing with me, are you?

Mindy:
I’m laughing with you.

JL Collins:
Well, I certainly deserve to be laughed at, I mean, there’s no-

Mindy:
No. It was the phrase, these are competent people.

JL Collins:
Well, yeah, right, which is a laughable thing to say, and it was an even more laughable thing to believe, but anyway, that was the assumption that I made. So there’s another mistake upfront. Along about the middle of July, it finally occurred to me, “Oh, this condo that I bought should be about done, and maybe I should go over and see how wonderful it looks,” and so I did, and it looked exactly the same as it did in February. I mean, it hadn’t been touched. Not a mode of dust had been moved, and it was gutted, I mean, as it had been when I had first seen. It was gutted to the … What do you call it? The lath in the old buildings, right?
I mean, I was horrified because, of course, I’d given notice at my apartment that I was … I thought I was being so clever because instead of saying I’m moving out on August 1st, which would’ve been really silly, I said September 1st. I thought giving myself that extra month was very clever.
Well, now, I’m looking at a place that is in two weeks from when theoretically it’s done and I’m moving in and closing, and it hasn’t even been started. So I was more than a little outraged. I was down in … I use his initials to protect his anonymity, although why I do that, I don’t know, but YP are his initials. I was down in his office with my fists on his desk leaning over and threatening to climb down his throat, and he was assuring me, of course, that everything would be done by August 1st, which even I wasn’t naïve enough to believe.
What’s interesting is what he had been doing, and you have to understand at the time the real estate market in Chicago had been red hot and like we’re seeing in the real estate market today, I would say, and the prices of properties were going up dramatically even within month over month.
So what YP was doing is he wasn’t even trying to finish these apartments that he’d sold, and there were 52, I think, in the building. So he’d sell them, he’d collect the down payments, and then he’d just sit on them. When the outraged owners would come storming in into his office like I did, what he would say is, “Well, why don’t I just give you your money back?” A lot of people were smarter than me said, “Yes, I want my money back,” and then he’d refund the deposit, and he’d simply turn the unit around and resell it for another 15%.
Well, this was wonderful as long as the real estate market kept cranking its way up, but on that July day, what neither YP or I realized is the Chicago real estate market, particularly the condo market, and condos seemed to get hit hardest first when the market turned sour was in the process of plummeting. So he said, “Well, why don’t I give you your money back?” I said another mistake I made, “No, I don’t want my money. I want the condo. I want to live in this place.” I so wish I’d said, “Yeah, give me my money back,” because within a month or maybe six weeks, all those apartments that he’d been able to successfully turn over and resell over and over again suddenly that merry-go-round stopped, and he wound up with a building that was half empty and at that point unsellable.
Of course, there’s no way he’s giving me my money back at that point. A month, six weeks later, I was demanding my money back and he was not only refusing, but he simply didn’t have the capability to pay it back. Then things got really ugly because now he can’t meet his commitments to the bank, and now he has to try to actually finish these units so he can close on them and get the balance of the money to satisfy the bank. Of course, as you pointed out to me, and I should have recognized, I’m not dealing with somebody competent. So getting the apartments finished was a whole another nightmare that didn’t go well.

Scott:
So you’re supposed to move in on August 1st. When did you actually end up moving in?

JL Collins:
So his memory serves, it’s probably October 1st, and in my defense, I probably moved in to the nicest department in the building because while I didn’t pay any attention in the beginning as I should have, after July 15th I was paying intense attention. I don’t want to say threaten the man, but I was an intimidating presence in his office on a regular basis. So I think my place got more attention than most, but the other thing is that he made a critical mistake. I made a lot of mistakes in this journey, but YP made a critical mistake at one point, and I think out of his desperation to get these things closed so he could get that money from the bank. He let me move in before we closed and before the apartment was fully done.
So now, I’m living in this place and it was essentially done. I had a checklist of things that needed to be finished and fine tuned, but it was perfectly livable. Now, I’m in it. I don’t actually own it because we haven’t closed. I’m not paying any rent so I’m living rent and mortgage-free. So I suddenly went from being in a very bad position being in a very good position, and I would refuse to close until they completed this checklist that I had.
YP would keep saying, “We’ll complete it and let’s set up a closing day,” and I’d say, “Okay. Let’s do that,” and they’d finish a couple things on my list. Closing day would come and I’d cancel it because the list wasn’t completed. Of course, that made him crazy. That made his lawyer crazy. That actually made my lawyer, who I engage, crazy, but my lawyer Wayne had said to me when I was so outraged in trying to get out of this deal because the contract had said, if it wasn’t finished by a certain time that he was obligated to refund my money and, of course, he just refused to honor the contract.
My lawyer Wayne pointed out that there was no real practical way to enforce that because of the cost of litigation that it would take. So when YP said, “You don’t like it. Sue me,” he knew my hands were tied. Well, when Wayne was saying to me, “JL, you have to close. I mean, the law says that when essentially it’s done and you’re just down to a checklist, you have to close. You can’t keep canceling these closings like you’re doing,” and you can imagine what I said to Wayne. I said, “Let him sue me.”

Mindy:
Okay. So I am listening to this and I’m thinking a lot of things. First of all, poor Wayne. I can completely understand what Wayne is thinking, and YP, I don’t feel at all bad for him because I’ve dealt with YP many times and, sorry, you should have honored your obligations in the beginning. Back to the beginning when you said you weren’t checking in on things, I don’t know if anybody else’s condo units were getting worked on at all, but the squeaky wheel gets the grease, and if you’re not there checking on your stuff, they’re not going to work on it at all. Were they working on anybody else’s unit?

JL Collins:
I think they were, but probably not as diligently as on mine because I was the squeaky as possible wheel. Again, he had a very small crew to do the work because he never intended to do the work. That wasn’t his strategy. He was just going to keep reselling these things, I guess, forever, because he like everybody at the time believed that real estate could only go up and that they would only be more valuable six months from now than they were at that particular point.
By the way, I absolutely agree with you. I have no sympathy for YP. He eventually fled the country, actually, went back to his home country and he just left the bag, hold the bag, and they auctioned the remaining apartments, which by the way, went for about half what I paid for mine.

Mindy:
Of course.

JL Collins:
To give you an idea, that’s just the beginning of the disaster that this-

Scott:
What did you pay for yours?

JL Collins:
So I put down $5,000, and you have to inflation injustice to make it significant, of course, and in the book I do that. My memory’s not good enough to do it for you in our interview here, but I put $5,000 down on a $45,000 condo. The base condo was 40 grand and I took all the options, which added 5,000 to it. Then when they went at auction and, of course, they didn’t have the options because the condos that got auctioned off were not finished, they were in various states of progress, so some of them were just shells. Some of them were, I guess, pretty far along, but they went for $20,000-$24,000 at auction, and there were about half the building.

Scott:
Were these luxury condos like really in a pretty nice place?

JL Collins:
I guess today with the hype around everything’s luxury, so I guess somebody selling it today would’ve called it a luxury condo. Mine was actually, when it was finally done, was a very nice place, a nice space. It was a one bedroom, one bath. I don’t remember how big it was. It wasn’t terribly big. Probably 700-800 square feet, something like that, but it was nicely finished. As I say, I took all the options and it did turn out to be basically a new apartment in a charming old building.
So the project had the potential to be really nice, and I think ultimately became a nice building as the owners themselves took over and finished their apartments. Then of course, the common areas of the building were not finished when he fled and left everybody holding the bags. So that required special assessments on all the owners to raise the money to finish the common areas.

Mindy:
Okay. I want to jump in here again and say to those of you who are listening who are thinking, “Oh, I want to get into real estate,” listen to Jim’s story. He said condos were going up month after month. Prices were just continuing to go up. That’s where we are right now in much of the world or, I’m sorry, much of the United States. There are some markets where this isn’t the case, but in most markets, we are seeing exponential growth month over month. What are we in Denver? It’s been 27% price increase over the last 18 months or 12 months or something like that. We just had a fire that has taken out a thousand houses in two cities just south of me that is going to affect the real estate market for years to come because that was a thousand single family homes.
The market is marching north, but that doesn’t mean that it will always go up. I mean, listen to Jim’s story. Real estate only goes up. May I remind you 2008, 2009, ’10, ’11, ’12. The market can go down. I wanted to have you on the show to share your story about how you don’t always make money in real estate because BiggerPockets can be really, really good at you to do these things, but we also try to encourage you to run your numbers and invest or buy like you’re buying an investment. It sounds like you bought because Steve told you to, which is I bought because I wanted to and Scott bought because Brandon told him to. You don’t just buy a house because you feel like you should get into real estate. You buy a house to … I was going to say you buy a house because it’s a good investment, but it’s not an investment, and it could be an investment.
I mean, my houses are investments, but that’s because I buy the worst dump on the planet. I bought those to condos that were not done. I forced the appreciation, but I don’t know where I was going with this. There’s a lot of parallels with this market that you were in and the market that we’re in right now.

JL Collins:
Yeah. It feels that way. Now, of course, we don’t know for sure where the market we’re in right now is going. I mean, it could continue to go up. As you mentioned in Colorado where you are and I happened to be in Colorado when that fire took place, I was in Golden, which is just south of there. What a tragedy. So I mean, there are factors like that are driving up the prices at least in Colorado.
As we travel around the country, I mean, I hear it everywhere we’ve gone how prices are going up, and we are in an inflationary economy. So I don’t know where this market is going. The same thing I say when I talk about the stock market, I have no idea what the stock market’s going to do next. I do know that the stock market plunges periodically. That’s a natural part of it, and real estate plunges periodically. That’s a natural part of the process.
You mentioned 2008. The time I’m describing, which was in the beginning of the 1980s are both cases of that happening. I wouldn’t, by the way, lay all the blame of my tragic story at the feet of my buddy Steve, although he was the one who lured me in this particular building, but everybody at the time, and I mean everybody was saying, “You have to buy real estate,” especially if you’re young and single and you were renting and renting is throwing you, all the same stuff that I hear today.
So it was an environment that I let myself get swept up in, and I was young and naive and I didn’t step back and say, “Wait a second. Is this right for me?” Setting aside anything macro because I don’t think anybody is much less I could have predicted that the market was about to plunge in 1979, but what I could have done is stepped back and said, “Wait a second. Is this really the right thing for me to do? Does it really make economic sense to give up an apartment that I liked, that I was enjoying, that I was paying $160 a month for,” and again, remember you got injustice stuff for inflation, “and move into a condo that was going to cost me $270 a month in mortgage and assessments and everything?”
By the way, of course, I had no way of knowing this at the time, it wound up being $570 a month, which with all the special assessments and everything that came later. So clearly, is that a good economic decision? Setting aside the fact there was no appreciation. In fact, as we talked about earlier, they went in auction at half what I paid, but doesn’t make any economic sense to give up $160 a month apartment that you like, that you enjoy to go into a condo that is going to cost you for sure $370, and actually turned out to be 570.
Clearly, the answer to that is no. That’s not a good economic decision to have made. Then I would’ve set back and said, “Well, does the condo offer me a lifestyle that is worth all that extra money to me?” The answer there, yeah, it was nicer than my apartment, but I didn’t care about that. It wasn’t that much nicer. I much would’ve preferred to have that extra money each month to invest.
So I think those are the kinds of mistakes I made, just some of them. The book is filled with many more, but those are the kinds of things I would suggest that anybody looking in this environment asks themselves. Go ahead.

Scott:
Yeah. So we’re in this spot now where you’ve got this condo, you’ve already given us a sneak peak that there’s special assessments that are coming down the road in addition to it being worth half what you paid for shortly after you closing the deal. What’s the next phase of the journey? Is our story over at this point?

Mindy:
I want to jump in here before Jim answers and say I have never owned a condo that didn’t have a special assessment. Never in my whole life that I’ve owned condos I’ve not had a special assessment. Okay. Jim, what’s your next story?

JL Collins:
Well, let me address that first, Mindy, and then I’ll go back to, if I can remember Scott’s question, we’ll go back to it, but at the same time, I bought a condo for my mother in Florida, and the only condos that don’t have special assessments that I’m aware of are ones that have very large regular assessments, and then they create a pool of money for when those big things happen.
The condo that I had bought for my mother was, she was retired, and it was filled with retired people, and they tend to have cash on-hand. So they wanted the smallest possible assessment monthly to cover their basic expenses, and then every now and again if they needed a new roof or they wanted to repave the parking lot or something like that, I’d get a notice saying, “Oh, we’re going to repave the parking lot, and there’s a special assessment of $5,000 and it’s due in two weeks.”
Well, when you’re old and retired, then maybe that’s not a big deal when you’re young like I was at the time coming up with five grand in the spur of the moment was a whole another frame of reference. I’m sorry, Scott, real briefly, your question was?

Scott:
Well, I was just going to ask you to continue the story and tell us what happens next now that you’ve got this place and it’s worth half what you paid for. You’re getting special assessments. What happens next?

JL Collins:
Yeah. Well, so what happens in the immediate future is now I’m living in this thing and in pretty short order, I’m paying $570 a month or the privilege of living in this thing. I’m just licking my wounds. As long as I don’t sell it, I’ve got a $40,000 mortgage, so if I can only sell it for say $25,000, I mean, I’ve got to come up with 15,000 just to get out from under it.
In the meantime, I’m dating the woman who is about to become my wife and we decide that we’re going to need a bigger place than this when we get married. So I went off and bought a two flat in Chicago, two flat is a term for, what would you call it out in Colorado? It’s a two-family house, basically, which, by the way, I did much better on because at least as painful as this first purchase was, it did teach me. It was a very expensive education, but I did learn.
So the two flat wound up pretty good, but when we moved to that, then I’m left with the conundrum of what to do with this condo, and as I say to sell it would mean taking not only a huge loss, but coming up with 15 grand to satisfy the bank, which I didn’t want to do. So I wound up renting it, and I wound up renting it to a wonderful woman. I actually forget how we found each other, but she was a terrific tenant. She paid her rent on time. She took impeccable care of the place, and then when she left after a couple of years, she actually found the next tenant for me, who was equally wonderful, but the problem with that was I could only run it for 370. Meanwhile, it’s costing me $570. So it’s hemorrhaging about $200 a month just to hang onto it. So that’s the second part of the incredible loss that this thing represented, and then-

Scott:
How long does that continue for? How long are you losing money on this property from a rental perspective?

JL Collins:
Well, so that continues for about five or six years-

Scott:
Oh, my gosh.

JL Collins:
… but it gets worse because as I say, my first tenant was kind enough to find my second tenant. The second tenant was kind enough to fine me a third tenant who was also … So the one bright spot in this thing is I was very lucky with the ease of finding tenants and the caliber of tenants that they were. They all took great care of the place. They paid the rent, exactly what you want with a tenant. Well, my third tenant, what a terrible woman she was, didn’t find me the fourth tenant. Of course, anybody who has rental real estate realizes that your tenant has no obligation to do this, and she certainly didn’t have any obligation.
Then it was unrentable. I began to realize how terribly lucky I’d been in not only finding good tenants, but finding tenants at all. So suddenly, and now, by the way, I have since moved away from Chicago. So I’m doing this long distance, and now I’m not hemorrhaging $200 a month. I’m hemorrhaging $570 a month, and that went on for about 18 months.

Scott:
Oh, my gosh. Okay. So what year is it? What year is it, the end of this 18 months? The loss are stacking up to thousands or tens. We lost $25,000 just in the value day one or in the first year or two. We’ve also lost $200 a month for three to five years and now we’re losing $570. So we’re in the 20, 30, 40, $50,000 loss range at this point.

JL Collins:
That’s before you account for inflation. So it’s actually, if you look at it at today’s dollars, it’s my much, much worse. Again, my memory isn’t good enough to do that calculation, but in today’s dollars, the total loss was well into six figures. Then I also do a calculation in the book where what if I just taken this money and invested it in the S&P 500, and that’s really depressing because that amounts up to over a million dollars.
So it’s not just the actual cash lost. It’s also the opportunity cost lost, but in any event, so now I’m sitting on this thing that I can’t rent. I also can’t sell. The market was so bad for condos I couldn’t get a realtor to take the listing. Now, think about that for a second because for a realtor to take the listing requires no effort on their part. They can just take the listing, sit on it, and if the thing happens to sell by some magic, they can collect a commission. I couldn’t even get a realtor to do that. That’s how bad the market was at the time. So I’m stuck with this thing that I for whatever reason can’t find a tenant for.

Scott:
What year are we in right now?

JL Collins:
We’re in ’85-’86, yeah, somewhere in that timeframe.

Scott:
Okay. Keep going. So you’re not able to get a listing. What do you do now?

JL Collins:
Well, so now I just suffer, I mean, as I say for about 18 months of no tenant and, of course, I’m trying to find a tenant, but when you’re trying to do this long distance, it’s difficult. So finally, what finally brought my pain … Are you ready to hear how my pain ends or at least before the IRS gets involved, how the pain ended?

Mindy:
Did it burn down and you didn’t have any insurance?

JL Collins:
Yeah, well, no, no, no. There’s a whole another thing with the IRS, but finally out of the blue, one of the good things to come out of this is that when I was still living in it and YP had fled the scene, and we were the owners of this building. We’re brought together in the way that only adversity can bring people together, right? So we knew each other pretty well. We worked hard together to get the common areas finished, for instance, and to come up with these special assessments that we all imposed upon ourselves to get the building in order.
Anyway, we had become friends and, shamefully, I forget this guy’s name, but he had become the president of the condo association and a good guy. One day out of the blue, he calls me up and he says, “I have somebody who might be interested in buying your condo.” Of course, I can’t tell you what wonderful news this is, right? It’s like somebody calling you up and saying, “I have somebody who has a pile of gold bars they don’t quite know what to do with and they want to give them to you.” I mean, the news could not have been any better than that.
He said, “No. The woman who’s interested, her boyfriend lives in the building and your apartment actually is adjacent to his apartment.” So not only does she want to be in the building, but as it happens, my unit was the most ideal for her purposes. So anyway, I immediately arranged a business trip to Chicago so I could meet with her. Of course, I was hoping that she was naive and silly and I could take advantage of her, and she wasn’t any of those things. She was sharp and smart and a lawyer, in fact, but she did want the apartment.
So she’s looking at it, and at one point she says, “So how much do you want for it?” Of course, I’m mentally doing the calculation. I’m saying, “Well, I paid $45,000 for it back in ’79,” and I realized, and talk about understatement, I realized that the condo market hasn’t gone up much since then. Yeah, Mindy, she was nice to the news. She didn’t burst out laughing in my faith, although she would’ve been justified.
I said, “I realized the market hasn’t gone up much since then, but I’d be willing to take what I paid for at 45,000,” and without batting an eye, she looked at me and she said, “I’ll give you 30.”
Now, at this point, 30 is like manna from heaven. I mean, at this point, I know that this woman and I are going to do a deal. The only question is, how can I get out from under this with, of course, I still basically owe the bank 40 grand, the 40 grand I borrowed because as you know, most of your payments in the early years are interest. It might have been down to 39 grand or something. Anyway, in my mind, I owe the bank 40 grand.
So we go back and forth a little bit and she agrees to buy it for $40,000. So at that point, you say to yourself, “Oh, for the great tragedy this is, you only ultimately lost $5,000.” Of course, that doesn’t count all the money that hemorrhaged out over the six years that I held onto it, which I do in the book total up, by the way. So that’s the deal that we struck and that allowed me to get out from under it without having to come up with extra money for the bank, but as I say, that’s before the IRS, before I had to pay tax on my capital gain. Don’t you want to know how you pay tax on a capital?

Scott:
The story doesn’t end here, huh? All right.

Mindy:
Yeah. Yeah. Wait a second. If you sold it for less than you bought it for, I’m not a tax expert, but that sounds like a capital loss.

JL Collins:
Yeah. Well, that’s what I thought, but the IRS explained to me that both you and I are wrong about that, Mindy. So in those days, I don’t think this is true anymore. I know when you own a rental because while I bought this thing to live in it, I converted it to a rental and I began writing off the expenses involved with it, including depreciating it. In those days, you could do something called accelerated depreciation, which basically meant that instead of depreciating over 30 years or whatever it was, you could say, “This thing’s wearing out faster than normal and, therefore, I’m going to depreciate it over some shorter period.” I forget what that period is, but it allowed you to take a bigger deduction for depreciation.
Of course, because I’m hemorrhaging so much cash in this thing, I am grasping at straws, anything to make the pain a little less, but when you take depreciation, as I’m sure you and many of your listeners know, that reduces your cost basis in an equivalent amount for when you ultimately sell it. So the depreciation I’d taken over those five, six years had taken my cost basis from $45,000 down to $25,000.
So the IRS said, “Yeah. You lost $5,000. You sold it for 40. You bought it for 45. You sold it for 40. You lost $5,000, but you’d depreciated it and, therefore, your cost bases is not 45,000. It’s 25,000, and you sold it for 40,000. So that’s a capital gain of $15,000, and we want our cut.” So that was the final bit of pain and injury and insult in the process.

Scott:
That’s phenomenal.

JL Collins:
Yeah. I’m laughing now, but it’s taken me years to see the humor.

Scott:
Oh, my gosh!

Mindy:
So it doesn’t sound like adjusted for inflation you lost six figures. It sounds like you lost six figures in the ’80s, too.

JL Collins:
I don’t know that was that close. I was probably 40, 50, 60 grand in those dollars. As I say, I run the numbers in the book and it’s comfortably into six figures when you take inflation into account for today. So in fact, I actually do a chart in the book. I don’t have a copy of the book with me or I’ll look it up. I do a chart taking all the numbers that I mentioned in the book because I mentioned that the numbers as they were at the time and I calculate what they would be in inflation adjusted numbers. So people, if they’re curious, can go and look and say, “Well, $160 a month for an apartment is stupid cheap,” and of course, even then it was a good deal, but you can look at what the equivalent would be today for that apartment.

Scott:
So if you could go back and think it through, what would you do instead of this purchase and the whole journey that we just unpacked here in great detail?

JL Collins:
Oh, Scott, I would’ve gotten a pack of about a $40,000 bills and I would’ve sat outside and lit them on fire one at a time, and it would’ve been less painful and more entertaining. No. Well, first of all, my apartment, when I first went to look at it in July and he offered me my money back, I should have grabbed that with both hands because he didn’t realize that the market had turned on him, and I had been an excellent tenant for the apartment where I was renting for a number of years, and my landlords loved me and I could have easily gone back and said, “Hey, I want to continue renting,” and they would’ve been happy to let me stay in my $160 apartment.
Moreover, even going back before that, when my buddy Steve was so excited about buying a place for himself and the world around him and around me was all saying, “You got to buy real estate. You got to buy real estate,” I should have taken a step back and said, “Well, is this really right for me? Is this really something that I want?” and the answer to that question even then would’ve been no. I mean, I was perfectly content in my apartment. Even if things had gone swimmingly with the condo, it would’ve been considerably less expensive to continue to live in the apartment. So yeah, I wish I had had the wisdom not to get swept up in the mania, in the common wisdom that you have to buy.

Scott:
What about once you’re in the deal, you got it, and you got to deal with it? Anything you would’ve changed following the purchase once you had the property or already in the whole and from that point on?

JL Collins:
Yeah. I’m not sure that there was anything I could do other than what I did. I mean, I think I made most of my mistakes in the beginning, but once I’d closed on the thing, the die was cast and you have to live with your decision, right? That’s another important lesson, I guess, to come out of this is that once you close on the property and you own it, you have to live with that decision, and if it turns out to be a good decision and it keeps appreciating or it’s the place you really want to live and you enjoy it, even if it costs more than where you were before or if it’s a rental and you’ve done your homework and it’s positive cash flow and doing well, then those are all good things, but even if you make a colossal blunder like I did, you own it, and at that point, you just have to figure out how to deal with it.
In my case, I had to keep digging into my own pocket to make up the shortfall, well, between what I’d been running for initially and what the 570 bucks a month this thing was now costing me, which was more than I had figured on because I didn’t count on the special assessments, but I just had to dig deeper in my own pocket, and then when I rented it, I had to keep digging into my own pocket to make up the difference between what I owed the bank and my assessments and what I was able to get in rent.
By the way, that’s another great lesson that I would caution anybody listening to this who’s not familiar. Landlords don’t get to set the rent. I hear all the time that, “Well, of course, owning is better than renting because if you’re renting, you’re paying all the owner’s cost plus a profit to that owner.” Well, sometimes if the guy you’re renting from, if the person you’re renting from has done their homework and done a good job, that will be true, but that’s not always true. There are a lot of people like me that get forced into renting places that back into it, where your rent is a screaming bargain compared to what it actually costs. So landlord doesn’t set the rent. The market sets the rent. If I’d been able to set the rent, I would’ve set it for $650 a month, but I don’t have that option. The market sets what the rent’s going to be.
If you’ve done your homework as an investor, well, you know what the market is going to set that rent at and what you’re considering buying, and you make sure that you buy it in such a fashion that that rent that the market is setting for you is profitable. If you do stupid things like I did, you wind up owning something that is far more expensive than what the market’s allowing it to run for.

Scott:
Now, I think it’s super valuable perspective, and I love that you’re like, “Hey, the answer to all of this is live with the decision once you’ve made it,” and really all of these factors downstream no matter how good you got of the eventually at managing that property and making the decisions that you could to optimize from there, there was just really not much you could do to change the situation. It was determined by the market and you had to live with it for as long as it took to get out from under it.

JL Collins:
Yeah, exactly. You also don’t get to decide when to get out from under it in all the cases. As I say, I couldn’t even get an agent to take the listing. That’s how hard it was to sell this thing. So I had to just suffer through it until finally the right buyer happened to walk in my door. Thankfully, the president of the association who she reached out to, he and I had stayed in touch and he knew that I was, I was going to say interested selling, desperately probably is the better word. So, yeah, I mean, it pays to keep all your doors open, I suppose, but yeah.
So once you own it, you have to live with it for better or worse, and there’s the compelling case for not doing what I did, and rather going into it with your eyes wide open and having done your due diligence and your homework before you sign on the dotted line.

Scott:
If you’d held onto it for another 10 years, what do you think would’ve happened?

JL Collins:
I don’t think it was so deep underwater that I’m not sure 10 years would’ve done it. If I’d held onto it until now, maybe it would’ve turned out okay. It depends, Scott, on whether I’m holding onto it as an investment property or as something to live in. If it had suited my living needs for a longer period of time, then it would’ve just been an expensive place to live in.

Scott:
Could you have bought another property in Chicago around that time and done much better on it if you’d been looking at it from an investment mindset?

JL Collins:
Well, not only could I, I did. That was the two flat that I bought. So I bought the two flat I want to say in ’81, a couple years later. The good news such as it is is that this was a real education. This condo was a real education. So when I decided that I was going to buy the two flat, I was a much older and wiser real estate buyer at that point. I did a whole lot more due diligence. I was a whole lot more savvy in how I approached it. That deal turned out pretty well. In fact, it turned out very well. The only mistake I made with that one is I should have held onto it a little bit longer, but again, by then I had moved out of Chicago and I was not com comfortable being a long distance landlord even though on the two flat it was cash flow positive.
In fact, if I look at it holistically once I own the two flat and I own the condo simultaneously, the two flat was positive enough that it was paying for the losses on the condo. So I didn’t have to dig into my pocket in the same way that I did before that, but of course, that also means that instead of the two flat adding money to my pocket, it was just making up for the mistake, for the massive mistake the condo represented.

Scott:
Well, what I love about that is that we started off this with the circumstances of the market and how eerily similar they are and then the disaster that you just went, that was this condo purchase, but we’re hearing that even in a tough market like that, with your savvy purchase on the two flat you were able to generate cash flow and achieve value creation over your whole period with that.

JL Collins:
Yeah, and by then, the market had cooled quite a bit, but as we talked about at the very beginning of our conversation, this was a period of very high inflation. What’s interesting about that? I don’t know. I don’t tell the two flat story in this book, but I actually bought that for no money down. I did that by getting a mortgage from the bank for, testing my memory, I think for 75% of the purchase price, and interest rates in those days, I think my mortgage was 16%-17%. Then I negotiated a deal with the seller for the other 40,000 or the other 25% or whatever it was for I want to say 7%. So I wound up with a blended interest rate, if you will, of around 13%, which, of course, sounds horrific to anybody listening today, but at the time, it was a very, very attractive interest rate. Yeah.
Now, the mistake I made on that one, by the way, is I had read this book called Nothing Down about buying real estate with nothing down, and I thought, “Well, that’s a pretty cool idea,” and I made that my goal, and I accomplished that goal, and it turned out to be pretty profitable overall, but the mistake there was that’s the wrong goal, at least in my opinion. You should never go into buying real estate, as an example, with your goal being, “I’m going to buy this with nothing down,” unless you have no money.
I had money to put down and, in fact, I could have done a better, more profitable deal by putting money down, and the goal should have been, “I want to buy this piece of real estate in the most advantageous possible way for me with the resources I have.” In my case, I had resources to put money down. I had the knowledge to do it without putting money down, and I should’ve looked at those two options, and if I’d done that, I would’ve, for a variety of reasons, I would’ve put money down, but anyway, both those options were far better than the condo.

Scott:
Yeah. Wow.

Mindy:
Well, and we’ve talked about the money that you lost. This has been a lighthearted retelling of the story, but we didn’t really get into the stress that you … This was a very stressful time, I’m assuming. It was very stressful for me when I first read the book. I was reading through them like, “This is my condo in Chicago,” and I remember just we would have these meetings and it was so stressful. You look back at it now and you’re like, “Well, that was a $10,000 problem,” but at the time, $10,000 was a lot of money. At the time, $40,000 was a lot of money. Losing $150 a month or $300 a month or $570 a month was a lot of money that you had to come out of your pocket, and you’re not thinking at the time, “Oh, well, my other property is making up for it so everything’s okay.” You’re thinking to yourself, “I have to write another darn check for $570 to the bank every single month. I could have been renting for $160.” We don’t talk about the stress and the sleeplessness and the anxiety that you’re feeling for, and this was for six years that you had this. I mean, did you ever think one time, “Yay! Hooray! Real estate’s awesome”?

JL Collins:
Well, yeah, when I sold it and before I realized-

Scott:
A manna from heaven.

JL Collins:
… and before I realized what the IRS would have to say about it. I was saying, “Yay!” The IRS took the yay away. Yeah, I’m laughing about this with great-

Scott:
I think that’s your motto.

JL Collins:
Yeah. I mean, at this point, with a distance of 40 years, I could see the humor in it and I’ve gotten a book out of it. So there is the upside, but at the time, I would not have been able to chuckle for this as we’re doing it at the time. I mean, I would not have been able to see the humor, and I don’t remember feeling stressed. I remember feeling extraordinarily aggravated.
The other reason that I bought a condo is I bought into this concept that if you buy a condo, it’s worry-free, you don’t have to mow the lawn. Well, that’s true. In the entire time I own the condo, I never once mowed the lawn. What I didn’t count on was the endless meetings with lawyers and the endless battles with YP before he fled, and then the endless conversations with the other owners trying to figure out how we were going to fix this, how we were going to finish the common areas that had been left undone, and how are we going to raise the funds for that.
So I never had to fix the plumbing or mow the lawn or shovel the snow, but there was endless work involved in owning this thing, so endless. I think, Mindy, it comes down to there was so much aggravation I didn’t feel the stress. The aggravation just overwhelmed the stress and the work. So yeah, it was an enormous amount of work and effort. Again, as I say, the good news is that was provided a tremendous education, which probably has benefited me and certainly benefited me with the next real estate purchase, but yeah, but there was lots of aggravation and probably lots of underlying stretch and certainly no laughs.

Scott:
Well, is there anything else that we should know about this experience before we adjourn here?

JL Collins:
I think we’ve covered it pretty thoroughly. I mean, I tell the story in a more coherent fashion in the book, and as they say, the numbers are there if anybody’s curious, not only is the actual numbers and the dollars of the day, but also inflation adjusted if people want to play with that, but my subtitle on it is A Cautionary Tale, and that’s what it is. This is not a book telling people don’t buy a condo or don’t buy a house or don’t invest in real estate because all those things can be good things, and I have done all of those things and have had them be good things for me as well. It’s a cautionary tale into not being impossibly naive in how you approach it, doing your homework.
Again, I would applaud you got on BiggerPockets for the educational resource you are to help people not make the kind of mistake that I made. I like to think that if BiggerPockets has been around at the time, I would’ve been at least smart enough to take a look at it and might have saved myself a whole lot of grief. On the other hand, I wouldn’t have a new book out.

Scott:
Yeah. So I definitely encourage folks to check out the book. The book is called, again, How I Lost Money In Real Estate Before It Was Fashionable, subtitle, A Cautionary Tale as you mentioned there. It’s a wonderful, fun, quick read. I think you are able to make light of the situation looking back on it. I think you learn a lot about the mistakes that can lead to enormous piling up losses in real estate. For me, for one, coming out reading the book, I felt actually better about my real estate investing and the way I approach it from reading it because it is good to hear that you can lose money from all this stuff, but feeling like, “Hey, okay. I’m a little bit more prepared than maybe Jim was going into this purchase of this condo.”

JL Collins:
“My goodness, JL, I’m not that stupid.”

Scott:
Yeah. I have these concepts around cash flow. So I think it was really helpful to get that view and it was a fun read and reinforced a lot of the core beliefs I have around really self-educating around this, knowing the numbers and running them before buying real estate.

JL Collins:
I appreciate that take, Scott, because that’s exactly how I wrote it. It’s a very short book. It’s meant to be a very entertaining, fun read. It is meant to have a serious message underlying it that here’s a classic example of lots of things that can go wrong if you’re not careful. I mean, it almost reads like fiction because so many things go wrong, but everything in it is absolutely true.
The other thing I’ll throw out is it’s filled with wonderful illustrations, and I can call them wonderful because I didn’t do them, but I found just a terrific illustrator who I think is just spot on with the illustrations that go along with the story. So I think it’s a feast for the eyes and, hopefully, it’s a fun read as it was for you. Then yeah, it’s worth, hopefully, being a cautionary tale for those who need a cautionary tale. Certainly, I would hand it to anybody before they go out and buy something.

Mindy:
Absolutely.

Scott:
A feast for the eyes of the reader, but a famine for Jim Collins.

JL Collins:
Well, I’ve recovered since, but it was nip and tuck there for a while.

Mindy:
Yeah. If you’re thinking about buying real estate, you should read this book, and if this book can scare you out of buying real estate, then choose another investment vehicle because this book is not even close to the worst thing that can happen to you in real estate.

JL Collins:
You got them mortified to hear that.

Mindy:
You didn’t even have a tenant that trashed your whole house, did you?

JL Collins:
No, and that, Mindy, is a great point because when I was investing in real estate back in the day, and especially this is before the internet, I don’t know if it’s still true because I no longer invest in real estate, but back in the day when you invest in real estate, you wound up getting to know other real estate investors because you tend to … Also occurred to me that I was the only real estate investor that I knew who didn’t have a tenant horror story, who didn’t have a story of a tenant trashing their place. I was the only one, and I knew quite a few at that point in Chicago, and suddenly, it occurred to me that it wasn’t that I was smarter than all these other people because clearly, I wasn’t, it just that my time in the barrel hadn’t come. I’d just been lucky.
In hearing their stories I thought, “I don’t want to deal with this,” and that’s why I got out of real estate investing. It actually made me money. This was a bad start to it, but overall, it made me money, but it just felt like too much work. Ultimately, with the bad tenant thing, too much risk that I just didn’t want to deal with, but that’s me. I mean, people, as you well know, people have made fortunes in real estate if you go in with your eyes wide open and having done your homework. So there you go.

Mindy:
That’s the best way to invest by being prepared and doing your homework, and what do you say, Scott? 150 to 250 hours of research before you start investing.

Scott:
I think that’s the starting point. That’s the minimum price to pay before getting into real estate investing.

Mindy:
250 to 500? Yeah.

JL Collins:
Where were you in 1979 when I needed you?

Scott:
I’d blame Josh on that.

JL Collins:
Why didn’t you call me up?

Scott:
It was a tough year for me.

Mindy:
Oh, my God! I was in second grade.

Scott:
Well, Jim, where can people find the book?

JL Collins:
Well, the easiest way to find it I suppose is on Amazon, and the easiest way to get to it on Amazon actually is to go to my blog, jlcollinsnh.com, and if you click on it, there’s a cover of How I Lost Money In Real Estate Before It Was Fashionable, and then right below that is the cover for Simple Path to Wealth. Click on either of those, it’ll take you to Amazon and you’re good to go.

Scott:
Awesome. We’ll also link to all of that at the show notes at biggerpockets.com/moneyshow285. For anybody that is interested in checking out any of these books, go to Jim’s site, go to Amazon or go to the show notes link there.

Mindy:
Jim, thank you so much for your time today. Thank you for being 1% of the guests that we have ever had on our show, and thank you for sharing your story of losing money in real estate because we don’t do that enough here. So I appreciate you taking time out of your very busy day of doing nothing all day long to talk to us.

JL Collins:
Yeah. I could be out sightseeing. Instead, I’m hanging out with you. Hey, I appreciate the invitation to come back. It’s always a pleasure to hang out with both of you in the real world, but also on the podcast. So anytime you want to have somebody on that you can laugh and mock regarding my real estate condo, I’m available.

Scott:
We will certainly do that.

Mindy:
Awesome. Okay. Thanks, Jim. Say hi to Jane for me and we’ll talk to you soon.

JL Collins:
Will do.

Scott:
Thanks, Jim.

JL Collins:
Take care. Bye-bye, guys.

Mindy:
Okay, Scott. That was JL Collins. That was a lot of fun. Honestly, when I was reading his book, that was a lot of PTSD because I went through almost the exact same scenario in the same city that JL Collins went through. I bought a condo that was supposed to be rehabbed. It wasn’t. It wasn’t rehabbed correctly. I think the guy did end up skipping town. Just a whole lot of disasters. I did not lose quite as much money as he did, but this was back in 2001 where the market was starting to climb up. I think I broke even, but I sold it after a year instead of after seven years of renting it lower, but still, all the stress, all the anxiety, all the everything, I relived it, and it didn’t dampen my spirits for real estate, obviously.
I love real estate, but one of the key takeaways that I got from that book is if this story freaks you out, absorb that freak out. Let that freak you out and realize that real estate isn’t the right investment vehicle for me at this time. You can explore it again later. Maybe down the road you’ll be in a better position to invest in real estate. Maybe the market will be in a better place for you to jump in, but if this story freaks you out, I want you to let that freak you out and take a step back and learn from it. If it doesn’t freak you out, please visit biggerpockets.com and learn, learn, learn.
What do you say, Scott? 250 to 500 hours is the starting point for where you need to be doing your investment research before you buy a property. I mean, buying a property and jumping in with both feet, I know you are trying to answer me, Scott, and I’m just on a roll. Let me keep going. Buying a property and jumping in with both feet is going to be the best education possible. Listen to Jim. He just shared this, this really great education he got, but if you can learn those same things without the pain and anxiety, that’s better. You don’t need to go to school of hard knocks when you can learn from somebody who went there.

Scott:
Yeah, we think we’re cheaper at BiggerPockets than the education that Jim or JL Collins went through here, and probably the same amount of hours at the end of the day. So I think that’s it. I think it’s that 250 to 500 hour mark is really that minimum. We mentioned 150. Getting up there and really committing the mental bandwidth to learning about this and absorbing different perspectives and hearing the horror stories, hearing the success stories and going through it I think we’ll make a huge difference in the odds of success for anybody that wants to get into this, and if you’re not willing to pay that price, maybe real estate’s not a good spent for you.
One other thing I want to point out is JL Collins got lucky in his story. When he was talking about how he had one tenant and that tenant found another tenant for him and that tenant found another tenant for him, my biggest mistake personally as a landlord was I did something very similar to that. I did a really diligent screening process for two tenants. They split up. They were a couple and she brought in a roommate, who was great, and everything went well. Then she left and I was left with the roommate. She brought in her boyfriend, right? Everything was great.
Then she left that person and I now have the boyfriend, and I’m several layers away from my screening process, and this remaining tenant, the boyfriend, several layers removed, caused a tremendous amount of problems and actually ended up getting arrested before I got the property back and was able to rerent and rehab it. So it could have been even worse from that. I really encourage you, don’t let the tenants refer or if you let the tenant refer another tenant, that’s fine, but go through the screening process and check the credit criminal and income check and do your reference check if you’re going to self-manage on that because I didn’t and I paid a price for that. So it could have been even worse for him and he could have got a bad tenant or a tenant that trashed the place. Thankfully, I did not have that problem.

Mindy:
Yes, yes. Real estate is not the right investment vehicle for everyone, and there are so many different ways to invest your money to grow and generate wealth. You don’t have to just be stuck on real estate. Even though I love real estate, I’ve had my problems, too. I’ve had co contractor problems. Oh, my goodness. That’s why my husband and I DIY everything because it’s so much easier to just learn how to roof my house and try and find a roofer or that’s actually one of the things I don’t do, but it’s way easier to learn how to do a new skill than to try and find somebody to do it for you.

Scott:
One last thing here. We would love to hear from, I think, a couple of other folks who might have invested in this time period in the late ’70s, early ’80s in real estate, and maybe had some successes and failures, what worked, what didn’t. I think there’s a lot of, to my mind, overlap between the economic environment that we talked about at the beginning of this podcast and today’s economic environment. I think it would be really valuable to hear a couple of those stories on the show.

Mindy:
Ooh. My dad bought a house. My parents bought a house up in Oregon the minute before the market crashed and they ended up owning it for 30 years because they couldn’t sell it for the longest time that I don’t remember why they ended up eventually selling it.

Scott:
Yeah. I think we’d love to hear stories from investors in particular, who have those successes or failures in that time period. I think that’ll be really valuable as we’re thinking about how to navigate the waters ahead.

Mindy:
Maybe I’ll set my dad. Maybe we can do a test recording with my dad and if it works out, great, and if not, then we won’t air it.

Scott:
Sounds great.

Mindy:
He’ll be here in a few months. Okay, cool. Well, I’ll set him up. I mean, I would have to. He’s not a techie. Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
Okay. Before we do, let’s just say, let’s use our new phrase. The IRS takes the yay away. That’s their new motto. So I have a friend named Evan who works there and I’m going to share that with him, “Hey, do you guys need a new motto?” Okay. From episode 285 of the BiggerPockets Money podcast, he is Scott Trench, and I am Mindy Jensen saying, “Give me a shout out.”

David:
This is the BiggerPockets Podcast, show 585. When you want to BRRRR, start with knowing what’s going to affect the value. The lender who’s going to be doing the refinance is going to be the one who understands how that works. So you want to talk to your representative, whether it’s a direct lender or it’s a broker like us that finds you one. Ask them, “Hey, which way should I go,” and then develop your strategy based off of what they’ve said. If you don’t like what they say, well then look for another loan officer, another lender, another whatever person that’s going to finance this, and create a different strategy.

David:
What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, here with a Seeing Greene episode. On these episodes, we get questions directly from our listener base, you, and we answer them for everybody to hear. So we have several really cool questions that come up today. We talked about financing and what type of loan would be appropriate for the right type of property. We talk about scaling. That’s one of my favorite questions that we get into today, is “How do I scale without burning out, or without making mistakes, or without taking on too much risk, or without leaving meat on the bone? Can I be going faster, and I’m not going fast enough?” We talk about if we should be raising money from people, and what point that actually becomes relevant. And then I threw in my 2 cents about the way that I raise money, and my philosophy behind the responsibility that we have when we’re borrowing people’s money that frankly doesn’t get spoken about enough.

David:
And then we talk a little bit about how real estate… Sometimes when you talk about it, it seems so simple and easy. Should it be harder? Should we be making it harder? Are we overthinking, or are we under-thinking? So we tackle a lot of the really common questions that people ask, many of them when people are getting started, but we also get into some higher-level stuff. Today’s quick tip. We want to do more live shows. So I love being able to answer video questions like this. The problem is sometimes I have to speculate as to what the person really means when they submit their question. I love it when they’re here and I can dive in deeper and find out what they’re really facing before I answer the question. So if you wouldn’t mind, go to biggerpockets.com/david, leave a video question, and in that question say, “I would be willing to be interviewed live on the podcast and get direct coaching from David and his co-host.”

David:
If you do that, my producer will reach out to you. We will let you know when the time is scheduled to do that. You could be here live. You can tell all your friends that you featured on the BiggerPockets podcast, and I’ll get to answer your question. I’ll also be very, very grateful. I’ve had people that have come to work with me because they’ve been on these shows and I’ve got to talk to them. I’ve had people that I partnered up with to do different things. A lot of relationships are built just by taking that step. So we want to hear from you. Please go to biggerpockets.com/david, submit your question, and let us know if you’d be willing to show up for a live show where we answer it more thoroughly.

David:
All right, last thing I want to say is make sure that you subscribe to this channel, that you like it, and that you’re following me on social media. I’m DavidGreene24. If you’re too shy to ask a question on the podcast, well first off, get over it. But second off, I’ll help you get over it. Send me a DM. Tell me what your question is. I want to be able to help. If you live near me in California, I definitely want to be able to meet you, because I do meetups out here. I want to get you plugged in, and I’d like to hear more about what you got going on. So submit me questions, DM me with anything that you are embarrassed to ask about in a public forum, and without further ado, let’s get on to today’s show.

Chad:
Hey, David. My name’s Chad, and I live in the upstate of South Carolina. We are trying to scale into real estate as we have been taking advantage of the tax-free capital gains that we’ve made on our primary home by moving every two years for the past several years. We tried our hand at flipping a house without living in it while we were in an apartment, and that went really well except for the tax implications from those capital gains. So we decided that wasn’t a way to build wealth or to scale into real estate for us, so now we are trying to get into it quickly. My question for you is: What is the best route for us to take going forward? And are we on the right path? We kind of have an idea based on our knowledge and understanding of real estate and investing from the BiggerPockets community. Where we are at right now is that this summer, we had purchased a property with two houses on it in the Smoky Mountains of North Carolina.

Chad:
We just finished one of the studio houses on the property and have launched it on Airbnb, and the other house we are seller financing and selling to one of our contractors there. We decided that project was too big to take on from out of state. So now that we have that one launched, we just bought our neighbor’s house and are about to launch that on Airbnb and other STR platforms in the next week or so. We decided to go into the STR route, because even though it’s somewhat risky with that endeavor, it does seem to scale faster as far as capital and cash flow there, and I thought this could be a good way to pivot into long-term and commercial real estate once we refinance and consolidate debts. So our current plan is that in the next few months, once we’ve been six months on title on the North Carolina property, we’ll be cash out refinancing that one and hopefully pulling the new equity, if not just consolidating the debt that we have.

Chad:
We used a HELOC from our primary home and a small personal loan to finish and furnish up that property, and we’ll also be getting all of our funds out of the property once the seller financing contract is complete, hopefully sometime early next year. The other home that we just purchased, we used a private money loan, and that’ll be sometime in the beginning of next year that we should be able to cash out refinance once we connect with another local lender. We’re still getting quotes on the rates and things like that for that. So that’s kind of my question, is: Are we on the right path? Because we do want to do this long-term. My W-2 kind of seems to be getting in the way, and we’re very tired at this point after renovating one property and switching right over to the next one. I’m on that lookout for another deal, but I don’t see a way to continue acquiring real estate at the end of this year until we finish consolidating those debts and hopefully have new equity to work with.

Chad:
I know that one thing that will be in the way when we do go and refinance is how much I get paid on my W-2, because the STR income won’t be counted towards our debt-to-income ratio. That’s what I’ve been told by the lenders. So using our own equity from these properties, we’re hoping to get into multifamily 10 or 12 units, or commercial property. I guess I’m a little vague with exactly specific what I’m asking, but does this sound like a good path? Are there other nuances that I don’t see that we could be acquiring other deals during this time? And as far as my own job, I am trying to pivot within my own industry of IT to increase my income to make that debt-to-income look better. And thanks for all your time, and you’ve been great to listen to on the podcast. I appreciate it.

David:
All right. Thank you, Chad. I appreciate the kind words there. Glad that you’re liking the podcast. There’s a little less beard, but there’s a little more bald. All right. So that was a little bit of a long-winded question, but I think I have an idea what you’re getting after. You’re trying to figure out… You’re saying, “How do I scale,” but then you’re also telling me what your current plan is. And I think what you’re looking for is for me to break it apart and tell you if it is sustainable, if it will work, and what you would do different, which is kind of what I do. As a consultant, I look at all the different pieces that my clients have with what they’re trying to accomplish. I run it through the weird matrix of my brain after seeing as much real estate deals as I’ve seen in the time that I’ve been doing it, and I come up with a plan that will maximize efficiency for the person according to their goals.

David:
So you’ve got several things you’re doing well, and it sounds like you’re willing to do whatever it takes to make it. So right off the bat, Chad, I think you’re going to hit your goals, which is great. So let’s talk about how we could do it the fastest way. When it comes to scaling, a lot of people ask this question: How do I scale quickly? Now, I’m going to paint a picture, or an analogy, if you will. Imagine that you’re trying to run a race, and the further you can run, the more money that you’re going to make. That’s sort of what we’re talking about here. The more properties you can buy, the further can get into growing your wealth, the more money that you’re going to make. The question to ask is: What will stop me from doing that?

David:
Now, some people lack ambition, they lack drive, or they’re afraid. Those are people that we make mindset episodes for. You’re not going to run very far in the race if you’re afraid to get started, or if you’re lazy, or if you feel like you don’t know how to run, or you’re in terrible shape. Those are people that need to learn how to analyze deals, listen to podcasts, educate themselves, because that’s what’s going to stop them from running. The goal is to get as far as you can. There’s other things that slow people down though. Other than that, maybe you’re carrying weights around. Maybe you don’t have enough energy to keep going. So what we’re going to talk about right now are the four things that I think slow most people down. Now, we are assuming that mindset is not a part of this, because from what you’re telling me, it’s not an issue for you.

David:
The four things I wrote down when I was listening to you that will slow someone down from running the race are going to be: running out of capital, that’s a finite resource, running out of time, that’s a finite resource, running out of opportunities like deals to get, that’s a finite resource, and then running out of the ability to finance, because you’re probably not going to pay cash for everything. That can be a finite resource. And you sort of touched on all of those at some point in your question. We’re going to start with capital. Most people will struggle with real estate investing because they don’t have enough money. I’m just being completely honest with you. Brandon Turner wrote The Book on Investing in Real Estate with No (and Low) Money Down. Fantastic book, lots of strategies. Do them. But I will also say those strategies work. They take more time and they are harder than if you just have a lot of money.

David:
I can run further and faster with the resources I have than someone can getting started, even with those techniques. Now, that does not mean they should not do it. I’m just saying if I’m in really good shape and I can run for four hours without getting tired, you can’t keep up with me if you’re new to running. You have to use these strategies to make it work, but you have to stop and take breaks. It’s harder for you to run. What I’m saying is don’t compare yourself to somebody who’s got a lot of capital, because they’re going to run further than you. Just let that inspire you, that someday you will have that capital and you can run that way. The two strategies that I recommend more than anything for people that are capital restricted, which is most new people, which is why I’m starting there, is house hacking and the BRRRR method.

David:
The BRRRR method is a way of buying a property, fixing it up similar to what I think you said you’re trying to do in the Smoky Mountains, and then refinancing afterwards to get your money out of the deal. That gets you your capital back. It can be reinvested. You eliminate the problem of running out of money. That’s why I wrote the BRRRR book. The second is house hacking. Now, I didn’t write the house hacking book, but I could write a book on that because I’ve helped hundreds and hundreds and hundreds of clients as well as doing this myself. It is an amazing strategy. What I tell people is you should always house hack one deal a year before you even try the BRRRR method. If you can get a primary residence loan and put 3.5% down, 5% down, you don’t need to do the BRRRR method.

David:
You don’t need to do all the work to get your capital out of the deal, because you barely put any capital into the deal. So the first thing I would say to you, Chad, is you and your wife should be house hacking one property a year. Find the best neighborhood that you can get pre-approved to afford. Find the right floor plan, get that house, split it up however you do it, whether you do a triplex, duplex, a place with a basement, an ADU, you add an ADU, you switch the floor plan. Whatever you’re doing, figure out a way to do that first. That will be the biggest thing. If you just buy one house a year like that, and then every year or maybe every two years you also do a BRRRR thing, you’ll be good. You won’t have capital restrictions.

David:
Then you’ll have enough equity like what you’re seeing in your primary residence, that you can pull it out and you can just run faster. The next thing I’ll say is time. It doesn’t sound like you’re time-restricted, but if you’re taking this new job on, that is going to become at a certain point a restriction for you. So continue to buy real estate, continue to work, like you are, to save money and to help your debt-to-income ratio so you can keep buying, but know at a certain point you’re going to need to quit that job. The next would be opportunity. Make sure you’re investing, that you have a strategy where you’re investing in an area or in an asset class that will allow your time to be fruitful. If you’re chasing after the same deals that other people are chasing after and you just can’t get anything under contract, you need a change of strategy.

David:
If you’re looking for deals that are just way too good, like there’s someone else that would buy it for much more than the price you want it for, you need a new strategy. You’re limited in your opportunity, and it doesn’t sound like that’s your problem right now. It actually sounds like you’re making some pretty good headway when it comes to finding deals. And the last is your financing, and here’s what I want to say about that. It’s good you’re getting a job to improve your debt-to-income, but you don’t have to do it that way. Companies like mine get people pre-approved based off income that the property is going to make, not the person. So you could switch right now. Now, the trade-off is you might have a slightly higher rate. It’s usually around half a percent or more to do those loans, but those are the ones that I use.

David:
I don’t use my own debt-to-income ratio, frankly, because I don’t want to have to show all of the taxes that I have, the businesses I own. My situation becomes more complicated. I don’t have a W-2 job in the sense where an employer pays me. I own businesses and pay myself out of those businesses, so I have to sort of show this really long paper trail of why I paid myself the amount I did, why I didn’t have to pay taxes because it was sheltered by real estate. It’s just a hassle, so I use loans where we take the income from the property to qualify me. And you can do that same thing. You can reach out to me, and I’m happy to look into that. If you don’t want to reach out to me, just find a lender and ask them about a loan like that so you don’t have to stay work in that job to keep buying real estate.

David:
I don’t know that these loans will be around for forever. They’re good loans. They’re 30-year, fixed rate. They’re not shady subprime-type stuff, like what we saw before, but I’m taking advantage of them while they’re here. Right now, there’s so much money that’s flowing around because we printed so much of it that lenders have a lot of it, and they need to get rid of it, and so they’re looking to make loans based off the income of the property. That’s a way that you could remove your time restrictions. So the four restrictions are capital, time, opportunity, and financing, and I believe I gave you a strategy to help with all of those. The next thing or maybe the last thing that I’ll say when it comes to the situation is we all want to sprint and get as far as we can, and that’s why I like this running analogy.

David:
Because if you’re trying to go as far as you can, you don’t necessarily start off going as fast as you can. Sometimes, trying to run as fast as you can will burn you out, and you’ll end up getting passed up in the race, or you won’t go as far as what you could have. When I go running, I start off very slow and I get warmed up, and I actually speed up as I go until I start to get tired, and then I slowly wind back down again. I think that strategy would be better for someone who wants to scale a portfolio. Don’t go buy 17 houses all at once and then try to figure out what to do. We’ve had people on this show… We’ve had them on different versions of this where they say, “Hey, I just bought six properties and I don’t have enough capital to rehab all of them. What do I do?”

David:
Well, you have a capital restriction. There’s not really a lot you can do. You’re in a bad spot. You got to sell it off, similar to what you have going on in the Smoky Mountains. That was a really good example. You’re having to sell a property to have enough capital to fix up the other one. So don’t try to go fast, but what you want to go is far. You want to do this at a pace that you can handle. Just buying a house a year in a good area puts you in a really good position for your future. BRRRRing another one after that puts you in a really good position for your future. Saving the short-term rental income that you’re making and putting that towards buying more properties puts you in a better position for the future. You’re not going to start off running as fast as you will be running in five years. The important thing is that you don’t too fast too quickly, and never make it to five years to where you can step up your game then.

Lourdes:
Hi, David. My name is [Lourdes 00:16:00]. I’m in Denver, Colorado. Today is January 10th, and my question is how to tell if an area is A, B, C, or D. And what if it’s mixed? What if you have really nice single-family homes, and around the corner, there’s some low-income duplexes? That’s it. Thank you.

David:
Hey, thanks, Lourdes. I really like this question, because we rarely ever get to go into the why of things. Most people just look at the what, but true experience and truism is gained from chasing the why. Why do we call them A, B, C, and D-level properties? Well, if you think about when we bring it up, it’s only when we’re describing a neighborhood to somebody else. I just bought a house in a B-class area. I look for houses in a C-plus area. I only want to buy A-class real estate. The letter doesn’t really matter, doesn’t make sense. That’s why we don’t have F. Why does it stop at D? It doesn’t go to F. That doesn’t make sense. Just the way it is. What we’re really communicating when we convey that is the personality of the real estate, and this is something I’ve been saying more often. Real estate has personalities.

David:
A-class properties are probably not going to cash flow when you first buy them. They might break even, but you may actually lose money on them. But over a long period of time, they’re going to go up in value a lot. The rents are going to increase a lot. You’re going to get equity probably faster than you get cash flow, and they’re going to be a joy to own. You’re not going to have a lot of problems with those properties. Those are good properties for a long-term perspective and for people that make really good money and need a place to park it, but they don’t need cash flow right off the bat. That’s the personality of that deal. A B-class property is also pretty good to own, not a joy to own, but it’s really fun to own it. You’re not getting a ton of issues.

David:
You are going to get still appreciation, but not as much as an A-class property. And you’re also going to get a little bit more cash flow, but not as much as a C-class property, but more than an A-class property. That’s kind of where I end up falling. I’m getting into some A-class stuff now. I used to not touch it very often. Now, I’d say maybe 40 to 50% of what I’m buying is A-class. Before, it would’ve been maybe 10%. But I still buy more B-class property than anything else, I would say. The personality of a C-class property is going to be heavy on cash flow, easier entry, probably a property that’s going to need some work. If you’re selling an A-class property on the market, you probably fixed it up before you sold it because you had the resources to do it.

David:
If you came to me and said, “David, help me sell my house. It’s an A-class property,” I’m going to talk to you about what we can fix up to get you top dollar, and you’re going to be able to do it because you have the money. C-Class properties, the owner might not have the capital to do that, so you’re more likely to be stepping into meat on the bone, and this is why most investors start there. It’s kind of like training wheels. You can add value to it, you’re not competing with the really wealthy people because they don’t want to own it as much, and it’s going to be stronger on cash flow than it is going to be on appreciation, which probably matters to the newer people that don’t have as much capital.

David:
D-class properties are going to be very little appreciation, if anything, compared to the other ones, a lot of headache. They’re not going to be a joy to own. Your cash flow potential is the highest, but the real benefit of a D-class property is going to be how easy it is to own it. There’s not a lot of competition to get it. You can get all these cool tricks, like seller financing and subject to. The people who own those properties are trying to get rid of them, so they’re going to play the game you want to play. You’re going to probably dictate the terms on a lot of those deals because the seller’s motivated, but they’re motivated for a reason. They don’t want to own that property. A-class property is the same owner might have it for 10 or 20 years. D-class properties tend to change hands every couple years, because people get worn out. So understanding the personality of the property will help you know where you want to get into it.

David:
But what I’m doing is I’m break down how I see A, B, C, and D-class so that instead of saying, “Is this an a A, a B, a C, or a D,” you say, “What is the personality of this? Well, this would be a great deal to get into because I wouldn’t have any competition, but man, it would be really hard to own it. There’s a lot of crime. There’s not a lot of tenants that want to live there. The school scores are low. It’s not going to go up in value.” We typically call that a D-class property, but who cares what we call it? What you need to know is how would this property work once I own it. What would it be like to operate it? And does that fit for my goals? Okay, to the second part of your question, what about neighborhoods that are both? They’re not really both, but what you described is what if you have a really nice single-family home, and then a low-income duplex that’s right next to it.

David:
It’s probably not a low-income duplex if it’s in a neighborhood right next to a nice single-family home. It’s probably just being rented to lower-income tenants. But that doesn’t mean that it’s a bad neighborhood, or it’s bad tenants, or it’s actually a problem. It just is that specific landlord might have chosen tenants that could be causing problems. Or maybe they’re not causing problems at all, they’re great, but they can’t afford to own in a neighborhood that nice, and that’s why they’re renting there. I don’t know this specific property. Now, keep in mind that’s how I’m answering this question, is I haven’t seen the house. So if this is just a haunted house, just something terrible, don’t hear me saying that you should go buy it, but what you’re describing to me is what I look for.

David:
I want to buy the duplex in the great single-family home neighborhood. It’s very rare to find that. And the reason is that most cities, when they do their zoning, they clump it up. They go, “Here’s where all the single-family homes go. Here’s where all the multifamily homes go.” And the multifamily tends to be buried in the corner, and it’s never looked at, and that’s where all the mildew grows, because it doesn’t get enough sunlight. And then you get nothing but all the tenants, and then more and more tenants start moving in there. There’s no pride of ownership. The income goes down, the neighborhood goes down. The police presence goes up, the crime goes up. That’s what you’re trying to avoid. What I like are the benefits of multifamily property, higher cash flow and less risk, mixed in with a great neighborhood of single-family homes where I’m not going to get all those issues that I described when the zoning is separating multifamily from single family.

David:
It’s better if you mix it all in together and you have a nice ratio of both. So what you described, Lourdes, would actually be what I would be pursuing. I want to find multifamily property in a neighborhood that’s B or A-class, because I’m going to have more appreciation from that property. And just imagine that it’s a duplex there, and I can rent it out and get twice as much cash flow as a regular house because it’s a duplex, or maybe three times as much because it’s a triplex. And then five years later, I want to sell it. Well, if I bought it in the section of the neighborhood that is zoned for multifamily, I’m not selling it for much. I’m going to sell it to another investor. They’re going to be looking at like it’s a D-class neighborhood, and they don’t want it. I’m stuck. But if I’m going to sell it and it’s in a nice single-family neighborhood, maybe someone buys it who wants to house hack.

David:
Maybe the David Greene team is representing a buyer, and we find that house for our client. We say, “This is the one you want to buy. You’re going to be in the best neighborhood, and you’re going to rent out the other unit to someone else to reduce your income.” Now that person’s willing to pay extra to have that property. It’s worth more to them because of the income it brings in. That’s the way that I’m looking at it. I’m actually looking for deals just like you described, so I would highly encourage you to chase after those ones with more vigor than if it was a multifamily property that was not in a single-family neighborhood.

John:
Hi, David. I appreciate your haircut. Thank you for representing. My name’s [John Mark Burely 00:23:35]. I am currently running a roofing company with my brothers. My wife and I have a barn wedding venue, and we had a two-unit rental, first purchased back when I was 18 or 19. Had the option to buy it on land contract here in Michigan. Bought that thing, had it paid off pretty quickly. Recently got news that my job… Over a year ago, a year and a half ago, my job was going away. I managed 11 apartment complexes for a company, and they were selling the whole portfolio. So plan B came on the horizon. Got my two-unit with a wholesaler. Sold that thing, took all the cash, and bought a 12-unit complex. So I have this 12-unit complex. Lose the job, take on this roofing company with my brothers.

John:
It’s going good. I want to keep building the portfolio, the rental thing. I think that’s where to be. I have the opportunity right now to make offers. They’re both off market, but I’m in touch with the owners for a 32-unit apartment complex and then a 235-unit storage unit complex. Both looked like really good deals. One of them I used to manage for the prior company, and it was out of their geographic zone, so I contacted the owner. I said, “Hey, man, you guys want to offload that?” So I’m going to be paying more per door than what we sold it to them for likely. It’s 2021, the beginning of 2022, so market’s hot right now.

John:
I’m curious. Do I try to raise money from other folks to buy these new complexes and hold onto the 12-unit? Or should I sell the 12-unit and try to milk it for everything I can, and use that cash as down payment for these bigger-sized complexes? I don’t like being over-leveraged. I don’t like owing people who I know. That’s a nerve-racking feeling. I’ve just never been in that world, so I’m not familiar with it. And I’ve heard of and seen relationships go sour over money, so I don’t like to get money between friends. So I’m curious what your counsel would be. Is this something where, “Hey, man, leverage the happy investor culture that you’re in, and use other people’s money to make these purchases and then pay them back over time and be over-leveraged”? Or sell and move on, and kind of do it the slow, steady way? So I’m curious what your thoughts are. I appreciate your feedback. Thank you.

David:
All right, John. Your hair’s looking great as well. Soon as I saw your video, I thought, “Oh, looks like I’m looking into mirror.” Let’s see if I can break down the question you’ve got here. You mentioned that you left a job as a property manager, so I’m assuming that means you are capable of managing and analyzing a property. You started a business, a roofing company, so you have some income coming in from that. And that tells me that you are a problem solver, and you don’t need someone else to lay a path out for you, so I’m going to give you advice based on those things. That’s what I can tell from listening to your video. Your question is: Should I raise money from other people to buy the bigger unit that I want to buy? And you gave two examples of self-storage or an apartment. Or should I sell what I have and use that money to buy the bigger property?

David:
And then you mentioned some of the concerns you had, some of the emotions you were feeling, like you don’t want to raise money from other people. You don’t want relationships to go bad. Let me give you my perspective on capital raising. So I do it as well. I have the website investwithdavidgreene.com. People can go there if they want. They can invest with me. I take a different approach than most people do. The average… [inaudible 00:27:27] the average, but just the more common person that I see, much more common, is they say, “Hey, if you want to invest in real estate, you can invest in this deal. I’m going to buy this apartment complex, this self-storage. Look at the prospectus, look at the proforma. If you think it looks good, you make the decision to invest in it. And if it works out, you’re expected to get this return. But if it doesn’t work out, you’re going to lose your money.”

David:
And that has gotten along pretty well, because most real estate has been going up in value. So even if they make mistakes, it’s sort of covered by all the appreciation we’ve seen. This has been a good time to be lending money. I don’t love that, because it should be the operator’s skill that determines how well the investment goes, not the market just helping them because we’re seeing so much appreciation. When I let people lend money to me, when I borrow money, I’m not doing it by saying, “Look at the deal and see if you want to invest. Lender beware. You’re doing this at your own risk,” type of a thing. I understand most people that are investing with me don’t understand how real estate works. Otherwise, they’d probably be doing it themselves.

David:
They want the benefits of real estate. They see the strength of it. They like the safety of it, but they don’t know how to do it themselves. So they’re really not invest investing in the deal, they’re investing in David. So I have mine structured to where they get paid independent of how well the deal does. If somebody lends me money, they get their interest payment, and it’s not quarterly like most syndicators do. It’s every month. It just goes right into their bank account, as if they were getting direct deposit from a bank or interest from a bank, and it doesn’t matter how the deal does. And I do it like that because I don’t think that they’re investing in the deal.

David:
I think they’re investing in me and my word, and my word matters more to me than if a deal goes bad and I go, “Hey, sorry. I lost all your money.” You’re exactly right the relationship goes poorly, because in their mind, their expectation was they were investing in you, John. They weren’t investing in that deal. They don’t know how real estate works. So if you lose their money, they’re mad at you. They were trusting you. And I think this is important to recognize. Most people investing in real estate, I don’t think you’re investing in the deal. That’s the cop out the syndicator uses to be like, “Hey, don’t blame me. You knew what you were doing,” and that’s why I just don’t do that. My word matters too much. The platform I have here on BiggerPockets matters too much. I can’t default on debt. I just wouldn’t be able to sleep at night, and people would lose trust in me, which matters more to me than whatever wealth I could build by borrowing money and doing what other syndicators do.

David:
So this is my perspective on the advice that I am going to give you. That’s why I wanted to kind of put that out there. That’s also a bit of a pet peeve of mine that I think just raising money is so easy that people are doing it fast and loose. They’re not very good at what they do, they’re not very careful, and they’ve been getting away with it. But musical chairs is going to end at some point, and all those people that put their money in real estate are going to lose it, and then they’re going to blame real estate. And I hate that. I hate when people blame real estate, rather than blame the operator who screwed up or the decision they made that was unwise. For you, I would say there’s a way we can do this where you can do both.

David:
If your gut is telling you you don’t want to raise money, it sounds like you haven’t done it before, don’t do it on your first deal. Sell your 12-unit, then go buy the storage facility or the apartment, whatever you’re going to buy. Use your own money. Put a lot down, more than you normally would. That’s going to give you quite a bit of equity in that deal. After you’ve done that and it’s been stabilized, you’ve improved the rents, you’ve made more money with it, then go raise capital and say, “Hey, I’m not raising money to buy a deal. I’m raising money for a deal that I already bought. So I can secure your money with a lien on this property in second position,” which is probably the same thing they were going to get if you used it to buy it. But you’re not making them take all the risk of what if you screw up managing and operating the property. You’ve already shown, “I’m managing and operating it well.”

David:
So it’s less risky for them to give you the money after you’ve stabilized it. Now, many people hear this and go, “I never thought of that.” It’s because most people that are borrowing money and raising money to buy real estate don’t have any of their own, and it’s because they don’t have enough experience. They can’t do what I’m describing, because they don’t have the resources to do it, because they don’t have the track record. They’re trying to learn on the person’s dime who’s giving them the money, and that’s what I don’t like. It’s better if you do it the way that I’m saying. Once you raise the money, after it’s been stabilized, you’ve effectively paid yourself back. And this may sound unconventional, but it’s not shady. It’s not shifty. There’s nothing wrong with this. People do the same thing with the BRRRR strategy.

David:
They go, “What do you mean you’re going to refinance it after you already bought it? I thought you use a loan to buy?” Well, you do, but you could also use a loan after you buy it. It’s kind of the same process. This is the same thing that I’m describing. When you raise that money on the property you’ve already bought, so it’s safer for these people, then go buy another 12-unit or comparable to what you sold with the money that you’ve raised. Now you’ve got both. You didn’t have to give anything up. You also eliminated the risk for your investors, and you forced yourself to prove that you know what you’re doing before you raised money. That’s the way that I look at problems like this. I usually put the onus on myself to take risk off of other people’s plates instead of saying, “Well, here’s the risk. Make up your own mind if you want to do it.”

David:
So I’m hoping more people will raise money the way that I’m doing it, so that there’s less bad of a reputation that gets out in the real estate investing community. We haven’t had a lot of that right now, but I promise you if you were raising money in 2005, there’s a lot of people that lost money letting people borrow it in 2005. And they blame real estate, they don’t blame the operator. So let’s not do that. Let’s keep a solid relationship with real estate. Let’s invest our money with the right operators who have experience doing it, and let’s make sure that we’re not chasing after the highest returns ever, which is also exposing us to more and more risk.

Andrew:
Hey there, David Greene. Andrew Cushman here. I don’t have a question, but I just wanted to say great job on the Seeing Greene episodes. They’re awesome. I listen to every one of them, even though most of the questions don’t apply to me, simply because you do such a good job explaining things to people that by me listening to you do it, it helps me answer questions better when I get asked similar questions. So anyway, just want to let you know you’re doing an awesome job with those episodes. They’re great, and keep it up.

David:
Well, Andrew, I don’t know what to say other than thank you. That’s very sweet of you. It actually means quite a bit, because this is a nervous and scary position to be in. I don’t know what questions are coming at me. They could be anything related to real estate. I could look like a fool. It is a little nerve-racking, so the fact that you’re saying that means quite a bit. And that just goes to show Andrew’s character. He’s such a cool guy. Andrew’s a very good friend of mine, and I would encourage you guys to follow him as well as check out some of the episodes that he and I have done together. So Andrew is my multifamily investing partner. We’ve created a system of how we underwrite, analyze deals, and then pursue them, so the LAPS funnel. How we find leads, we analyze them, we pursue them, and then we have success.

David:
And if you would like to learn more about that, check out the show that we did with Andrew featured here. All right, we’ve had some great questions so far, and I want to thank everyone for submitting them. You can submit your question at biggerpockets.com/david, because we need them so we can make awesome shows like this. I wanted to play some feedback that we had from YouTube comments so that you guys can hear what some of the people have been saying on YouTube, and I also want to encourage you to head to YouTube and leave me some comments that I can see there. My producer wanted me to let you know that we’ll be seeing Andrew Cushman on the next episode of 586. Make sure you check out 571, episode number 571 on phase one of multifamily underwriting, and then tune in for phase two, which is where we go into it deeper.

David:
So Andrew is basically my partner, like how we just heard from John and he was describing how he wants to raise money. Well, Andrew and I do the same thing. We raise money from people, we go invest it into real estate and multifamily, and we have a screening process that we use to make sure we’re not buying the wrong properties. And Andrew’s my really, really good friend, and I trust him quite a bit. And we basically break down for you all: This is what our underwriting process looks like. These are the exact steps that we do. We actually, now at this stage, leverage those steps to other people that come work for us. They started as interns, and now they’re employees of the company, and that’s how systemized we are that other people can do this work. So if they were able to learn it, you are absolutely able to learn it yourself.

David:
So make sure you check out that episode. It’s going to be 586. And before you listen to episode 586, listen to episode 571, where we get into phase one. 586 is going to be phase two. All right, next comment comes from Dave H. “You asked for comments and feedback, and here it is. This series of detailed Q&A has been some of the best content for a newbie like me. Some of the questions are exactly what I would’ve asked. Other questions from more experienced investors got me thinking about things I hadn’t considered. Keep it coming.” Well, Dave H., thank you from Dave G. I will do my best to do that. Now, if I’m being fair, while I appreciate your compliment how good the show is, the show is only as good as the questions I get asked. If people don’t ask questions or they ask lame ones, I can’t really make a good answer out of that.

David:
So I want to give the attention here to the people who have been submitting their questions. Please keep doing that. Go to biggerpockets.com/david. Submit your question there. Make it as good as you can. I really love these consulting-type questions where you say, “I’ve got this asset and I’ve got this goal, and I’ve got these things working for me and these things working against me, and I can come up with a strategy.” It’s sort of like how Brandon and I would talk about how you got to have tools in your tool belt so that when different problems come along, you know what to do. I feel like the contractor with a tool belt full of tools, and I get to show you guys which tool that I take out based on what problems are being presented to me, and then everyone gets to learn. So please keep those coming, and also thank you for the kind words, Dave.

David:
Next comment, “I would like you guys to cover getting financing in an LLC and keeping away from your personal credit for investors looking to scale, but coming with that strategy, making your personal credit and your business credit worthy to get mortgages in your LLC’s name.” Okay, this comes from New Image Properties LLC. Please, come on here and ask us a question about what you’re trying to do. I would’ve to speculate to get into this now. I’d rather be able to have you on maybe on a live show, where you could tell us what you’re thinking. Based on what you’re saying here, my understanding is you look at it like an LLC has its own credit, and then you have your own credit, but most lenders don’t see it that way. They see an LLC as an entity.

David:
But you are the manager of that LLC, and as the one making decisions for that LLC, they’re going to look at your credit. Now, if you want to get a corporation, doesn’t have to be an LLC, but a corporation and use that business to buy property, you can, but you need to usually show a track record of that corporation making real estate payments. So we can talk about that more. If you want to submit your question, I’ll get into how that works. It’s something that I do myself. So I own C corporations and S corporations, and I can buy real estate in the name of the corporation, but only when I can show a track record that those corporations have owned real estate have been making the payments. That’s sort of how you develop credit for a corporation. But it doesn’t work the same as a FICO score, which is what most of us are used to when it comes to understanding how a company looks at credit, because that’s how they do it personally.

David:
Thank you for that, though. All right. Are these questions resonating with you? Have you also thought, “Man, I wish I could avoid having to use my own credit,” or, “I want to buy more properties in the name of an LLC, because it’s safer”? Have you wondered what you should do to scale faster? Well, if you have questions that are similar, please go to the comments and tell me what you’re thinking. Leave a comment below and let me know what you need to think about, and don’t forget to subscribe to this channel. So take a quick second while you’re listening, get your finger out, stretch it a little bit. Hit the like button and hit the share button, and tell somebody about this podcast, and then subscribe to it, because we want you to get notified every time one of these Seeing Greene episodes comes out.

Pedro:
Hi David, this is Pedro. It was great meeting you at the BPCON2021. I have a question regarding the BRRRR strategy. So currently I have a house hack in Long Beach, California, and I also have single-family BRRRR rental in the Kansas City market. I’m now looking to buy a fiveplex in Kansas City as well. For the single-family BRRRR, I did the rehab in a way that would put my property in a higher set of comps so I could get a higher ARV, therefore getting more money during the cash out refi process. However, I know that as I’m getting to the fiveplex space, I’m going to be relying on commercial lending, and therefore they’re going to be looking at the net operating income. Therefore, I know that in order to get a better appraisal, I need to either increase my rental income or decrease my expenses or do a combination of both. Therefore, I wanted to get your thoughts on what’s the best way to BRRRR a property that relies on commercial lending for the refi process. Thank you, and have a great day.

David:
All right, Pedro, thank you for that. I totally remember meeting you at BPCON. I believe we spoke a couple times, and you’re one of those people that has the “Whatever it takes, I’m going to get it done” attitude. So I love that. You also brought up a great point that I want to highlight here. When you’re using the BRRRR method, what you’re really doing is starting at the end and working backwards. What you’re trying to do is make a property worth as much as you can so that you can refinance it so that you can put a renter in there. And in order to do that, you have to rehab it. And in order to have that, you have to buy it. So even though we describe BRRRR and the steps you take, you actually start with the end in mind and develop a strategy backwards from there.

David:
Now, the common way we describe BRRRR is for residential property based on comparable sales, and the fastest way to improve the value of a residential property is to improve its condition, so the rehab is typically where that happens. But you bring up a very good point. If it’s a commercial property, they may be looking at comps, but they may be looking at the NOI, the net operating income, and they may be looking at some combination of the two. So what I would say is you need to talk to your lender before you do this. If it’s us, talk to us, if it’s another lender, talk to them. But guys, everybody who’s hearing this, please hear me say this. Pedro, I love that you’re asking the question. You’re just asking it to the wrong person.

David:
All you have to do is go to the bank or the lender or the broker or whoever that’s going to refinance it and say, “David, I want to refinance my five-unit property. How can I increase the value of it?” And then we’re going to look at the different people that we’re going to broker your loan to, and we’re going to say, “Well, this one’s going to use comparable sales, and this one’s going to use net operating income. Which one of those do you have the most control over?” And you would say, “Well, it’s already pretty nice. I don’t think I can improve the condition. And there’s no comps around that are actually going to be much higher than this one, so I could probably improve the net operating income by jacking up the rents.” We’d say, “Okay. If you could get the rents up to this amount, this is how much they borrow,” and then you have your strategy.

David:
And it might work the other way, where you can’t move up rents, but there’s a lot of comparables that are priced higher because you got to at a good price. Then you know how to move forward. So I’m using this as an example for everyone. When you want to BRRRR, start with knowing what’s going to affect the value. The lender who’s going to be doing the refinance is going to be the one who understands how that works. So you want to talk to your representative, whether it’s a direct lender or it’s a broker like us that finds you one. Ask them, “Hey, which way should I go,” and then develop your strategy based off of what they’ve said. If you don’t like what they say, well then look for another loan officer, another lender, another whatever person that’s going to finance this, and create a different strategy. But someone like you, Pedro, who’s got the attitude you have, I have zero doubts you’re going to make it work. Just find the right lender, talk to them, and they’ll set you straight.

Dominic:
Hey, David. Thank you so much for taking my question. I currently do not have any rental properties and I’m looking to get my first unit, which is going to be a two to four-unit small multifamily. I want to use either a NACA loan, which Tony Robinson talked about on the recent Rookie Reply podcast, or an FHA loan. And from there, what I want to do is add value to it, kind of BRRRR, but I don’t want to take my money back out. I always want to transfer the loan from either a NACO or an FHA to a conventional, so that way I don’t have to have the owner occupancy restrictions of those loans over my head, and have a little bit more flexibility with it.

Dominic:
So I guess my question for you is this. I know what I just said, it’s simple in nature, but it’s not going to be easy. But because it seems so simple, I feel like I’m missing something. My specific question is am I off-base here? Am I missing something? And I guess my follow-up question would be how do you navigate real estate knowing that there’s a lot of simple concepts that are very powerful, even though they’re not going to be easy in practicality? How do you know that you’re still on the right track and not oversimplifying something? Hopefully that makes sense. Thank you so much, David.

David:
All right. Thank you, Dominic. I really like this question. Here’s where I want to start. Most of the strategies that you hear described on how to scale with real estate, if you really think about it, almost all of them are based on the financing of real estate. The BRRRR strategy and everything that’s involved is all about how you get your capital back out based on the fact that financing is in your benefit. If the property’s worth more, you can refinance it. You’re just capitalizing on the power of a refinance. House hacking is capitalizing on the power of a primary residence loan to buy property that will still generate income. Most strategies you hear about are based on financing. So you’re asking the right question, because you’re talking about financing.

David:
Now, what you said was “I want to use an FHA loan,” or I believe you said a NACA loan, “to get into a house, but then I want to refinance it into a different loan so that I can use that FHA loan again to buy the next property.” So let’s start with that. There’s several kinds of loans, but I just want to give a broad overview of what you’re looking at. You’ve got government loans and then you’ve got non-government loans. Government loans are typically VA, USDA, FHA, and then just conventional. And when you hear us say Fannie Mae or Freddie Mac, what we’re describing when we say that are companies that sort of ensure loans that… These companies have partnered with the government so that once they give you the loan, Fannie Mae or Freddie Mac will buy it from whoever gave it to you so that that company gets more money. They can go give another loan out. That’s how that works.

David:
And they have tighter guidelines for those loans than they do for non-government loans, but you typically get a benefit. An FHA loan is a very low down payment with the very low credit score. A VA loan available to veterans could be no down payment and no PMI. The Fannie Mae Freddie Mac loans typically have the best interest rates. That’s the benefit of those loans. But then you get into the space where you don’t qualify those anymore, and you’ve got jumbo loans, you have nonconforming loans, you have debt-service coverage ratio. You’ve got all these different types of options. And then I guess the third one could be credit unions and savings and loans institutions, typically what we call portfolio loans. So that’s banks or lending institutions that lend and keep the deal on their own books. They don’t go sell it to anyone else. So when it comes to your specific situation, you’re asking, “If it’s that simple, why isn’t it easy?”

David:
It could be easy. If you bought a house with an FHA loan, you put 3.5% down, and you wanted to refinance out of that so that you could use another FHA loan, that wouldn’t be too hard. There’s conventional loans that you could refinance into where you put 5% down. So let’s say you buy a $500,000 house, and you put down 3.5%. So that would be $17,500, and then you want to refinance into a conventional loan that needs 5% down. Well, that would be 25,000. As long as you have $25,000 of equity in that deal, plus enough to cover your closing costs, you can do that. So you walked in with 17,500. If you gain another 20 or 30,000 in the year, you would have enough at that point to refinance into a conventional loan. You could buy another house with an FHA loan. But you might not have to.

David:
FHA loans are not the only loans you can use to buy a primary residence. There are conventional loans with 5% down. Now, right now, they’re not able to used for multifamily, in most cases. Those are for single-family residentials, because the government guidelines shift a little bit, but still, you can just buy another single-family house with another 5% down loan the next year and not even have to worry about refinancing. Then the year after that, you can do the same thing again. That strategy is simple and easy. And that is why I say every single listener of this podcast, every single real estate investor, assuming they can manage a property or pay someone else to do it and have the funds to do it, should buy a primary residence every year and house hack it.

David:
You should go in for 3.5% to 5% down. You buy in the best neighborhood, the best area that you can. You live there. You rent out parts of the home to other people. There’s tons of ways to do it. You do it with a duplex and a triplex and a fourplex. You do it with a basement. You do it with an ADU. You do it with two houses on one lot. You rent out the rooms of the house. You buy the house, you put up some walls, and you make it into separate spaces. There’s lots of ways you can do that, but it is simple and it is relatively easy. It’s just not convenient to have to share your house or share your space or whatever, but there’s ways of doing it that you don’t have to share the space. I house hack, and I don’t have to share the space.

David:
I just take a portion of the property, I wall it off. I make sure it has its own bathroom and its own little kitchen area and its own bedroom and that it has a separate entrance, and I never would ever have to see those tenants. And I can do that any time I want, so I know everybody else can do it too. Everything in addition to that is what gets a little more complicated. That’s when you’re chasing after really good deals with tons of equity where there’s a big rehab. That’s where it becomes a little more complicated and not easy. But Dominic, just start with what I said. Buy a house every year and house hack it. And then in addition to that, if you want to buy out of state, if you want to do the BRRRR method, if you want to buy commercial property, you have all these options that will become known to you that you don’t have to jump into right away.

David:
Just do those in addition to the meat and potatoes that I described. And if you do it the way I’m saying, it won’t be hard. It won’t be complicated. It won’t be as risky. You’ll be paying yourself instead of a landlord. You’ll benefit in so many ways. This the best strategy. Everyone should be doing it, and everything else in my opinion should just be considered supplemental. All right, I want to thank all of the people who called in or who left a video message for me today. I appreciate you. We got some really good stuff. We got to hear from Dominic there, who had a question about “This real estate thing seems like it should be harder than a really is. Am I missing something?” We had John, who’s trying to figure out if he should raise money or if he should sell a property and buy something else.

David:
We had several other people that came in here, and they had questions that I thought were really, really good that I hope as you listen to it, you both learned something and you had your eyes opened to how you can make a strategy work. The goal of this is not to overwhelm you with information. It’s to equip you with the information that you need to take action, start buying real estate, and start building wealth. I am really, really glad I get to be the person who walks through this with you, who gets to experience this with you, and who gets to teach you, a lot of the time from my mistakes, in what I think you should do. If you’d like to reach out to me, I’m @DavidGreene24 on all social media. Send me a DM. We can talk about loans. We can talk about real estate representation. We can talk about consulting. We can talk about a lot of the other stuff that I have going on that might be able help you.

David:
And if you’re not on social media, just send me a message through BiggerPockets. I check that. I have one of my team members check that sometimes. We want to make sure that we get in touch with you, because helping you build wealth is what BiggerPockets is all about. Please consider sharing this show with anybody else that you know that’s into real estate and might have fears about it. The more that they know, the less that they will worry. And make sure you leave me a comment on YouTube, and tell me what do you think about this show and what would you like to see more of. And then lastly, I want to talk to you, so go to biggerpockets.com/david and submit your video questions so you can be on the podcast. I can help you, and all of our other listeners can benefit as well. Thank you very much for listening. If you’ve got some time, please check out another one of our videos or podcasts, and I will see you on the next one.

Question: What would you say is the latest craze in real estate investing?  The thing that everyone is talking about and wanting to learn more about?

If you ask me, the term “short-term rentals” comes to mind. At the most recent BPCon, the short-term rental breakout session was not just a full house. It was standing room only. People were packed wall to wall, even with investors standing outside the conference room listening in. 

So why are so many people interested in short-term rentals? Well, odds are that even if you do not own a short-term rental, you have likely stayed at one before. Whether listed through Airbnb, VRBO, or other similar sites, many investors see significantly higher cash flow by turning a traditional property into a short-term rental.  Also, there can be an added perk if the investor can get some personal enjoyment out of the short-term rental property as well.  

It is not uncommon for us to see a property make two to three times the cash flow when changing from a long-term rental to a short-term rental. With the higher cash flow comes the need for good tax planning. Why? Because how much of it you get to keep is more important than how much money you make! So let’s go over how to minimize taxes from your short-term rental investments. 

Short-term rentals and taxes

To start, we need to first define what a short-term rental is when it comes to taxes.  Many investors are under the impression that just because they list their properties on a platform like VRBO or Airbnb, they are considered short-term rentals. That is a mistake.

For tax purposes, a rental is not defined by where it is listed but by the number of days that a property is available for rent, as well as what type of services are offered alongside the rental. Generally speaking, if the average number of rental days per guest is seven days or less for the year, then the property is considered a short-term rental for tax purposes.

If the average guest stay is longer than seven days, that property will still likely be treated the same way as a long-term rental even though it might be advertised as a short-term property. Rentals, where hotel-type services are offered (like a bed & breakfast), are generally treated as short-term rentals. 

One important thing to remember is that short-term rentals, like long-term rentals, are typically taxed at the investor’s highest ordinary income tax rate. So if you are an investor who is in the 35% tax bracket for your W-2 and other income, any taxable rental income is added on top and also subject to this tax rate.

Strategies for reducing taxes on short term rentals

Since short-term rentals often create high cash flow, it is essential to make sure that you are using the appropriate short-term rental strategies throughout the year to reduce taxes on this source of income.

Maximize your tax deductions

 Maximizing your tax deductions is the first step in reducing your taxes on your short-term rentals. As an investor, you may have frequent trips to your short-term rental to set up, stage, or even manage the properties. Make sure to document your trips so that you can write those off against your rental income at tax time. Travel to short-term rentals is tax deductible against rental income, just like travel for any other type of real estate investing. The key is to make sure you have documentation to prove the reason for those trips. Let’s go over an example of just how powerful this can be.

Let’s say James owns a few short-term rentals in a lakefront community just two hours away from his home. He purchased a large truck that he used primarily to rehab, stage, and manage the short-term rentals. 

Since the car was primarily for business use and weighed more than 6, 000 lbs, James was able to deduct the entire purchase price of the truck. By writing off close to $30k on that truck, James was able to lower the taxes on his short-term rentals and save close to $10k in taxes. Depreciation is based on the truck’s purchase price, so James was able to create a significant write-off even though he financed part of that truck purchase.

Shift your income

Income shifting is another way to maximize tax savings on short-term rental income. Consider paying family or friends who are helping you out with your short-term rentals to shift income and save on taxes.

James had a nephew who was still in college that was interested in getting into real estate. James hired his nephew to help with the rehab and repairs to get the short-term rentals ready. The $8,000 James paid his nephew was tax deductible and saved James another $2,400 in taxes.  Most of the tax-saving short-term rental strategies traditionally used for long-term rentals are the same ones available to short-term rental investors. 

Take advantage of depreciation

An investor may often have higher start-up costs with short-term rentals. Sometimes you may need to purchase furniture, fixtures, and appliances. Whether buying these as brand-new items or buying used items, most of these items may currently be eligible for bonus depreciation. This means that instead of depreciating the cost of these items over multiple years, you may be able to take the full depreciation in the first year.

For example, if James spent $6,000 on appliances, furniture, and a kayak for his short-term rental on the lake, that can result in a $6,000 deduction immediately in the first year.  It is important to keep itemized listings of the items you spend money on. Supplies like towels, bedding, and toilet paper are all tax-deductible expenses. Those small amounts can add up to some substantial tax savings.

Track your expenses

Tracking expenses for short-term rentals is just like any other rental property. If you have multiple short-term rentals, track the income and expenses by property. We have already touched on travel, furnishings, and income shifting.

Don’t forget the other potential tax deductions such as business meals, eligible home office, or related educational expenses. Since short-term rentals can be very profitable, it is extremely important to make sure you capture all of your expenses to offset the taxes associated with that income.  

Know the tax benefits

Investing in short-term rentals can also come with some great tax benefits. Some of those tax benefits may even be better than those from investments in regular long-term rental properties. 

For those in the long-term rental space, you probably already know some of the restrictions concerning the passive activity loss rules for higher-income investors. In short, if your adjusted gross income is over $150,000, then any rental losses from long-term rental properties typically can only offset income from other passive activities. When there is an excess loss, those losses are not used to offset taxes from your W-2 income. The losses are instead carried forward into future years to offset future passive income.

However, an investor who can claim real estate professional status would then be able to use the net losses from the long-term rentals to reduce taxes from W-2 and other income. For investors who work full-time, obtaining real estate professional status is often tough to achieve. One of the main hurdles is that the investor must spend more time in real estate than their job.

So for someone working 2,000 hours a year at a job, they would need to spend more than 2,000 hours that year in real estate as well. Real estate professional status is often difficult for investors who are still working full time. This means the excess rental losses are not as helpful to offset taxes from W-2 or other non-passive income. When it comes to short-term rentals, though, the good news is that it is treated differently than long-term rentals for tax purposes.

One of the perks of investing in short-term rentals is that the investor’s ability to use excess rental losses from the short-term rentals to offset taxes from W-2 and other income is a little easier to achieve. This means that if you’re operating in the short-term rental space, you do not need to be a real estate professional to be able to potentially use rental losses from those properties to offset taxes from W-2 and other income. 

However, you will still need to show that you are materially participating in your short-term rentals. So what exactly does it mean to materially participate in your short-term rentals? There are seven tests, and you only need to meet one of them.

Tax benefit qualifications to know

Out of the seven possible qualifications, here are the top three that are most commonly used:

1. Participate for more than 500 hours during the year on the short-term rentals
2. Participate for more than 100 hours in the short-term rentals, and no one else incurred more time than you
3. Participate in substantially all of the activities in the short-term rentals where your participation exceeds the combined time of all other individuals

Material participation time can include tasks such as staging and managing the property, dealing with guests, repairing, cleaning, restocking the property, to name a few. 

Once you meet one of the material participation tests for your short-term rental, then any net tax losses may be deductible in the current tax year and thus help offset taxes from W-2 income. If you are an investor who owns multiple short-term rentals, you may be able to combine your hours across all of your short-term rentals as well. 

Let’s go over a quick example of how this strategy works: Ashley works full-time at a tech company. She decides to buy a property in a nearby ski area and rent it out as a short-term rental. Even though she had to pay a slight premium for the property and incur some start-up costs to get the property ready, it had phenomenal cash flow in the first year.

Ashley loves connecting with her guests and sharing her insights to make their stay a memorable experience. By working proactively with her tax advisor, she decided to be very involved in managing her short-term rentals. She documents her hours during the year to ensure she meets one of the material participation tests. Her tax advisors assisted her with maximizing her tax deductions by writing off the business use of her car, computer, and home office.

The first year she owned the property, she decided to obtain a cost segregation study to accelerate the depreciation deduction for her short-term rental. With proactive tax planning, not only did Ashley not have to pay taxes on all of that cash flow she received from the property, but she also created a significant net loss of $20,000 for tax purposes.

Since she worked during the year to ensure that she met the martial participation hours with respect to this property, Ashley was able to use the $20,000 loss from the short-term rental to reduce some of her taxes from her W-2 income at the tech company. Not only did Ashley receive significant cash flow from the property, but she also paid no current taxes on that cash flow and instead used additional losses to reduce taxes from her W-2 income.  

Dreading tax season?

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

Final thoughts on tax benefits for short-term rental investors

As you can see, there can be some significant tax benefits to investing in short-term rentals. It is important to remember that rules and regulations can change quickly regarding short-term real estate investing.

Before investing in a short-term rental, it can make sense to analyze the deal to see how it would otherwise perform as a long-term or mid-term rental. If the city were to enact new short-term rental restrictions or changes, you want to ensure that you have alternative investment strategies to keep the property performing well. 

Once you have decided that short-term rental investing is for you, make sure to work with your tax advisor and plan proactively during the year so that you can keep more of that excellent cash flow! 

Ashley:
This is Real Estate Rookie, episode 166.

James:
Yeah. There’s all these signs that you can do as you’re working with your team members. If a contractor is trying to charge you for that or they won’t give you pricing breakdown, probably not your guys. That’s a sign, stay clear from that person. You need to work off facts.

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

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the stories, the motivation, the inspiration to get you started as a real estate investor, or keep you going if you feel like stopping. Ash, what is going on today?

Ashley:
Today, we are doing part two of rehab and construction cost series with James Dainard. If you guys haven’t listened to that, go and listen to that episode released on Wednesday. We are here now for part two. Tony, do you want to recap what part one was about?

Tony:
Yeah. Part one was one of my favorite episodes we’ve done so far. We’ve had some amazing guests, but James really gave a master class on estimating your rehab costs, on building your team, how to find contractors, how to find general contractors, how to vet them, how to put your scope of work together, how to give pricing estimates. Just everything you need to know about the first step of getting your rehab done.
There’s actually three phases that we’re going to talk about. Phase one was everything you do before you get to the property, so that’s like the prep work that we just talked about. In today’s episode, we’re going to talk about steps two and three, which is what you do when you’re doing your first initial walkthrough, and then what happens after you actually close on the deal.

Ashley:
James, welcome back to the show.

James:
Thanks again for having me. I’m surprised I got invited back.

Ashley:
We tried to get somebody else to fill in to cover the second part of the series, but no one would do it.

James:
That’s usually my role. I’m the backup plan.

Ashley:
Yeah. Okay, well, let’s jump right into it. What are the things that … You’re going to a property. You had said in the previous episode, you want to be 99% sure that this is a property you would like to put an offer in. What do you bring? Who do you bring with you when you’re going to look at a property?

James:
Yeah. Especially right now with the market as hot as it is, you have to be prepared and be able to write a very strong offer to secure that good deal. Anytime that we’re going to these initial walkthroughs, we want to make sure we’re prepared. We can write a no inspection offer and then really get aggressive to lock it down.
The things that we bring to every walkthrough that I go to is, the first thing is a camera. Document what you’re seeing because that’s going to really … You can go through a house, and as you look through photos, you can revisit your floor plans you might need to fix. You can notate, as you’re doing your budget, what materials you can keep and what you need to get rid of for plans. We always bring a camera. We bring a walkthrough sheet that we created internally for our company and for our project managers, and that just really lists out, itemize every little piece that needs to be done in that project. It starts with roof, windows, front door, interior, so it’s all documented out.
The reason I still, even to this day, use that sheet is because it’s really easy to miss something as you’re walking through a house. Even when we did our walkthrough, Ashley, I went through this whole house with you. I went right by something and then luckily, you go, “Hey, “What’s inside the closet?” Oh my god. I didn’t check. I open the closet and sure enough, there was ducting and it was going to cost us two grand more in moving things.
By having that sheet, if I would have gone through my sheet properly, I can say, “HVAC and layout. Do I need to change any of my HVAC route?” and lay it down. We have a walkthrough sheet that takes you from A to Z. We get to count out how many windows, how much square footage we need to replace, and it gives us a template to give that a good format. In addition to, by writing in all these items, like if I’m writing down 14 windows, exterior door, a front door, and a slider, I know what those costs are.
As I’m getting my bids back from the contractor, I could be very specific with him, saying, “Hey, you quoted these windows at this,” and I can break down the price per window because I know exactly what the count is. It’s harder to do that if I go, “Wait. Did I have 10 windows or 14 windows? I can’t remember.” A lot of times, the contractor’s not going to notate that, so it gives me a good blueprint, as I’m not only just creating my budget, but double-checking the contractor’s bids down the road.
I also bring a flashlight everywhere because you need to stick your head in areas that are dark. You need to check your crawlspaces. You need to check your attics. I like to bring a tape measure as well because if you do have to create value and reconfigure plans, you don’t want to just say, “Well, I’m going to stick a bathroom here,” and not really take a step back and look at the space to see if it actually even fits, so all these things you want to bring with you.
If you’re a newer investor, and this is your first purchase, and you haven’t done this before, what I used to do when I was brand new in the business is I would bring a home inspector with me just to notate. You don’t have to pay for a full inspection report. Basically, it’s like a walkthrough inspection where it’s just a bullet list rather than a full report because they’re going to help you catch other things that you may miss.
What I think you should always bring with you is your broker, who’s going to be selling the house for you down the road, so they can give you feedback on what makes it more marketable and also, a general contractor to come through to get your estimate on the house. Once you’ve been doing this for a while … Again, we’ve done like over 3,000 homes, we can walk through, and notate, and know our costs pretty well, so we don’t bring a general every time.
My first probably 30 homes I bought, I always brought my general with me to get a quote because he was educating me as I’m doing my walkthrough going, “Hey, we can’t take this wall out.” Or, “We can take this wall out, and here’s why,” so be prepared on your walkthroughs because the way the market’s ripping, you have to give them a solid, no BS offer at that point.

Tony:
James, I want to dig in a little bit. You said you have this walkthrough sheet. Is the walkthrough sheet separate from your scope of work or are those two documents one and the same? If they are different, what exactly is that walkthrough sheet, if you can give us more insight?

James:
That’s a great question. Our budget sheet, how we created it, it’s on Excel format to where we have to input. We have it broken down, like we talked about in the last episode, by labor and material costs, and so we can narrow our budget way down. The walkthrough sheet, because if we are doing our walkthrough with, let’s say it’s an off-market deal, private sale and I’m walking around with my laptop trying to fill this whole thing in, it can take a while and it gets a little awkward. Plus, your deal finder might not like it because you’re in the house too long.
What the purpose of the walkthrough sheet, is actually just to take your notes so then, when we get it back to the office, I can input it into my budget sheet and refine everything. Also, what I like to do is it gives me a general … It’s basically my bullet point list with different types of items we need to do. As I’m trying to make the deal work or invent that return by putting the right plan in play, I have the counts, I have the photos. I have all my details of what I need to do, maybe how old the furnace is, how many doors I need to put in. Then I can go to my comps when I’m at my office and use that sheet to reference what the materials are in the comps, and then start playing around with that plan.
The purpose of the walkthrough sheet is to be efficient. You can be quick. It helps you not miss anything and also, it gives you the physical counts of everything. We’re writing down door counts, window counts, large kitchen, small kitchen. We’re making all these notes on that sheet.

Ashley:
Yeah. I actually just ran and disappeared for a minute to actually get the sheet that I have from when I did the walkthrough of James’ and I flip. On it, it goes, I’ll give you guys an example. For windows, how many? Are they vinyl, metal, wood? What is the estimated age of the windows? Then, what condition are they? You just circle one, two, three, four, or five. That goes through the whole thing. It goes for the plumbing. Is it galvanized, copper, PEX, approximate age? Then, condition of that too.
James, while we’re talking about this, I have like a million notes on to here, on to this sheet, but there were some things that you knew from learning and doing different walkthroughs that helped you actually go and do the walkthrough accurately and help with your budgeting. For example, one of those things was telling if the electrical outlets were grounded or not. Just like this little thing that you don’t need to be an electrician to know, but there’s things you can learn on YouTube or from contractors that will help you even fine-tune your budget more.

James:
Yeah. There’s all sorts of little cheap, and tricks you can do. Actually I did a video for BiggerPockets called Red Flags for Flips. It’s on the YouTube channel, and I talk about … You can visually see those a little bit more in the video, but yeah, there’s all these little tricks and tips that we’ve learned over the years. Then part of how we’ve learned them is by me losing money. I learned a lot of this stuff early. Our goal is to make sure that people don’t go through those same hard lessons as us. I’m just kind of thickheaded though. “Yeah, I’m going to go buy that,” and then I learn later. By having it on that sheet, going, checking electrical, that reminds me to go, “Hey, what kind of outlets do I have in there?”
There’s different things you can do. As we’re walking through a house, I might pop a plate off an outlet if it’s a house built in a certain era. That’s also why I bring the tax record to the walkthrough. I also have my tax record because it’s telling me square footage, it’s telling me year built. Based on the year built, that’s going to tell me what the mechanicals are in the house, which are going to tell me a big part of my budget. If it’s in the Pacific Northwest, the homes of the 1960s are in the middle, so they can have old wiring or good wiring, so trips that we’re doing is we’re looking at the outlets. If there’s only two prongs in there, that means it’s typically not grounded, which is going to also typically mean we need a full rewire.
We’re looking for, does it have two prongs or three prongs? Are the outlets upside down? If they’re upside down, that’s a way for them to self-ground or get the reverse polarity out of there. That’s usually a sign going, “Hey, we’re probably going to have to rewire this house.” We’re going to look at the panel to see if there’s a shutoff. There’s all these little things that you can see that will tell you whether your mechanicals are old, or if you go to your plumbing. If you have three valves, a lot of times in your plumbing, that’s the setup for an old galvanized system. Whereas, if I have one that’s typically going to be copper or PEX from there on, because that’s a new type of plumbing kind of install. There’s all these little hints and signs that you can notate.
That’s also why you want to bring your camera. Because as you’re shooting camera pictures, you can go, “Wait. Did I need a full replumb? Let me go back and look at that valve. Let me go back and look at where that toilet location is, or where that electrical switch is.” If I’m walking into a house, and typically the outlets are every eight inches off the ground, or all my switches are normal, then usually the wiring’s going to be of new code.
If I go into a kitchen and there’s no outlets in the kitchen backsplash, that means it was built in old code, at that point. It’s not grounded, there’s no GFCI. As you do your list, it reminds you to look at those things. Then as you’re looking at them, you want to look for those little signs of … Not signs of neglect, but signs of datedness in mechanicals. See if there’s an oil tank on the property. That means your HVAC and ducting system’s probably going to need to be updated if you’re not converting or changing out to oil. There’s all these things that you can look for.

Tony:
James, your wealth of knowledge when it comes to what to look for … I can tell that you’ve done this. I mean, you do anything because mentioned in the first episode that you’ve been involved in 3,000 different transactions. When you do anything 3,000 times, you’re going to know it like the back of your hand. I want to remind everyone that’s listening that just because you’re not as well-versed as James in everything that he just outlined, that doesn’t mean you still can’t go out there and make some things happen.
Like he said, a lot of this knowledge he gained was through trial and error. It’s not necessarily that you have to be able to look at piping and know whether it’s galvanized, some other material. What James is trying to communicate to the listeners, to all of you, is that there are just certain things to look out for, but don’t feel overwhelmed if you don’t have the same level of knowledge and information James has.
I just want to recap, just like really quickly, James, some of the things you said to bring with you. You said a camera, your walkthrough sheet, flashlight, tape measure. Then from a people side, if you can, maybe bring a home inspector, a broker, and then a GC. One last question on the GC piece, James. You said you had a GC come along for your first 30 flips or so. Were you paying that GC for his time? Or what kind of agreements did you guys have for him or her to follow along with you on those first few flips?

James:
No. I never paid the general because that’s part of business. If someone asked me, I’d be like, “Well, are you a home inspector?” Because as a broker, if a client wants to go look at a property and I take them and they don’t like it, we leave, I’m not going to bill them for my time. That’s just a potential for me to earn a sale at that. Same with the general. You’re going to have to estimate because you’re trying to get the work.
If some guy asked me for $200 to go walk it, A, I would look at what’s going on in my own business practices, or am I driving people nuts at that point? Then maybe I need to fix that. Or B, that guy’s going to nickel and dime me over everything. If he wants $200 to do a walkthrough, what’s he going to want when he has to move a door an inch because he didn’t really calculate it right? He’s just not the right person that would fit inside my demographic.
Everybody on my team, I want us to all be together with the same mindset, that we’re all here to help each other and the angle was to get the project done, but I definitely wouldn’t pay. A lot of reasons I know a lot of this stuff, again, is I did a lot of things wrong in my early 20s. I would go out and find the deal first, buy it, and then try to figure it out, and by being very, very inefficient … Actually, the best thing I ever learned in construction was losing a lot of money on a house. Because I was there a lot and I got to see.
At the very end, I was like, “Okay. Well, that was a very expensive college for flipping homes.” I did everything wrong on that house that I could have possibly done wrong, and I had to create my system off of that. Like, “Okay. Don’t do it this way. Don’t do it this way. Don’t do it this way,” and that’s how you learn. If you don’t know these things, just hire the right team members. Hire the right contractor, work with the right broker that really understands your business. They can help you facilitate your plan, and then that’s where you can feel a lot more comfortable at your walkthroughs.

Ashley:
James, going back to the piece about paying a contractor to come out for a walkthrough, do you think because you are experienced and you have that credibility that you are going there 99% sure you’re going to make an offer on this property, that it may be different for a rookie investor who’s never purchased a property and is maybe going out and looking at their first few houses and they don’t have that experience? Do you think it’s a different scenario then that they should be offering or could be offering to pay a contractor?

James:
If one of my clients asks if they should do that, I would tell them a hard no on that. I just might be going out there to make 200 bucks for an hour or $300. I think you’re talking to the wrong people if they’re asking for that. You don’t need pull to have someone come out. Honestly, if I put myself in the contractor’s shoes and someone called me and says, “Hey, I don’t know what I’m doing. Will you come look at this house for me?” I’m going to go, “Okay. I got a good margin construction job I can do,” at that point.
They should want to come out there. Like, “Oh, you need a lot of help? That’s okay. I can help you.” I would think that’s a good for the contractor. If they’re working for someone that doesn’t know what they’re doing, they have a lot more opportunity to create margins there. Most guys should want to come do the scope of work.
Again, as an investor, you are also providing income for people. It’s not just about the contractor. If you’re working with a broker … This is why you should always pay your brokers. Don’t try to get the best deal on your commission. Pay them what they’re supposed to get paid, but set expectations for them to help you. As part of our brokerage, we will bring them out generals if they need it because we want to make sure that they’re doing well, and that’s provided in our service.
If you have the right team behind you, you’re not going to need to pay that guy. Anybody that’s creating revenue off of your business, make them work, make them help you, and they’ll bring out additional people. If one of my clients called me and says, “I know this is no inspection, but I want to do an inspection for buyer purposes only,” I’m going to refer him three to four home inspectors. Or he says, “I really want this deal, but I don’t have a general,” we’re going to refer on people to go out, and they’ll get an estimate, and they’re not going to charge.
You don’t need to pay the contractor, but the people that you are paying or that are making money off you, put them to work. They’ll be able to help you get the people out there as well. That’s a problem that the broker, a lot of times, has to solve. The client wants to buy this, but they don’t know how to do it, so they can help them do it. You can earn your commission at that point. Use your team, and then you should be able to get them out. Don’t let people charge you for that stuff.
I would say, instead of paying a contractor to come out and go to your job, give up your time and go offer to intern for a developer, or a builder, or a flipper to where you can help them by just going to the site and seeing what’s going on. You’ll end up learning way more that way, not spending your money, and actually getting hands-on experience than giving some guy money to go look at a house.

Ashley:
Thank you for sharing your viewpoint on that. Because we do talk a lot on here about how, if you are a new investor, you can’t get a contractor to come out because you’re going to look at so many different properties, to offer them some money and incentive, but I think you give a very valid point that maybe they’re not the right contractor if they’re not going to come out and look at projects for you for free.

James:
Yeah. There’s all these signs that you can do as you’re working with your team members. If a contractor is trying to charge you for that or they won’t give you pricing breakdown, probably not your guys. That’s a sign, stay clear from that person. You need to work off facts. If a broker can’t tell you where the value-add is, probably not the right broker. It doesn’t mean they’re a bad broker, but they’re not an investor broker. As you’re interviewing your team, look for these signs to make sure they fit on your bench. If it doesn’t, move on to the next person. Keep calling, keep checking for those people.

Tony:
James, you’ve given us some amazing information through these first two phases. Again, the first phase is what to do when you’re initially looking at the property before you get onsite. We just talked about what to do when you’re actually walking through the property. The last and final phase here is, what happens after you do your analysis, you walk the property, everything looks good? Now you got it under contract. Now it’s yours. Now you own this property. I’m curious what your thoughts are, but Ashley, I want to hear your reaction to that piece first.

Ashley:
Well, first I just wanted to say, James we’re out of time, so we’re actually going to bring you back for a third episode. No, I’m just kidding. I’m joking

Tony:
Two episodes back for every guest.

Ashley:
Yeah. Let’s go into getting the deal. When I came out,

James:
I feel like I’m slowly becoming your intern.

Ashley:
What you’re slowly doing … When I came out and we looked at the first property, we got the property under contract. What happens from there? That’s the piece that you and I are working on right now for our flip is okay, scheduling the contractors, putting together the contracts, the final scope of work. Can you walk us through that process?

James:
After we secure the deal and we get ready for closing, the next steps that we always take is we’re doing one last final revision of our budget before estimating, because the first thing is we don’t want to have a contractor go out there with an unprepared budget. That’s how they beat us up on our numbers, and then we’re going to have a bunch of change orders, and we’re starting on the wrong foot.
The second thing that’s important about making sure your budget’s revised correctly is, at least when I do it and I know a lot of investors do, is they’re getting the construction loan with their hard money or soft money lenders. If your budget’s incorrect, it can cause liquidity problems. If you’re 20% off on your budget and you had that rolled into your loan, that means you’re going to have to come up with that additional capital out-of-pocket, which can mess up your returns down the road, so you want to make sure budget is finalized and prepared that way.
Then from there, we always end up getting at least two quotes from generals. We secure the deal. We have our finalized budget. We have our finalized specs then selected because inside of the final budgeting, we’re going through the comps, figuring out what kind of allowances we need to put in to get the maximum value. Then we start bringing out contractors to estimate and confirm our budgeting.
If we get the numbers we like, and before we hire them, we end up checking their license and bond again, because you want to check that every time you hire a general. It’s not just the first time. Those things can expire, so before we hire them again, we always make sure their status is active and ready to go. We make sure they have a bond because if they don’t and we don’t investigate that, that’s going to be our problem with L&I in the city later. Then from there, we then have the contractor sign a construction contract, or the subcontractor as well. That is very fundamentally important for any investor to do that. I learned that the hard way, again. Most of this stuff that I preach is because I lost money doing it the other way.
A contractor estimate is an estimate. You can sign that and yes, it is a contract, but what it doesn’t do is outline general policies, procedures, and how things need to be completed, and inside timeframes, which is that’s, the construction contract needs to be attached to your construction quote. The reason being is because if you just sign that construction contract or quote, you’re locked into that guy, so he can lien you for properties. You’ve bought out that job with them, so the bid is to outline costs for what’s being done. The contract is set up to how you facilitate that.
Inside your construction contract when we have him them sign that, and we do not flex on that, they have to sign it. It talks about start dates, completion dates. It talks about change orders, how the change orders are handled. For example, you cannot do verbal change orders with us because that always goes bad. A contractor will say, “Hey, we opened this wall. It’s going to be about 1,000 bucks to fix the framing inside.” You get the bill, it’s 1,800 and they’re going, “Well, I said it was about 1,000,” and then you get hit for the 1,800.
In our construction contract, it says, “You have to email it with a broken down bid. It has to be signed by us,” and give it back to them. The contract really protects you and your investment against a third party that can mess it up at that point. Also, it tells them how they’re going to get paid, so it’s not all just to protect you. It also protects them. Like, “Hey, if you get this done in this timeframe, we’re going to close you out within 24 hours, and that you’ll be paid in full.” It clearly defines everything, and it allows for your project, when it’s going forward, not to get spun out of control.
We estimate it two to three times. We then review our bid. We identify which items are heavy, or not heavy, or that are maybe outside of our budget. We then talk to the contractor, see what items we can pull out for our bundle method. Then we agree to the price, we sign the construction contract from there, and then we give them their deposit.
Typically, we’re giving the general contractor different payment schedules to where … It’s referenced on the construction contract too. We’re going to give them 10% at first, 25% after demo, and then 25% from here on, and it lists out their draw schedule from there. That’s really our core process. You buy it, or you contract it, you estimate it. You go through the estimates. You figure out what you’re over on and what you’re not on. We then plug in our own bundle guys. We have them sign a construction contract, and then we put the plan in play at that point.

Tony:
You’ve got this thing down to, it’s like a science, James. I want to circle back to one thing that you mentioned because we didn’t touch on this in the first episode either. Why is it that you prefer licensed contractors over maybe just like a really skilled handyman? I know some flippers where they almost exclusively use handymen and things like that to run all of their projects and avoid general contractors. What’s your take on why one might be better than the other?

James:
Well, A, the first thing is I lost all my money when I was 24 years old because I did a flip on time and materials that turned … It went triple over and those were skilled labor guys. I learned a lot, but I lost all my money. It was the most expensive college I ever went to. There’s nothing wrong with hiring a skilled laborer, but the skilled laborer or carpenter should still be licensed. They need to be licensed and bonded.
The reason that I’d don’t hire non-licensed and bonded people is because that’s the rules and regulations in our state. I have had people … When L&I drops by a job site, and if they check their license and they’re not licensed, not only is the contractor going to get a fine, but you’re going to get a fine as well as the building owner, so you need to check with your local state and regulations at that point to figure out what the process is.
The other reason is I like to know my cost. If I’m doing time and materials for a skilled laborer, if he’s having a bad day or a slow day, or let’s say he kept running out of materials and he’s got to drive to Home Depot 10 times, that could be a problem. I’m going to have to pay for that on my hourly rate and it can cause me not really to know my numbers. As investors, it’s our responsibility to hedge against the investment, and the only way for me to do that is off fixed pricing, saying, “Hey, you’re agreeing to do it for this amount.” Then I can put it in my budget and I can move things around, so we like to fix costs.
There’s nothing else wrong with having a handyman come out or a carpenter to come do some additional items too. You can actually save a lot of money that way, rather than doing it the piecemeal. I personally only use fixed bids. I don’t like time and materials, but it also does come down to what kind of project you’re also doing. If it’s a rental property and you’re just doing a cosmetic where you’re changing out door handles, light fixtures, plumbing fixtures, maybe doing some trim repair, that’s a handyman type of job. Whereas, a lot of ones, we’re taking these things all the way down to studs and I can’t have one to two guys putting that whole house together. It will take forever and my debt costs will get out of control.

Tony:
Yeah. Well thank you for adding that clarification, James. I love the caveat you put at the end that it depends on the scope of the job that you’re doing because that definitely does play a major role.
One other follow-up question for me is, so you have this contract, do you ever find, or have you ever had an experience where maybe a contractor refused to sign or maybe ghosted you after you gave him his contract? I ask this question because it happened to me a few months ago, where I found this contractor that I liked. I gave him the contract and in there, there was one line that said if he missed the deadline more than two weeks, I would charge him, I don’t know, $50 a day or something like that. He was like, “Hey, I’m not really sure about this,” and whatever we were talking. He just stopped responding to me all together. Have you ever had that? If so, how do you handle those kind of situations?

James:
Well, I would say you dodged a bullet because if the guy was … That means he was already telling you he was going to be late.

Tony:
Yeah. Fair enough.

James:
What I always do is I do have a penalty clause in there, and then we have, hey, that you are going to … We charge a lot more. It’s 150 to $200 a day because our loan … I mean, it depends on the size of the project and the loan balance. What we also do is put a bonus in there for them. If they’re completed early, they’re getting that same credit back. If I’m saying, “You have four months to do this project, and $200 a day if you’re late,” but if they get it done early, every day they’re done early, they get the $200 bonus too.
I typically like to set up my daily rate charge is what my per diem loan basis is because then I’m just giving … It’s no extra cost to me. I’m saving on the hard money because it’s debt cost. It’s going to my contractor, which is great. He’s getting a bonus. At the same time, what’s fair is fair, and if I’m going to bonus him early, he needs to chip in from his penalties too.
Also in there, we have a clause that does state what they’re not at fault for, and that’s very important. I explain that paragraph to them. If it’s a permit issue, they get no days credited against them. We have a bullet point of things that say, “These will not be counted in the days or delays.” We had to add in a pandemic part too. If they’re out of materials and they provide us with the receipt but it’s backordered two months, that’s not their fault. We’re not going to penalize them for it.
You just have to make sure that your contract is written very clearly. Typically, from my experience, contractors don’t really read it, so I like to read it back to them, saying, “Hey, this is what this is set up for.” Majority of the time, by you offering that bonus, they’re so excited that they’re not going to care about the delays either. Also too, you guys, if you find a good general contractor and they’re doing a good job and they’re a little bit late but they did everything right and they were working their tails off the whole time, don’t charge them that late fee. Take care of those people.
I don’t nickel and dime them on those late fees, but where it does come into play is if they’re not showing up at all and if you have a conflict, that becomes a bill for them. You’re saying, “Hey, you’re 30 days late at $200 a day. That’s $6,000. What are we going to do about this?” It’s actually a way to separate from the contractor too. If they’re pushing back on that … It’s a very reasonable request. Don’t bend. Just be logical and figure out what’s a common ground to get to an agreement to have that in there.

Ashley:
This reminds me of a rental lease, going by the lease agreement and what you have in there and sticking to it, because you both signed the agreement, and using that so that there isn’t any controversy down the road. Like your clause, I love that you have things that they’re not responsible for, those what ifs. If there’s a permit issue, you’re not going to charge them, so that there’s not an issue going forward, things like that.
Once the project is complete, do you do a final walkthrough with the contractors? Do you go through and blue tape? What does that look like?

James:
Yeah. After we’ve scheduled everything out and we go through, we get the project done, the steps that we always take is … We’re really big on this because, especially on a flip, the last thing you want to do is spend time working on this project for three, four, or five months, and then rush the end to where there’s a bunch of little, small detail. You’ve already spent 99.9% of the money, and because you didn’t spend that last 1 to 2%, the house isn’t that marketable or it just has a weird feeling to it.
We spend a lot of time on that last two weeks, punching out the house and checking for quality items. What we always do is, within two weeks of being done, we start blue taping it. We do our first prelim blue tape, where it’s just getting on the bigger things that we’re seeing through. Then once it gets to almost the completion date, we have a construction clean done because if you’re also blue taping when the house is dirty, it’s still not quite as good. You’re missing things. It feels weird. We have a construction team done and then we do another blue tape.
At the same time, we use an app that’s super handy on the Apple Store. It’s called Punchlists with an S the end. It makes it very, very easy that we go through, and not only blue taping it, because contractors sometimes will just straight take your blue tape off and throw it on the ground. They’re like, “Well, maybe they won’t notice it later.” We take a photo. It goes into this report on this app, and then you can write what needs to be done next to it. Then it prints a PDF at the end that we leave on the counter for our contractors saying, “Hey, here’s all the items. Here’s a picture of it. This is what needs to be done. Initial it when you’re done,” and then we have a clean report. We do our walkthrough, go through that report and make sure everything’s been done.
At the same time as that’s going on, we always do pre-inspections before we go to sell or lease. The reason we also do it before leasing is once a tenant moves in, if something breaks right away that was maybe something easily fixable, it makes it really hard to schedule and get back there, and so it’s just not very efficient. The pre-inspection, we do our own punch list, but then the pre-inspection then punches out even more items to where we can give to the contractor. We want to have both these lists because we don’t issue final payment until all are done and all permits are signed off.

Ashley:
Who is doing that pre-inspection? Are you actually hiring a licensed inspector, or is that somebody in-house, or is that you that’s going through and doing that?

James:
No. You always want to hire a third party for that because, especially if you’re selling a flip or any property, you got to do a Form 17, you got to disclose. What I like to do is have, have a third party come in, because especially if you’re selling too, a lot of buyers are going to think, “Well, you flipped it, so everything’s right on the house.” That’s not true. Sometimes, you’re not doing things certain ways on a flip because that’s what you don’t need … You don’t technically have to do that to sell the house. You’re just going with a different plan.
Having a third party’s going to reduce your liability. It’s also going to put a new, fresh pair of eyes on it. Then also, you can provide that to your next buyer or tenant, say, “Hey, we did have a third party inspect this property.” It shows that you, as an investor, has taken time and care and that you actually care about your project, rather than just winging it. Not only does it give you a really good punch list, it also makes your end buyer or tenant feel better about you as a person too,

Ashley:
And holds your contractors accountable, so if there’s something that was in the scope of work that maybe an outlet isn’t working or something even small like that, you can go back to them and have them fix that before you actually list it.

James:
Yeah. That’s a great point because a contractor’s relationship’s like any relationship. If you’re dating somebody or you’re married to somebody, you could tell that person, all day long, the same thing and just because of how long you’ve been together, you’re like, “No. No, you’re wrong. You’re wrong.”
Then this random person goes, “Oh, here’s this fact. Look. See, this is right.” It places a mediator between you and your contractor. After some time, you can tell them until you’re blue in the face, and they’ll argue with you and do all these things, but then when you have the third party come in, they’re like, “Okay, fine. I’ll fix it,” so it helps things move forward too. They’re kind of like a counselor for the relationship with your contractor as well.

Ashley:
Or if you’re like someone like Tony that doesn’t know anything about construction, you don’t even know how to check if things are done right or wrong, then you have the inspector come in.

Tony:
Seriously. Yeah.

Ashley:
Well, James, is there anything else you wanted to add on to finalizing the walkthrough with the contractor and just closing up the property with the rehab?

James:
No. I think it’s just the best thing you can do … Because all these processes are great in theory. It’s intimidating when you’re a newer investor and people are telling you all these things. You’re like, “Okay. I’m going to do all these processes.” They’re really good steps to implement in, but still not knowing, the unknown’s the scary part. Really, what I wish I would have done, it would have saved me a lot of money, is really go find that investor in your market that you can shadow, that you can work with. Offer them services.
I have people reach out to me all the time, say, “Hey …” I had somebody that worked for me for a year and they were really good at making CAD and as-builts. They’re like, “Hey, we want to learn about construction. We want to buy our first rental property. We want to learn about apartment buildings.” We made a deal to where she got to go check on all of our sites. She would go around, take photos of all of our projects once a week for us. She would get to learn and see things as she was doing that. Also, she would do as-builts for us so she could see about floor plans and things moving around.
She did this for free for us, as long as we gave her access to information, and now she owns like … She doesn’t do this for free anymore for us. She now has it figured it out. We actually hired her now to do them. She offered service and she got to learn so much. It’s one thing, like you could read a book and go, “Okay. That’s a great concept,” but it’s about doing, and putting that motion in play.
If you’re really new and you really want to learn, I would say shadow an investor. Shadow a general contractor and really learn what they’re doing because the more you understand, the less you’re going to get taken advantage of. The more you’re going to understand your margins. You’re going to also understand how to get things done, or the cost of implementing the right plan. Like we talked about in that last show, is inventing that margin. When the market’s hard and it’s not easy to find a deal, you’ve got to put the right plan in there to make a return. By knowing these costs, the more you know, the more you can dictate, the more you can control, and the better plan you can put in play.

Ashley:
James, I think when I was out there in the fall, you had somebody that had been doing some virtual work for you for free. They were actually moving to Seattle to come work for you.

James:
Yeah. That was for wholesaling. He reached out to me. This guy, I was hyper-impressed by him because he not only reached out to me five times on social media, and I didn’t respond, he then called my office four times. Then he’s like, “I just want to learn how to wholesale. I just started doing it. I’ll make phone calls for you if you teach us.” Then he ended up moving out to Washington and yesterday, we inked his first deal.

Ashley:
That’s awesome.

James:
His first deal got done.

Tony:
That’s amazing.

Ashley:
Yeah. I was actually worried about bringing it up. You were going to be like, “Oh, actually, that didn’t work out,” so I’m glad it is working out. That’s good.

James:
His first deal. We just signed and rented a house in Lynnwood, and it’s a good one too. It’s a really good buy. Yeah, offer yourself of service. Don’t underrate … Everyone wants to get coffee. Like, “Oh, can I buy you a cup of coffee?” Or, “Can I take you to lunch?” People are busy. There’s entrepreneurs … The people you want to follow will be busy because they’re doing work. Offer them something that helps alleviate pressure points for them, and they will give it right back. They got to pick and choose who they can spend time with, and if you’re on a team, you can learn a lot of information for free if you’re working with the right investors.
Also, watch BiggerPockets. There’s a lot of really good information on there. The more you watch, the more you hear, the more repetition, the more you hear people implementing, and then not only just hearing about how they’re doing it right, but find out how they’re doing it wrong. I have thousands of nightmare remodel stories. Those are the stories you want to listen to because you want to not step in that thing or do that thing, and it will save you a lot of time down the road.

Tony:
James, maybe we’ll bring you back for a third time and just have you talk about all the things that have gone wrong for you. That might make for a good episode.

James:
Oh, it will blow your minds on the stuff I’ve seen. Everybody thinks, they’re like, “Oh, well, you’re just this investor that does all these projects so you can do whatever you want. You get the pricing.” It is the complete opposite. That just means I’m exposed to way more types of projects, which means way more problems and way more people. I’ve seen the weirdest, craziest stuff. I’ve hired contractors that had fake identities and fake businesses, like legitimate fake people and they disappear with your money. Be careful. It’s a crazy business.

Tony:
Well, James, thanks so much for bringing so much value today, brother. This was, honestly, one of my most favorite episodes. Partially because you obviously provided a ton of value, but secondarily, because I’m trying to learn how to flip more efficiently myself, so I very selfishly asked a lot of questions that I’ve been thinking of. James, if people want to get in touch with you, they want to learn more about you and what’s going on, where can they get in touch with you?

James:
Come find us. My Instagram is probably the best way for you guys to find free construction, see what we’re doing, see the crazy things we do. That is jdainflips. Then also, on our YouTube channel, ProjectRE, we release a ton of really deep dive, specific things on construction to help you guys out and keep your plans going forward.

Ashley:
Well, James, thank you so much for coming on. You guys, follow James and I on Instagram, and check out his YouTube channel to follow my first flip, as I’m flipping my first property in Seattle. Thank you guys so much for listening. I’m Ashley @wealthfromrentals. He’s Tony @tonyjrobinson on Instagram. We’ll be back on Saturday with another guest. We are all done with James Dainard. Check out what’s new on biggerpockets.com.

Ashley:
This is Real Estate Rookie episode 165.

James:
I always tell people there’s two ways you can learn construction. You’re either going to lose a lot of money and you’re going to buy that thing and you’ll figure it out the hard way. Or you can take baby steps and start interviewing people, talking to people, but also go out and start shadowing with investment companies.

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

Tony:
And welcome to the Real Estate Rookie Podcast, which is in my opinion, the best podcast on the planet for new real estate investors, because every week, twice a week, we give you the stories, the inspiration and motivation to kickstart your real estate investing career. And if you’re already investing, hopefully we’re giving you the motivation to keep going and build an even bigger, better real estate business for yourself. So what’s going on today Ashley?

Ashley:
Not much. We just got a ton of snow in Buffalo. It was a holiday yesterday, so if it wasn’t a holiday, all the kids probably would’ve had a snow, but all my friends and their kids went out skiing and snowboarding in the fresh powder and I just sat at home and powdered because of my bump knee. So I do, I am having surgery February 10th. So I think this episode will have already aired by then or won’t air or the surgery would’ve already happened by the time in this airs. So I’ll probably hopefully be in rehab and recovering and have a complete ACL and MCL again.

Tony:
There you go. Back to old Ashley. So just no more snowboarding for Ashley, right?. You can just at walk from the side.

Ashley:
AT least not for the next six months, but next season, oh yeah, I’ll be back up there.

Tony:
You’ll be back out there. Okay. Are there like training wheels for boards. Like how can we get you like on a… or we’ll just keep you on like the bunny slopes next season?

Ashley:
No, actually Tony, I’ve been snowboarding since I was like 10 or 12. I’ve snowboarded it for a very long time. I just thought that I was-

Tony:
You were feeling a little gray that day.

Ashley:
It was like my first time on a super big hill and I went way too fast. It was definitely user error. Like me just thinking that I was… my body was still 17.

Tony:
Yeah, you got humbled is what it was.

Ashley:
Yeah. So and then I went into a woods trail and I hit some roots and they just flung me and ping pong me off trees, but…

Tony:
Well, hopefully this is the last time. I don’t have any torn MCLs or ACLs, my life isn’t as exciting, but…

Ashley:
Yeah, you’re actually getting a better shape.

Tony:
I’m trying to.

Ashley:
You have your fitness competition-

Tony:
Yeah. The fitness competition is coming up.

Ashley:
… you haven’t talked about that in a while.

Tony:
Yeah, it’s actually a little less than 10 weeks away. So it’s nine weeks and like five days away. I’m honestly really excited mostly because I’m kind of over the diet and waking up at the crack of dawn to do cardio and just eating every three hours. Like it’s starting to weigh on me. So I’m praying for the end competition, but it’s always fun. It’s always a good challenge. So I’m looking forward to it.

Ashley:
Yeah. When I went to Tennessee to visit Tony and record a podcast live there, he had all his meals that he had brought with him from California. And it’s like, I don’t know, 11:00 at night, everybody’s having a drink playing pool and there he is sitting at the kitchen table eating one of his meal.

Tony:
Eating some ground Turkey meatballs. Good times. Good times. Well, we got a crazy good episode today. And for the rookies that are listening, this might be my most favorite episode that we’ve done so far are only because our guest goes so deep into flipping and specifically on like how to estimate your rehab costs and there’s so many pieces. But today we have James Dainard on the podcast. So Ashley, you know James pretty well, just give like a really quick why we brought him on for this episode.

Ashley:
Yeah. So James Dainard and I probably met like a year and a half ago. He’s an investor out of Seattle, Washington. And every time I am with him, I’m mentally taking notes or I’m physically taking notes and scribbling down as much information as I can about what he is saying. So I finally found a way to get him onto the Rookie Podcast because he is not a rookie, but Tony and I have decided that we want to kind of incorporate and add into our series, having some experienced investors on where they just go down into a niche.
So today’s niche is going to be construction cost and doing a rehab. So this could be, if you’re doing a flip, this could be, if you’re doing a BRRRR for rental property, we are going to break down exactly how James process works and what his system is for getting a property, estimating the budget, getting contractors, how to find contractors, putting together the contract, putting together the scope of the work. So a ton of great information. And we actually had to, I get into two episodes. So on Saturday, instead of our usual Rookie reply with questions, it will be a part two series with James Dainard. So let’s get to it and let’s bring James onto the show.

Tony:
James, welcome to the Real Estate Rookie Podcast, where they’re super excited to have you on. I’ve heard so many amazing things out you from Ashley. So I’m glad to have you here, glad to share your story with our audience, well, welcome board, man.

James:
Yeah. Thanks for having me on. I’m excited to be here. I had many late night conversations with Ashley, so now we got to do a formal interview.

Ashley:
It’s only taken two years of knowing me to finally get on the podcast.

James:
I know, I’m starting to feel a little rejected at this point.

Tony:
Yeah. So James, for those who or for those that don’t know you, if they want your full backstory and all kind of how you got started in real estate, if they go back to the Real Estate Podcast, episode 338, you were interviewed there, you gave your whole backstory, but if you can just give us like a 30,000 foot view quick snippet of kind of who you are, what you do, what’s your businesses and what you’re going to talk to us about today.

James:
I’m James Dainard, I’m an investor out in the Pacific Northwest. I’ve been an active real estate investor since I was 22 years old, when I was a senior in college. We since kind of starting our company in college, I went from door knocking to buy my first deal. And then since then, we kind of expanded out and created a multilevel real estate investment company to where we own a brokerage, this source is on and off, market properties, we have a lending arm that finances investors in Washington State with hard money, short term construction financing. And then we are very active investors in general. We’ve been involved about 3,000 homes and 3,000 transactions with investors in the last 15 years. So we’re just an active shop.
We’re known for value add construction. A lot of the deals that we do with our clients and ourselves are heavy value add where we’re buying something that where the numbers may not look good on paper at first, but the right construction plan then allows us to kind of maximize it out. So currently right now, we’re working on about 30 flips ourselves, fix and flip. And then we have about 400 apartment doors under construction. So we do a lot of heavy lifting, a lot of construction plans. And then we like to get our hands dirty. We’re not really carpet and paint guys. We want to see the potential in the structure and kind of rip it apart. So done a lot of constructions, seen a lot of different things, probably crazier things than what people can ever imagine, but we’re just very active investors in the Pacific Northwest.

Ashley:
So I’m actually doing one of those flips with James. I’m doing my first flip and we are actually documenting the whole thing. But I flew out there for my first time to look at the property that were flipping and I got to see James process as to, “Okay, this is how we analyze a property that needs rehab. This is how we build the scope of work.” And I wanted to have him on today to kind of talk about the process of doing a rehab.
So kind of, you get a deal, you get a lead in, what do you do with the property to kind of estimate your rehab is? And then once you get to go look at the property, what are the things you should be taking with you? What should you be looking at? What do you need to know when you’re looking at the property? And then lastly, once you get that property, bringing in contractors, scheduling them, how that all works. And then most importantly, like building your budget, what are the construction costs going to be? So James you want to kind of like kick us off here as to what’s the first step when you get a lead that you want to analyze for a rehab.

James:
Yeah. The first step that we do before we bought any property, and we’re active investors so we buy all sorts of different types of things. Some are even new projects for us where we’re maybe buying something that we’ve never done before, we have to build a new process. But it always comes back to before you buy that first rehab, and I did learn this the hard way, is you want to build your team right, because everybody is out there and is chasing the deal right now. There’s no inventory. It’s hard to get that next goodbye. But you know, I hear it all the time, there’s no deals out there. Well, there is deals as long as you can put the right plan together. And the right plan together, it means that you have the right bench and the right resources to kind of make the margin.
A lot of times when you’re, Pacific Northwest, we have a very expensive market, it’s hard to get a deal. What we say is we have to vent the return. The right plan will create the right profit margin. But that comes down to building your bench. And before you jump into your first rehab, you want to make sure, one thing that we always do, is we have three active general contractors that we’re currently working with. The reason why we always have three is because sometimes they’re busy and their pricing might go up at that specific timeframe, so we always want to get three quotes and we also have two to three subcontractor trades for every line item in the house. So we have two to three plumbers, two to three electricians, two to three framers, two to three roofers and on from there, because as the market gets more expensive, it’s more competitive, the margins also get more compressed.
And so you always want to make sure you have that bench to where you’re not getting stuck with the same guy that’s giving you one price that you have to go to that price commitment. So go out there, build your bench, find your contractors, you want to go out and talk to investors, go to meet up groups and start talking to people and then kind of getting qualified from there. Or start talking to them about pricing and find out if they work with investors and kind of build that bench to where, when you go out to that project, you’re bringing out people that are, A, used to working on your type of business plan and then also that you can make a quick decision because if there is a good deal on the table, you can’t sit around and wait for it. You got to pull the trigger quick. The biggest thing is, go out and find those contractors that work with flippers or BRRRR people or investors. They can’t be the contractors that are working on your mom’s house. That’s a different type of contractor.
And so you want to go find those people and then start kind of getting them in the door. And then also at the same time, before you get going and you buy your next project, you want to make sure that you have an understanding of construction. And if you don’t, you want to take baby steps and start looking for different types of projects are smaller ones. I had to get a crash course on… I mean, I always tell people, there’s two ways you can learn construction. You’re either going to lose a lot of money and you’re going to buy that thing and you’ll figure it out the hard way. Or you can take baby steps and start interviewing people, talking to people, but also go out and start shadowing with investment companies, see how you can be of service to other big investors. And they’re going to teach you the ropes for free because you’re being of service to them.

Tony:
James, so much good information. Like my head’s spinning already and we’re like five minutes into this conversation, but I want to circle back about the team building, but before I do, I just want to highlight one thing that you said, you said you have to invent the return. And I’ve never put that way before, but what are great phrase. People, especially in today’s climate, feel that there are no good deals out there, but to your point, if you can find the property and develop the right business plan around the property, that’s how you find a good deal. I didn’t want that to kind of go over peoples head, but what a cool phrase you said there.
I want to go back to the team building James, because I think for of our listeners, these are first time investors, people who are aspiring to do a deal, but really haven’t done them before. So if I’m that new guy or girl that wants to get started, where am I going to find these contractors? Even for me, I was doing a flip out here in Southern California, I was looking for another contractor and no one wants to share who their contractor is because they want to keep their contractor for themselves. So where am I going? Who can I reach out to? What resources do I have as a new investor to find that contractor and start building that team?

James:
Yeah. And that’s a question we’re all having right now because since the pandemic, there’s been all sorts of things that have happened. Material cost has spiked, there’s labor shortages, and it’s harder and harder to find guys. I mean, even for me who’s been doing this for almost 20 years in the Pacific Northwest, I know a lot of people, it can be tough right now. And so the ways that we have found additional contractors, there’s a couple different things that we’ve been doing. We had to, A, we had to invent the return again. We had to create different are types of ways outside the box to find these resources. Our favorite way right now is to find actual contractors that are used to working on our model. There’s two things we do, we track permits. So I go around and I look on the Pacific Northwest, there in general, you can go through and look at what investment properties were sold, whether it was at a foreclosure auction, it could be a bank on property, it could be a fixer.
And then in the Pacific Northwest and almost every different state, you can actually pull in and reverse engineer and find out if that property address, like I can go on City of Seattle Permit Center, put an address and that’s going to give me every permit that’s been pulled on that project. If it’s a flip project and I know an investor bought it, that means most likely those trades are already going to kind of be in my wheelhouse for what I’m trying to accomplish. They’re used to working for fix and flip people, they’re working for investors in general. And so what it does is it actually gives me a call list as to where I’m not going on the internet and searching out plumbers and looking for 100, I’m now looking at 10 and out of the 10, I kind of shrunk my box into people that have already working for people like me. That’s our favorite way to do it.
In addition to, people talk about driving for dollars for deals, I drive for dollars for contractors. If I have an open day, or if I’m out looking at projects and I see a house that’s being flipped, I stop in, I introduce myself to the contractor, I explain who we are and that we need more kind of work and then we start interviewing them right there. In addition to, I can kind of see those people working on site. If I pull up to a flip house and the site is completely messy and there’s doors falling apart, windows, there’s garbage everywhere, I don’t want to hire that guy anyways. And so it’s actually the best kind of interview process because I got to see them working. And then also kind of see what they’re doing, I can ask them what they’re charging the people on site. And so I can visual kind of look at that.
So A, I track permits, I drive for dollars. And then the best thing too is just working with other investors for new people like in the Pacific Northwest, find the right brokerage and the right team, you know it goes back to building your team, for our investors, we have a resource list for them. So when they buy a property through us, we’re not just your traditional real estate brokerage, we’re here to service the client all the way through, not just find them a deal, we want to make sure that they can execute on the deal. Part of executing is giving them resources. So we are constantly filling up our electricians, plumbers, flooring and all our trades to where we know that we can refer them out to our client and that they can be successful. We don’t want them overspending their budget because we want them to maximize out that deal.
So work with maybe a right brokerage. If you find the right broker, there are brokers that focus on just investors. They typically are going to have referrals for you too. Another good way that I’ve been finding tradesmen too is I actually talk to my suppliers. I recently called my cabinet shop who we refer a lot of people to them, well, probably 100 to 200 jobs a year, and I called them and said, “Hey look, we’re giving you all these cabinet orders, you sell flooring. I’ll tell you what, I will buy all of my flooring and refer all of my flooring to you if you can give me six installers.” Because the flooring company I was working with was starting to get busy, they were starting to get expensive. And so I asked my vendor for help. And then he referred me five good contractor or flooring installers that work for investors.
And so just anytime you’re out talking to anybody, just ask the question, “Hey, who do you know that does this?” If you’re giving someone business, ask them for some favors back. If one of my clients calls me and says, “I’m jammed, I need an electrician for my house.” We’re going to go help them find that because as a broker and being a team member, we want to make sure they can get through that project, so then I can list that project down the road too. So as you’re trying to find contractors, drive for dollars, look for permits, work with the right type of team members, the right broker, the right hard money company. We finance people too in the Pacific Northwest. We also would refer them contractors too if they’re in trouble because it’s in our best interest for them to get that house done, because we lent them the money. So really build that good team and that team can give you tons of different types of resources.

Ashley:
James, once you get these referrals or you get these people, a list of contractors to use or vendors, what’s the next step after that? How are you actually vetting them? Or are you’re just taking someone’s word for it that this contractor will work?

James:
That’s a great question, it’s… because that is tough, right? People will tell you whatever you want to hear. Especially in real estate, you have mortgage guys that will always be able to get your loan done when it might be more complex. You have contractors that, “I can do a great job for an amazing price,” but you don’t know who they are. And depending on your state too, like in Washington State, it is not complex to become a contractor. You fill out a form, you send in a check, you get a bond and you are magically able to rip a house apart, which is kind of crazy because construction is complex in general. But the things that you always want to check before you hire those people, so what I do on every referral or every generalist referred to me is, A, I want to check the source. Who referred them to me? How many projects have they done? Have these people worked for those people before? If it’s just like, “Oh, my buddy told me about this guy,” then it’s not that good of a referral.
And then when I get these people on the phone, the first thing I ask for is what’s their license number. I will not hire unlicensed people. We pull a lot of permits, there’s a lot of liability in not doing so, you can get fined. So we want to make sure that they have a license. The other reason I like to hire and make sure they’re licensed and bonded is because that means they can run a actual professional company. You’re not just hiring some random guy that’s going to tear your house apart that can cause a lot more damage for you down the road. So you want to make sure that they’re licensed, that they’re bonded. I actually check to see how long they’ve been in business too on their license. Like if they just got their contractor license four months ago, I’m going to ask them where they worked prior before that. Like did you work for someone before? Or if they said, “I had a different company,” I want to know what happened to that company. I want to know the name of that company.
I’m going to pull up to see if they had any claims, because you can also check online to see if they have any claims against their bonds. The other thing I want to do is I always make sure I get addresses of three recent jobs they did for investors. Not for a homeowner, they need to be the same… Remodeling for homeowner is different than remodeling for an investor. So you want to make sure that you get the addresses of the projects they worked on. I like to pull up those addresses, see what they sold for. I want to see what the pictures look like. I want to see how long it took for it to sell too. Because if it took 90 days for it to sell in a market that usually takes five, was it a pricing issue or was it a quality issue?
And so those are things that I’m always going to check. And then I always get the name and can refer to. The name of someone that can get me actual references. I want to talk to them on the phone. And this is all a lot of work and it can be quite invasive. A lot of my clients are like, “Well, the contractors get a little annoyed when I ask these questions,” and I’m like, “Well, if they’re getting annoyed by you… these are all valid questions, probably not the right person to be hiring.” And so if someone pushes back on these questions, I instantly cross them off my list because nothing’s worse than hiring the wrong guy. And so those are always my first set of questions. And then I go into my pricing questions from there because I want to make sure, A, that they’re qualified, but then also they can actually do what I need them to do.

Ashley:
James, before we go in to the pricing, why do you prefer contractors that have worked for investors and don’t care if they’ve done work for homeowners? What’s the difference there?

James:
The reason being, like if you’re working for a homeowner, and this is why I would never do a renovation for a homeowner it’s, it is a different business. Construction is not all the same. Commercial construction is not the same as residential construction. Multifamily construction’s a lot different than actually fix and flip construction a lot of times, like how you do it, how you… what kind of materials you’re putting in. Custom and homeowner construction is also completely different, because they’re usually pricing things up higher because to be perfectly honest, investors are a lot of times easier to work with than a homeowner because you’re not building your dream house, you’re building a home that can create revenue and can create a return or maybe it’s a rental property that you’re trying to keep your cost down and you’re trying to make it more bulletproof rather than visually appealing.
A homeowner changes their mind a lot. And so contractors build that into their pricing. They got to have way more conversations with the people, they got to get a lot more feedback, the people will be moving things a lot more. Just like when I’m doing construction on my own personal house, I have a lot more opinion on it than I do a flip a lot of times. And so those guys, they’re used to dealing with that, like a custom build, there’s a lot more expectation, there’s a lot more personal opinion. And so you should charge more for that. It’s no different than if I’m buying a fix and flip property and it has a lot more hair on it, I’m expecting to make more money because it’s more complicated. If you’re a contractor and you’re working for a homeowner, it’s going to be more complicated most times.
The other thing is too, it’s about the subcontractors that they’re actually trying to go find. If it’s a custom home builder, they’re going to usually get their supplies from a very consumer friendly shop where they can send their customer down to a design center. They’re going to work with a designer, they’re going to pick out all their materials and then they’re going to put the plan in play, whereas we don’t do that. We pick the materials first, we pick the budgets and then give it to the contractors, so then we can control the budget. So it’s just a different format and it’s a different end product at the end of the day as well.

Tony:
Yeah. Thanks for clarifying that, James. I think that distinction is really good to know. I just want to go back to the event, the return point you made. Really quickly one more time. I think that I understand at a high level what you mean by that, but I think some of them are listeners might be wondering, what does that look like in real life? So when you find a property, how are you finding that undiscovered potential that maybe other investors are passing out? What is it that you’re looking for? How do you know if it has the opportunity to have that in turn or that return invented? Give us some insights into what that looks like.

James:
That’s a great question. And that always comes down to, are you creating the right plan and are you able to control the costs? Because fix and flip or BRRRR properties, they’re all the same. We’re buying something at a certain price with a certain margin in it. The middle is going to dictate how good of a deal that is. If you buy something at 60 cents on the dollar, like you can buy it for 60 cents, it’s worth a dollar. That sounds like a goodbye, unless you’re are spending 45 cents on your renovation, then you’re over market at that point. And so it comes down to what’s the middle number. And so what we do is we’ll look at it a lot… Every deal I look at, we cut it up three different ways. We’re going to look at it, “Hey, what’s it going to look like as a cosmetic turn?” If we just do carpet, paint and a quick turn, that’s usually going to be a lower profit, lower renovation by a higher cash on cash return on an annual basis.
That’s where most people are going to look, right? Most investors, especially right now, there’s a lot of newer investors in the market, they’re going for the normal plan that everybody’s looking at. You know, I got a four bedroom, two bath house, a comp is a four bedroom, two bath house, I got to replace the cabinets, countertops, windows and then that’s going to get me at this price. Whereas we might go in and say, and they’re going to spend $80,000 to do that, we’ll go in and go, “Well, instead of spending the $80,000, because that’s usually investors’ first question is, “How can I get this renovated for as cheap as possible?” Sometimes renovating it for the cheapest possible thing is not the right plan. Where we’ll go in and say, “Well, instead of having a four bedroom, two bath house, we’re going to rip this all the way down to studs and spend $150,000 on it instead and it’s going to take us three times longer, but we’re going to create $200,000 more in additional value.
And we’re not afraid to go for that higher… we always want to know what highest and best use is for the property. And it doesn’t matter how complex the plan is, as long as the return’s higher at that point. And in Seattle, there’s a lot of really old homes, 1900 and 1920s with old basements, they need a lot of structural work, a lot of reconfiguring. The more reconfiguring you do, the more complex and harder that it is at that point. We’re just not afraid of the hard work. And then part of that is we know the cost that it’s going to take to get it through the hard work. If you don’t know the cost, you can’t estimate it correctly. So if I’m doing a studs down house in Seattle, and I think it’s going to be… I’m saying it’s going to be $200,000, I’m going to break down how I’m going to get there.
If I bring a contractor out and I can’t control that contractor and the construction to keep it at $200,000, I can’t invent the return then at that point if every other contractor’s coming out and saying it’s $250,000. So what we do is we look at the total budget and we don’t just go to the normal route of hiring a general, putting the plan in play. We hire a general, look at where he’s expensive, take those items off, plug in our own guys to take our costs down and that’s how can create that margin at that point. So we’re not creating the margin on the buy, we’re creating it by reducing cost and putting the right plan in play. And that’s why we say, we invent it because it’s really on us moving the pieces around rather than just going A, B, C make your profit at that point.

Ashley:
Can you give us an example of that? Like a project you’ve worked on recently, what were some of the things that you took out that you put your own people on just to save some money?

James:
Yeah, so they’re… I like to call it the bundle method in construction. I like to get a full scope of work for a contractor, and I get all their… and when I get my scope of works, I always make sure that they’re broken down for material costs and install costs. I don’t get lump sums. I want every line item broken down at that point. That’s how I can kind of invent that return, because I can pull out the expensive parts.

Ashley:
And that’s another thing too that you should expect from your contractors. How you said, if they’re like getting annoyed or mad that you’re asking so many questions, they shouldn’t be annoyed or getting mad that you’re asking for this breakdown. Because if they’re actually taking the time to actually put together a valid budget for you or an estimate for you on the cost of this, that shouldn’t be a problem to get that breakdown.

James:
Yeah. And you don’t want to burn out your construction team. I mean, if you’re a difficult client, no one’s going to want to work for you. And so it’s about having really good communication with your construction guys is, if I have a general come out and he bids electrical for… he has his own electrician. That’s his guy or his two guys. He is also dictated on their pricing at the time. We don’t know if his two electricians are really booked out and maybe they’re charging a little bit more because he’s charging their cost plus 10% to 15%. And so I’ll just ask the question, say, “Hey, your electrical is really high, what’s going on?” And he might say, “Well, our guys are busy, costs have gone up.” So what I offer him, so then it still makes it worth his time, because if I have a really good general, that’s going to show up and do his job and has good communication and works with me, I want to keep him on my team and on my bench.
I’ll give him an offer. I’ll say, “Hey look, what I can do is I have three more electricians. Let me price this out.” And if they come in lower than his, he’s at $20,000 and let’s say my guys are bidding at $15,000. And that’s where it goes back to that bench, always have three people on your bench so you can plug this in. So I’ll get three quotes and then I’ll take my lowest quote and say, “Hey, I’m going to use this guy instead, let’s pull this off your scope of work.” If he has to manage them at all, I’ll still pay him his 10% on top of my bid, because he’s still doing the work. So I’m just saying, “Hey look, I’m still paying you, I still want you to do the work, but I just want to plug this guy in because it ends up going back in my pocket.” And typically, people are going to go, “Yeah, that’s a good way,” because you’re still taking care of your general, he’s still going to help run your site and at the same time you can reduce your cost down.
Typically, in the bundle method, I like to have my general do the framing, the plumbing, the electrical, the windows, the gutters, the roofing at that point. But if any of those line items are high, I will pull them off, let the contractor kind of help me put it in play, pay him for it. Or maybe the guy that wants nothing to do with it. A lot of time generals are bidding stuff high because they don’t actually know how to bid it. They’re going to say, “Well, I don’t want to get burned by my electrical quote because there’s so many variables in this house. You got to take down studs, we got to run new 200-amp service, we got to bring the meter in, whatever it could be.” And because they don’t know they’re throwing a real high number at it. Whereas, I like to know my number’s going in and so you’re almost doing them a favor at that point because you’re taking off the unknown and you’re plugging in an actual at that point.

Tony:
So James, you clarified a question that I had earlier, but I just want to make sure that I’m understanding it the right way, because you said up front that you like to use GCs. And you said you have about three general contractors that you rotate through, but you also said you keep two to three subcontractors. So the reason that you also keep the subs on your team is for this like substitution method that you just talked about?

James:
Yes, correct. Yeah. So we can always… So it really makes us and our general as a team. It’s better for them if I’m making money and I can go buy another house and they can keep working. I’m still paying them, but I’m giving them additional resources at that time. It helps them out, it keeps their cost down. And I always want that option because as a house, it’s not different than any business.
If I’m a manufacturer selling this pen, I got to sell this pen, I need to buy these. I sell 10,000 of these a month. I’m always going to have a backup supplier because if I can’t hit my… for some reason, this pen company goes out of business, I need to make sure I can still sell them to my customer or if this pen suppliers telling me that one cent today could be one and a half cent tomorrow, back down to one cent and then that’s messing up my margins, I need to be able to plug in that backup and kind of help keep your margins the same. And it is just, you have to have those people in line because just like anything, if you call that person and they’re busy, it’s going to cost more. And so you have to be able to outlay out.

Ashley:
So now that we know how to find a contractor, how to use a general contractor, how to bundle, use the plug and play. Let’s talk about actually getting together a pricing, a budget sheet before you even go and see the property to help you accurately analyze the deal. So you talked about how you get pricing from contractors before you even hire them. How does that incorporate with your budget sheet?

James:
That’s in a very important question. Because we budget, it’s all based on logic. Budgeting should be treated the same way as the analysis for the sale or the rental, the lease up. If you want to know how much it’s going to lease for you, pull comps. You want to know how much it’s worth, you pull or you pull rental comps. If you want to know how much it’s worth, you pull actual comps. So with contractors, we want to be able to break it down the same way. So what we do, the best thing that we did and this, we started doing this about five years ago, is instead of going lump sum, when we were first brand new investors is it would be like, “Hey, we need a kitchen, we’re going to put $10,000. We need a roof, it’s going to be $10,000. We need to rewire, it’s going to be $12,000.” It was always those lump sums and it was just a rough ballpark.
And that’s not a terrible way of doing it, it will kind of give you like a ballpark. And it also worked a lot better when there was tons of contractors around. That worked well in 2012 to ’15, because there wasn’t as much work for guys. And so they would do more to make that deal work. Now there’s too much work and there’s less guys and so what we want to do is how we break down our budgets so we can do the plug and play is we take all of our line items. If I’m calling an electrician, I write down what scope of work do they typically do. Well, I know they’re going to do a panel. I know that they’re going to knee a meter. I know that they’re going to do a mask. They’re going to possibly fully rewire house. They got to trim the house out and then they need to install fixtures. Those are the core things that I need to know in a house.
And so when I’m talking to an electrician, the first thing I do is I qualify myself and say, “Hey, we’re Active Investor, we are a flipping company. We do volumes so we can give you numerous jobs.” So as I’m telling them, I’m telling him I’m going to give him more than one job down the road. I also tell him my payment structure. I’m touching on this before I ask them the questions. And the reason being is contractors can be a little bit of a prima-donna right now because they’re so busy. They’re being very selective on who they work for them. And I don’t blame them, they should. That’s their business to do it. But qualify yourself so then they also kind of get off the edge a little bit. They don’t want someone just drilling them with questions.
I tell them who I am and then I also tell them how fast I pay. “Hey, once you’re done, we will cut you a check within 24 hours of it being done.” People like hearing that. We’re not saying we’re going to pay you in 30 day from when you’re completed, we’re going to get you paid right away. So you qualify yourself and then I start asking them questions. So now they’re less on defensive side. They know who I am, they know how I pay, they know I have experience, I’m going to take care of them. And then I just say, “Hey look, before…” The other thing I do is I value your time. I don’t want to take you out to a bunch of houses because they don’t want to do it either. Go bid them, just not to get at the work. And so the next question is I’ll say is, “Hey, can we just run through a couple different pricings?” And based on my prior jobs or what other investors have told me in the market or other electricians, I just ask the questions. “Hey, can we go through some core costs?”
“On an electric panel, typically, we pay 2…” And I don’t ask them for a number, I give them a range. I say, “A typically, I pay $2,000 to $2,500 for a panel. Is that about right?” And they’ll say, “Yes, that’s in there,” or, “No, I’m at $3,500.” And then I actually document, we actually database these people and write what they’ll do them for. Because they could be a really good electrician and I really like them, but they might be costing too much. And if I’m in a jam, I’ll still call them out but I’ll know their pricing. So be for a panel, I go $2,000, $2,500 to $3,500. For a meter, they usually cost me $500 to $700. So I just kind of throw out ranges and see where they bite on. And I go through and I ask them those same core questions. How much do you charge to rewire on a per square foot basis? Just roughly. You say $3 a square foot. And then lastly, I’m going to say, “Well, how much do you charge to put each light fixture in?”
Typically, that’s going to be $25 to $50 depending on the type of electrician per fixture. Based on asking five questions, I can get 95% of the way there with my quote with my electrician. Because is I’m going, “All right, if I need to rewire a house, I know what my panel costs, I know what my meter costs, I know what my mask is going to cost. He said roughly $3 to $4 a square foot to rewire just for Romex, my house is 2,000 square feet, so that’s going to be $6,000 to $8,000. Trim out is a dollar square foot, so that’s going to be another $2,000.” And then I can count out my own light fixtures and go, “Okay, he’s charging me $50 a fixture, it is going to be this.” And then at that point, it’s just up to me to pick the right spec.
If I’m going over budget, I’m going to look at my comps and go, “Well, I got to hire this guy that’s charging me $50 a light fixture, whereas usually it’s $30 from this other guy. Well, maybe I cut down my material cost by $10 by sourcing the right thing and I’m still going to fall right about the same budget. I can hire two different guys with two different pricings and still get to the same pricing as long as I’m picking the right specs at that point.” And so it’s about kind of logically breaking down every little section.
If it’s a flooring guy, I don’t ask him how much it costs to install hardwoods because that’s a… laminate floor, because that’s a open ended question. What kind of floor? Where are you getting it from? What’s the price for the allowance? I’m only asking them, what do you charge to install it? After that, it’s up to me to pick the right material that fits inside my budget. And so it’s just ask the direct question and they’ll appreciate it too, because you always want to go back to, “I don’t want to waste your time, contractor. I value your time. So if we can just answer these questions, I’ll know when I can call you out.”

Tony:
I was just going to say that. That was like a master class in estimating rehab costs right there. And for all of our rookies that are listening, almost every episode has like that two to three minute segment that’s worth just like putting on repeat and that was it right there. I think so many new investors, they feel, and this is how I felt too when I first got started, it was like we’re in it. It just feels so overwhelming to try and identify what I might potentially spend on a rehab, but if you just call any trades person and ask, “What do you charged to put in a light fixture? What are you charged to put in a new panel? A plumber, what do you charge to put in a toilet? What do you charge to re…” Like you just start slowly piece by piece, getting all the information that you need and once you’ve got everything, it’s just a matter of putting it all together. So man, it’s so eloquently put, I love that approach and I’m sure all the Rookies listening will as well.

Ashley:
Yeah. And James, you have the Excel spreadsheet that you actually put those figures in. So it’s really just plugging in the square footage or the number of light fixtures and boom, you have your budget estimate.

James:
Yeah. And it makes it very easy to get your budget really close. I mean, me and Ashley, we actually mocked up a budget for a flip and I ballparked it. And I was like, it’s going to be about 115, right? Because I’d memorized my budget sheet. And we were within 1% of that number once we cranked out all the numbers. So by having a sheet, so we take all these install rates and then I have four different budget sheets. Each budget sheet has a different allowance in there based on the quality of renovation. So if I’m doing a rental property, I have my rental budget sheet which is calling for like bulletproof items but also very in the expensive fixtures to where it’s going to fit inside my kind of model. Like I’m not going to put a $50 light fixture in a rental a lot of times, I’m going to go with a $10.
And then from a high end renovation, my light fixture allowances will maybe be at like $200 rather than $10, but it’s the same install rate that’s in there. So the budget sheet’s only changing based on the specs that I’m putting in. And it allows me to crank through budgets very quickly and when I’m underwriting and make a decision fast to where I can bring people out. In addition to, the best thing about asking these people these questions and putting into a sheet, it happens constantly where you are going, “All right, I have my budget,” let’s say my plumbing’s $12,000, “I bring my out there, he comes back with a quote of $15,000.” And I’m going, “Okay, I’m $3,000 over. Why?” I then bring him into my office and I don’t do the whole, “Hey, you’re over budget, can you help me out here, thing.” I go, “Hey, I just got some questions for you.”
I don’t even talk to him about the quote, I go through. I go, “Hey, how much do you charge for a tub to install? It was $500, right? Okay. How much do you charge per fixture? It was $50, right? How much do you charge per roughing?” I literally ask him the same interview questions I asked them prior to having them estimate. And then I get to the end, I go, “Okay, so that’s what was inside my budget. Why are we $3,000 high? What am I missing here?” And 95% of the time, they don’t have an explanation. And they go, “Okay, I will do it for $12.” And then you can also kind of guilt them later. Be like, “well hey, I asked you all these questions,” and I always check with them every two months, are these numbers still right? And I go, “If you’re going to raise your pricing, you got to tell me before I buy the house. Isn’t that fair, right?” Because it only comes down to fairness.
And so you can almost guilt them and instead of going back and forth over $1500 or $3,000, they’re just like, “Okay. Yeah, you’re right.” I’m like, “So next time I’ll pay you more if the pricing goes up, but this time, why don’t we stay committed to what we agreed to?” And it works 95% of the time. Or they’re going to say, “Hey James, you missed the mark on A, B and C and here’s why,” and then I can go, “Okay, I need to make sure I pay attention to that on my next project.” Yes. There’s a good learning lesson in there as well. So organizing the pricing, having it in a sheet, will help you negotiate as well. But it also teaches you lessons on how to have less variance on your next project.

Ashley:
So before we move on to the actual property, let’s kind of recap how you can do everything that you just mentioned before even going and looking at a property. So you can build your team, calling contractors, getting referrals, you can find all of your contracts before you even see a deal or analyze a deal. Then you can go on to building your budget, your scope of work by looking at the property tax records. What’s the square footage, how many bedrooms, how many bathrooms you have. And then also going and looking at the pictures. So whether you’re buying the property off the MLS or you have a wholesaler that sends you pictures, look at the pictures of the property. And James, you use, I think the first step that you actually do is, you enter the address and pull it up on Google maps, right? And just look at the area and look at even the exterior of the house to what that looks like.

James:
Yeah. When I’m prelim underwriting before, again, you also don’t want to become the investor that calls everybody on a fire drill and sends everybody out just for you to get there and go, “Never mind. It’s not a good deal.” And then the contractor’s annoyed. He’s going to start charging you more for the waste of gas trips at that point. And they also think you don’t know what you’re doing. If a contractor thinks you don’t know what they’re doing, that means it’s a more pain on them, which also means they’re going to charge you more. So yes, the first thing we always do is wholesaler sends me a deal and says, “Hey James, what do you think?” I go through the photos, or first thing I do is I take it, I go on Google Street View. The reason I do that is because that gives me a very actual look of what it looks like right now.
If there’s trash everywhere, but there’s overgrown sticker bushes, that means there’s going to be a ton of deferred maintenance, which is going to lead for unexpected issues throughout the project or a weekend warrior house. If I see like a bunch of weird roof lines on a house, I’m going to go, “Okay, this is going to be a weekend warrior nightmare house where someone did this, not logically. It’s probably going to cost a little bit more these way.” So that’s the reason I use the Street View at that point. Also, I like to see the yard because whether I need to put fences and stuff like that in. So I can get a lot just off the visual. The second thing I do then is pull the tax record because the tax record’s going to give me the general square footage for the house, the unconditioned space, a remodeled house may be $50,000 a foot on the upstairs, but if I’m finishing the downstairs and it’s raw, it can be a $100 to square foot. So I got to blend that out.
It’s going to give me a very good kind of baseline of where the square footages are. It’s going to tell me how many bedrooms and bathrooms I have. And then if I need to add bathrooms, that’s going to tell me whether I need to re-plumb the house or not. And then from the tax record, I also can see the lot size. Like how much do I need to allocate for the landscaping? Then I go into the photos and by having the square footage and the photos visually of what I can see, I then can go through my spreadsheet that’s already built out with pricing and just start ballparking it through. And as long as I’m within 10% of where I need to be to make that deal work, I’d say actually almost 20%, I’m going to go look at that house.
If I’m 30% off, I mean, I’m an honest conversation with the seller, the wholesalers, saying, “Hey look, this is just not going to work for me. I’m going to need to be this low on price and here’s why,” because having a prepared budget also helps me clarify the wholesalers to give me like the actual right price with logic. But you can really reduce wasted time. Like if you stop what you’re doing to go look at every different deal, you’re going to miss a good one over here. So by doing this, by going through the photos, going through the tax record, I can get my budget to 90%. It’s going to tell me whether I need to go out there or move on to the next thing or get the price down. And if I need to move on, I’ll just move on to the next one at that point.

Ashley:
And one last thing to add to that too, is that you showed me that you pulled the comps. And not only just to see what the sale price is, but also to see what the finishes are in the property so that you’re not budgeting for super high end finishes like granite countertop when everything else in the area has laminate or something like that. So using the comps to kind of help yourself budget too and pulling what other flippers or what other property owners have in that area and what is actually worth going for for that expense.

James:
Yeah. The comps are going to dictate the scope of work and the most important thing that you can get any contractor or that you need to implement into this business is a clear scope of work. Where I made a lot of mistakes as a bit new flipper or new renovator was always like, I want to do the cabinets, the millwork, the roof, the windows and the flooring. There’s a lot of ambiguity in there, there’s a lot of different… that can go 100 different ways at that point, you could put the wrong type of flooring in, the wrong type of materials, and so the comps are going to dictate. And so we spend a lot of time looking through every photo of those comps. What kind of materials does it have in it? Are these path inch laminate floors or are they hardwoods? That’s 100% difference in material costs.
Are they hollow core doors? Are they solid wood doors? Are they cheap cabinets from maybe a builder or affordable builder shop or are they custom cabinets? That could be a difference in $20,000 on your cabinets. Same with appliances. So we’re not only just looking at the materials, but then also we’re looking at what’s the comp’s going to dictate the scope of work. If I have a four bedroom, two bath house with one bath up and one bath down, and the comp has a formal suite bathroom with a formal master that has a walk-in closet and a five piece bath, I know I’m going to have to do a lot of framing on the house to reconfigure it. I’m most likely going to have to rewire most of the house because I’m going to have to run all new plum lines. I’m going to have to re-plumb the whole house. And I’m also have to do a lot of wiring because I got to move fans around, move different lighting fixtures, new floor plan.
So that’s going to already tell me based on the comps and what I currently have and to what the build out is, how much I need to actually budget in for electrical plumbing in the mechanicals. A lot of times it doesn’t really come down to the finishes is where you blow your budget, it’s how well you can control your mechanicals. How much are your core costs that are going on the inside guts, which a lot of times people aren’t going to pay for because it’s not visually, they want to know it’s new, but it’s not going to make them fall in love with it by making sure that you can kind of budget up accordingly. If I’m adding bedrooms and bathrooms, that usually means a full rewire and re-plumb at that point. And so again, it kind of tells me based on the comp, the scope of work it’s going to require all these different triggers for my mechanicals.

Tony:
Yeah. So James man, like so much value provided, and that’s just like the first step, right? We’ve covered what you’re supposed to do before you actually get to the project. So we talked about building your team, how to do that. We talked about putting your scope of work together, getting pricing from all your subcontractors, and then just kind of doing like a pre-mock up of what that potential budget might put collect for that property. So you’ve got all this pre-work done. What happens when you actually get onsite at the property? And then just one question to add onto that as well, are you doing this onsite visit after you have the property under contract or are you doing this before as part of your analysis of the property?

James:
It kind of depends on the deal structure. I mean, typically I prefer to at least walk a house. Every house that I write, I do wave inspections on. That’s part of the reason we get a lot of deal flow and also the market that we’re in right now, it’s very hot. There’s no inventory. These sellers get what they want at this point. And so we have to move quickly. And a lot of times we can get a deal because we’re giving better terms. Someone may say, we can come in and go, “Hey, we can close this in as little as five days, no inspection give you a $50,000 earnest money, release it to you on mutual. Get that deal locked down.” But it does come back to what’s the term.
So if it’s a wholesaler, I want to run all my prelim info first, because if I say I’m really interested in this deal and I go out and look at it and I don’t buy it and I do that twice to that wholesaler, he’s not going to call me again. I’m a waste of time. And so I’m typically doing this all beforehand because I want to A, make sure my reputation’s good to where I’m easy to work with on people’s first phone call. And so that’s just important for me in general, but then also I’m doing this prelim work so I have a jump start because after I do my walkthrough with that wholesaler, they’re going to say, “Do you want this? Yes or no? You got to tell me now.” And typically, a wholesaler is not going to have… they’re trying to place that deal inside their feasibility or inspection timeline. So they’re not going to allow me to do an inspection either.
So I need to be fully prepared to walk out there. I mean, I need to be 99% by the time I’m walking that house. Typically, we’re always doing a walkthrough and if I’m not doing a walkthrough on it, I am a going to add a 10% to 20% contingency to the house. Because it is just a variance in there to where… I’ve been involved in almost 3000 of these things, but that doesn’t mean that there’s… unexpected things can’t come up. And so if I can’t get inside, which I have bought a lot of homes at like foreclosure auctions, those kind of things, I always add a contingency buffer in there. But most of the time I’m not going to get an inspection, but I can do a walkthrough.

Ashley:
Well James, thank you so much for coming on. We have a surprise for everyone because we have gone a lot longer than we planned to. And this is just on part one of the episode. So we are actually going to have James back on again on Saturday for our Rookie Reply to cover a part two and three, where we talk about actually going into the property, what to bring, who to bring with you and what happens while you’re doing that showing of the property. And then after you’re close, scheduling the contractors and everything like that. So James real quick, why don’t you tell everyone where they can find out some more information about you and where they can reach out to you. If they have questions up to this point, if not, they will hear you again on Saturday.

James:
I’m excited. This is a surprise. Coming back for… So is that the key if I just keep talking, do you have to bring me back on as much as…

Tony:
Only if it’s good stuff.

James:
So to reach out to us and find us online, you can check us out on my Instagram, jdainflips. We do a ton of construction updates and actually free construction coaching on there. And that’s actually primarily what I do is our goal is to really get back to the community and just say, “Hey, before you go spend this money, check these things out first.” So check us out, jdainflips Instagram and then ProjectRE on YouTube. We release a ton of construction videos, deep dives on kind of how to implement that right construction plan. So check us out.

Ashley:
Thank you so much for joining us and we will be back on Saturday. I’m Ashley at welcomerentals and he’s Tony at tonyjrobinson on Instagram. But before you guys go check out what’s new at biggerpockets.com.

David:
This is the BiggerPockets Podcast Show 583.

Johnny:
If you want to get to X amount of income a year, we’re going to need to do these things within your savings rate, we’re going to need to do these things with your assets. Whether it’s selling it, whether it’s doing a cashout refinance, and then we’re going to come up with a plan where you can acquire one every single year for the next five years to hit this milestone of yours.

David:
What’s going on everyone. It is David Greene, your host of the BiggerPockets Real Estate podcast. The show where we teach you to find financial freedom through real estate. Now, if you are looking to have a better life and real estate is the way you want to get there, you, my friend, are in the right place. At BiggerPockets, we are a community of over 2 million members that are all committed to the same goal as you, to find real estate to hit financial freedom.
We do that by bringing in experts in the field, subject matter experts, people who have walked the path you’re trying to walk and are looking back at showing you what they did to get there, as well as people that made mistakes so you can avoid them. Today’s guest is actually a close friend of mine. It is Johnny Hoang, an agent on the David Greene team, here to talk about what to look for in a realtor to have success.
Joining me is going to be my co-host, Rob Abasolo, who helps me to take on this incredibly important topic of picking the right agent to represent you. And it’s fitting because Rob and I recently had to go through this exact same process ourselves for the houses that we are buying. Rob, welcome to the show.

Rob:
Howdy, howdy, man. I’m excited because we’re really unpacking a lot here. One of the things that Johnny talks about that really I don’t think a lot of people give enough thought to is that working with a good realtor is a two way street, right? It’s a partnership in that both parties are expected to give effort. And when one party doesn’t give effort, then the other party moves on. So, we talk about things like, what’s a kiss of death when you’re a realtor? What are some things that a potential client can say to you that may deprioritize them on the list?
We also talk about things that you can tell your realtor in the making that’s music to their ears? It was really nice to talk to Johnny, because clearly, he is one of the best at what he does, and that’s always an exciting thing to get to talk to someone that is so good at their craft.

David:
Yeah. So, you’re going to hear about this, but Johnny owns real estate himself, he’s also an investor, he is a house hacker, and then he helps clients do the same thing. And when I buy property in the Bay Area in California, Johnny is actually the person that I have represent me. He just put me under contract on a $2.2 million place in Moraga that he negotiated all himself. It was a deal he found me that had actually expired. It was not on the market. So, we were able to negotiate directly with the seller’s family.
There was a couple other people that were sniffing around it too, and Johnny got so many compliments from the seller that I said, “Man, he’s just doing so good. We got to bring him on here so he can share what he’s doing well.” Then that gives everyone a blueprint of what they should be looking for when they find their agent. I’m excited to let you guys hear about this. I think this was full of a ton of really good, actionable practical steps.
Before we get to the show, let’s take a quick word for today’s quick tip. Today’s quick tip is go to biggerpockets.com/agentconnect, A-G-E-NT-C-O-N-N-E-C-T. There, you can type in the name of an area that you are interested in investing in and get a list of agents that you can sort of do your research on to see if they might be the right person to help you with your deal. BiggerPockets provides them. If you’re using a BiggerPockets agent, you are much more are likely to find somebody who invests in real estate themselves, understands what you’re trying to do, and listens to the same annoying voice that you are right now on this podcast, me, and Rob with a slightly less annoying voice, teaching how to get this done.
Now, it’s not a guarantee that they’re going to be a Johnny or a Rob or a David, but you have a great place to start. And in today’s show, we are actually going to tell you what questions you should ask them and what answers you should expect to receive. Rob, is there anything you want to add on that before we bring in Johnny?

Rob:
I want people to just pay extra special attention because Johnny does give us some of those secrets for finding these unicorn realtors as well. I think it’s really great to hear it straight from the source.

David:
That’s awesome. All right. Let me tell you guys a little bit of about our guest today. All right. BiggerPockets, I have a special treat for you today. Joining us on this podcast is a real estate agent on my team, The David Greene Team, Johnny Hoang. Johnny is my top agent. He sold $67 million worth of real estate in 2021 in only his second full-time year in resale real estate. Johnny has done 20 deals and currently owns 10 properties across three different states. He also invests in virtual real estate, cryptocurrency, NFT, stuff like that. Like he’s one of my coach when it comes to that side. And he is joining us today to share with us what to look for in a really good agent,.Johnny, welcome to the show.

Johnny:
Thanks, David. And thank you for such an elaborate introduction. I feel honored to be here.

David:
That’s basically the only reason that I’m on this show.

Rob:
Yeah. His introductions are always the best, man. Quite the accolade list. $67 million on your second year. I mean, I got to imagine that’s a very small percentage of people out in the realtor world that are actually doing that. Right?

Johnny:
I would think so. Based on the data I’ve looked up, we’re one of the top producing teams. So, yeah, I would think so.

David:
Well, where did you rank in Keller Williams overall?

Johnny:
I believe it was, in NorCal, it was 11 I believe, if I’m not mistaken. Our team hit top five from my understanding as well, but me personally, it was 11.

David:
But you were in the top 100 agents of all Keller Williams, right?

Johnny:
Yes, I was.

David:
Okay. That’s pretty impressive for the second year. Johnny’s definitely doing something right. You also invest in real estate. So, we are here to pick your brain about what to look for in an agent. Here with me is Rob, who is not a real estate agent. I love that we’re getting to come at this from two different angles, right? Someone that sees behind the curtain and somebody that doesn’t know what the heck is going on, on the other side of the curtain, because our listeners sort of straddle both sides. Rob, if you don’t mind, what’s like the first pressing issue that you’ve always wanted to know about what happens in the world of real estate agents that you’ve always been afraid to ask.

Rob:
Mm, I guess, for me, it’s, I’m always very curious for a realtor. How do you prioritize which phone calls to take and which phone calls to decline? Because I got to imagine, at your level, you’re selling a lot of houses. $67 million, that’s a lot of houses. I got to imagine you get a lot of phone calls every single day. Is your phone just blowing up every single moment of the day?

Johnny:
That’s a great question. We do have a system in place in terms of how we prioritize people that need to buy a house now versus the one that have to buy a house later. The main way we prioritize that in my opinion is just understanding what their goals and their timelines look like and seeing how we can help them and how we can create a plan to help them. We would never shy away from anyone. There’s always going to be a place for someone that comes to us.
We just have to figure out a game plan and a timeline of what that looks like. But to answer your question, Rob, our main priority is to help the people that need a house ASAP. These are going to be the people that are renting a home, their lease is ending, and they need a transition into a new home as soon as possible. These are going to be the ones that are looking to sell their homes, and again, need to relocate for a job opening they just had that is requiring them to work a month later.
Versus the ones that are still playing with the idea of investing in the market and just want some information about how to get started, when to get started, how much capital they need to build up. We also have a plan for them as well. To answer your question, it’s really just, what does the overall timeline look like and what type of expectations do we need to set to see if we can come to those terms?

Rob:
Yep. Very fair question. I’m kind of curious, I mean you’re 28, so obviously millennial. I think you’re a millennial. You’re a millennial, right?

Johnny:
Yeah. I just hit the cusp.

Rob:
Okay. Yeah. I’m on the opposite side of that cusp, but do you prefer if someone is contacting you out of the blue, are you a phone call guy or a text message guy? Is a text message a bit of a breath of fresh air?

Johnny:
I don’t like text messages that much, to be honest. I like to pick up the phone. I like to hear someone’s voice. I like to hear the tone. I like to hear the energy. I just like those conversations to be completely honest. I feel like there’s so much that can be misconstrued in a text message and there’s not enough information for me to really understand how to help someone through a text message. I’m a phone guy. I love Zoom meetings as well, of course. And most importantly, I like to meet them in person. But to answer your question, phone guy all the way.

Rob:
And David, obviously you’re a millennial yourself. What are your thoughts on the matter? Are you a text message guy or a phone call guy whenever you’re talking to clients?

David:
That’s funny because I’m a millennial barely on the other side. Like, I’m one year within before I would’ve been like gen X or whatever it was. I, believe it or not, I’m the opposite of Johnny. My voicemail full because I don’t like people leaving voicemails. I probably get 30 phone calls a day. 15 of them are from spam. So, if I get a number that I don’t recognize, I just don’t answer it because it’s almost always some kind of a fraudulent call.
What I tee each people on our team to do is, if you call someone and they don’t answer, you send a text message saying who you are, because that’s what I need. You need to text me and say, “I’m so and so, I’m calling for this purpose.” And then I can either schedule a call or kick them to the right person, or call them back. But I think, Rob, you’re asking a very good question because this is one obvious problem people have when connecting with an agent is, if you’re calling and they’re a text person, you’re going to be really frustrated they’re not getting back to you.
And if you’re texting and they want a phone call, you’re going to be frustrated that they’re not communicating the information that you’re looking for. I mean, kudos to you. You’re already starting this thing off with some really good questions.

Rob:
Well, I’m really just diving into my pain points here because I think that’s a very fair bit of advice here. I always call my realtor first because I get a lot of people that send me emails and text messages and direct messages. If I’ve never met them before, there’s really no reason for me to respond if I don’t know them. But if I talk to someone via Zoom or via phone call, I can at least … There’s a human element there. It’s like, oh, that’s a real person. Here’s their tone. So, what I do is I typically will call my realtor. Hopefully they’ll answer.
I can’t expect that from super, super busy realtors, but if they do, we have a conversation and I’ll say, all right, I’m going to summarize what we talked about in a text message. Here’s what I’m looking for. If you could get me on a list, here’s what I’m looking for. Let’s say that someone contacts you Johnny and they’re like, “Okay, hey.” They got you to answer the phone. Can you sort of give me two directions here on how this phone call can go? If you write someone off immediately, for example, what is like the kiss of death that someone can say to you in that first phone call that sort of deprioritizes them amongst kind of that group of people?

Johnny:
Sure. In a broad statement, I would say someone that doesn’t have the right expectations. So, it’s going to be someone that calls me and says, “Hey, I just listened to the podcast and I want to buy in San Jose. I currently have 5K, but I’m talking to 10 other people to raise some capital. I want to do a bird deal where I can get 150% cash on cash. Don’t tell me I can’t do it because a lot of people have told me I can do it.” In a situation like that, of course, I would take on to unpack it, to really understand where they got this information, and figure out if I can come up with a plan to adjust their expectations to match the market that they’re giving.
If it’s a battle between the two of us and I just feel like everything I’m saying to them is just going one ear out of the other, they’re giving me just a lot of retaliation as to why it would work, that’s a relationship that I don’t want to get involved in. Because I can just tell that our expectations aren’t going to be aligned. I won’t be able to serve them correctly. It just won’t be a good relationship. Typically, when people are really out of line with their expectations and they’re not listening to someone that’s been in this market for quite some time and has done quite a few deals, that’s my sign to just say, “I’m not the right fit to help you. Maybe I can give you some information to better educate yourself about this market, but at this time, I’m just not the right one to help you.” That’s essentially what would be a red flag for me and the ones that I can’t help.

Rob:
What about you, Dave? I’m sure you got a couple of kiss of death statements here that you’re like, “Oh man, I can’t believe I have to unpack this.” Can you give us an example of that similar to Johnny’s?

David:
Yeah. There’s two kinds of people. The first is someone who says, “I need help buying a property and I want someone to represent me.” And they’re checking to see, can I trust you? Are you good? Are you competent? Are you skilled? And then there’s the other person who just wants information from you. They’re saying, “Hey, what can you educate me on in this area?” And they haven’t really decided if they actually want to buy or if they want you to be the one representing them.
When you get a client that’s telling you, “Here’s what I’m going to do in this market.” And, as the expert, you’re explaining to them why that might not be a good idea. You’re just basically checking to see like, is this person open-minded or are they stubborn? Because everybody eventually comes to the same conclusion. It just matters how fast you get there.
Do you get there because you willingly took this advice that made sense or do you have to go the hard way and you have to bang your head against that brick wall over and over and over? And meanwhile, prices go up $50,000 to $100,000 while you’re waiting. Part of what I think a good realtor’s doing is they’re not letting their client have unrealistic expectations. They’re not telling them what they want to hear, just so that they can get them signed up.
If a realtor doesn’t have a lot a business, if they’re not that good, if they’re not making that much money, they’re going to say whatever they have to say to get that client signed up, knowing eventually the client’s expectations are going to shift, but I want to lock them up now. I think what Johnny is describing is a more honest way to do business, but it will often lose you a lot of clients. Everybody wants to hear what they want to hear. They don’t want to hear what the reality is.
I was going to ask you Johnny, when someone’s looking for an agent, or when you’re looking for an agent, because you, like me, invest out of state, do you look for someone that tells you what you want to hear or do you look for someone that tells you what it is, and how do you gauge how honest they’re being?

Johnny:
I would say it’d be the second scenario. The first scenario I would want to speak to real estate agents and clients here, just to give you some tips. Someone that is being very agreeable, for example, if you have an intro call with an agent and you’re throwing all these grand ideas to them and they’re saying, “Yes, Johnny, I can do it. Yeah, that’s no problem. I can do that 60% cash on cash. We do those all the time.” You really have to pay attention to how agreeable they are and if they even have experience in doing these things.
Because I’ve noticed the top agents are super direct. They tell you how it is, and they give you examples of what can actually be done in the market, and they give you data points, right? They’re just not the yes, man. Typically, what I’ll look for an agent when I’m buying houses is someone that likes to explore ideas with me, but also puts me in my place.
Someone that can tell me, “No, Johnny. You can do this in this neighborhood. But you advise me that you don’t want to be in a bad neighborhood. So, if you want to be in a good neighborhood, you’re going to have to pay a premium in exchange for cashflow if you want to be in this type of neighborhood.” I’d rather have someone tell me that I have to pay more to be in a better neighborhood and lose out on profits than someone to tell me that, “No, you can buy in this neighborhood. It’s a great neighborhood. You’ll still get the cashflow.”
And then down the line I find out it’s a horrible neighborhood and my house is just not performing the way I want it to perform. So, to answer your question, David, I would say pay attention to someone that’s super agreeable, because that’s for me at least, always a red flag. For me, I would always want to check the information that they’re confirming with me, right? If I’ve done these analyses, but I’m not quite sure if it’s going to hit these numbers, but they keep telling me it’s going to hit these numbers, again, that would be kind of a red flag for me.
Sometimes I’ll even test the agents and I’ll tell them, “Can I do a 40% cash on cash here? This is what I’m seeing.” And if they tell me a little fib just to try to push me along, that’s probably not someone I want to work with. I want someone to assess my situation and really understand where I’m coming from and tell me what I can and cannot do in this market.

Rob:
That’s really great, man. I test my realtors with caution, right? I don’t necessarily expect them to know the nitty-gritty of what I’m looking for, because honestly I expect myself to really be analyzing all of these different things. Really what I want to stress check for is if there’s something that I’m missing. I’m really more looking for a realtor to point out flaws in my plan versus helping me formulate the plan.
If I come out at them and I say, “Hey, I’m looking for a 40% cash on cash in this neighborhood,” it’s exactly what you said, I want them to say, “Well, theoretically, what you’re saying is correct, but I wouldn’t do it in that neighborhood for this reason, this reason, this reason.” I definitely think that there’s a little bit of compromise that needs to come from both sides. Setting those expectations at the very beginning, I think, is something that I’ve learned over the years, is a lot easier to maintain the status quo when you can have that conversation at the very forefront of your conversation.
Kind of want to shift the gears here a little bit. I mean, we’ve touched on this a bit, but Johnny, can you give me an example of something that a client might call you and say, that’s like music to your ears? What’s something, if it’s the first phone call, client says this to you, what would make you say, “Oh thank goodness, I love these kind of clients?”

Johnny:
Yeah, sure. Music to my ears. If a client were to call me and say, “Hey Johnny, I’m currently paying $2,500 in rent right now. I want to find a way to get into real estate that doesn’t cost me too much and will enhance my living situation. Can you help me?” That type of client, I just love them because it’s very common for us in the Bay Area to pay $2,500 in rent. But if you can find a way to get into the real estate market and reduce those living expenses while reaping the benefits of being a homeowner, depreciation, tax incentives, I feel like that’s a win all day long.
Because that’s essentially what we teach here on The David Greene Team as well is just how to buy houses every single year using these strategies. So, when I hear someone with that type of situation, it’s music to my years, because I know I can help them. I know the expectations are going to be aligned there. As soon as they hit their first deal and then we work on the second deal the next year later, and they start seeing that passive income come in, and the financial burden being lifted off their shoulders after every single deal, that’s what excites me. That’s what fulfills me.
That’s why I got into the resale space, to help other investors realize that this is the path you want to take if you want financial freedom. It’s going to take a little while, but every house you buy is just, I feel like you just buy more time. That’s kind of long-winded but I hope I answered your question.

Rob:
You did great Johnny. You did great. Yeah, so if I’m hearing this correctly, we’re basically, when I’m talking to a realtor, I want someone that can listen to my needs. Hey, I need a house. I’m paying this amount. Set the right expectations. Hey, if I’m paying $2,500 a month, I want to keep it at that. It’s your job as a realtor to come in and say, “Well, in this market, you can spec this.” And then carve out a plan. Is that the process that you take whenever you’re talking to new clients?

Johnny:
Yeah. That’s exactly the process. I mean, I think the successes I found in resale was being able to listen to the consumer and coming up with the game plan for them to allow them to just follow it throughout the following years. Can I give you guys a little antidote in the beginning stages of my investing career?

Rob:
Yeah.

Johnny:
Okay, cool. As a child growing up, I always knew I would be a millionaire. I just didn’t know how I’d do it. I just didn’t know how I was going to get there. And through BiggerPockets, that was when I found that vehicle, and I knew that, okay, this is what’s going to get me to my first million. This is what’s going to get me to 10K of passive income a month. All I have to figure out is, how many homes do I have to buy and how many homes do I have to have in my portfolio to produce me X amount of income every year?
And how many homes do I have to buy in the next five years? And how much equity do I have to have within these homes? And when is the equity going to compile up to where I make my first million? When I found out how to create that blueprint, well, I didn’t create it. It was just from BiggerPockets. It was stuff I put together that I found on the forums, but I don’t want to take credit for anything that I didn’t fully create.
But yeah, when I found out how to come up with the blueprint based on what I’ve learned from BP, I just felt like that financial weight on my shoulders, it was just lifted, right? Because now I know, if I save up X amount of income every single year and I buy X amount of homes in the next six years, that’s when I’m going to net my first million. In the next six years, that’s when I’m going to have 10K in passive revenue if I stay consistent and continue to act and buy a house every year.
That was a very broad way of explaining it. But typically, someone that comes to us, we’ll assess their situation and see how much liquidity they have, see what type of assets they have. Then we’ll tell them, “Okay, if you want to get to X amount of income a year, we’re going to need to do these things within your savings rate. We’re going to need to do these things with your assets, whether it’s selling it, whether it’s doing a cashout refinance, and then we’re going to come up with a plan where you can acquire one every single year for the next five years to hit this milestone of yours.”

Rob:
I guess what I like about that is you aren’t just looking at their situation, but you’re using your experience to sort of help them carve out a plan for themselves. I mean, how often are you finding yourself, sort of in a sense, not financial planning, but how often are you relaying some of this personal anecdote and journey that you’ve had and helping people carve out similar things for themselves?

Johnny:
I would say it’s pretty often. I mean, think it’s at least 70% of the clients that we work with. Because another thing I want to mention too is, when I first started investing, we didn’t really have anyone to walk us through this process, and outside of BP, I mean, I’ve always said I’ve had hundreds of mentors through the podcast and just listening to people’s failures and successes. But to actually have someone physically there and someone you can pick up the phone and call to bounce ideas off of each other, I think that’s invaluable when you first start on your real estate journey.
To be able to cultivate that type of environment and that type of service, I think, is very important. To answer your question, Rob, I feel like yes, 70% of our clients come to us, and that’s basically what we do for them. We help them plan ahead. You can kind of see it how it’s a win-win for both of us, right? As they grow their portfolio, it grows our exposure. I think it’s just a win-win for everyone.

David:
Yeah, Johnny, one thing I want to ask you, of the 67 million in real estate you sold in 2021, what do you think was your most common client’s profile? What were they looking for and how did you help them?

Johnny:
Yeah, sure. So, I would say the most common profile would be the house hackers. Typically, they’ll come to us with about $2,500 that they’re currently paying in rent. They’ll have maybe 100,000 to 150,000 in maybe stocks or just sitting in the bank that they want to deploy. And they’re looking to reduce their living expenses by 30% to 40% through using real estate as that vehicle. I would say that’s a bulk of them. I think what was really cool was, in 2020, when I, towards the end of the 2020, I should say, when I started getting some traction, a lot of the people I helped in the end of 2020 started buying again with us the following year, because they’ve built up enough equity.
They’ve been able to convert their single family homes operate like a multi-family, so they’re cashflowing in most cases. Now, those same people I helped in 2020, I’m helping them again in 2022. Most of these people that we’ve helped in the very beginning, it’s really cool to see that they’re learning a lot and they’re able to grow by just repeating the same process. But yeah, I would say the house hackers, that’s the main bulk of where the volume came from.

David:
So, do you have a deal that one of your clients did you can walk us through, that was a house hacker, and kind of explain what the numbers worked out for that person?

Johnny:
This is a recent deal that we closed on about two months ago. This deal was in Upper West open, which is a very good area in the Bay Area. And purchase price was right around 1.2 million. They did a Jumbo loan at 10% down. So, down payment was about 120K. We were able to get a 25K closing cost credit. So, they basically just had to come in with a down payment, which was again, 120. The rehab amount was 30K. So, the total cashout lay on this deal was 150K.
Before I go on, I’ll back up just a little bit to convey what their situation looked like. This is someone that was paying $2,500 in rent every month, or $30,000 a year. And they wanted to get started in investing in real estate. They told me they’d been paying rent for last five years, which amounts to 150K that they’ve been paying to their landlord, which amounts to the down payment they’re paying now, ironically. They wanted to park it in real estate and figure out a way that made sense to them.
This property, again, was $1.2 million purchase. And what was cool about it is the main house was a three, two. It also came with a two bedroom, two bath detached ADU. It was converted from the garage, which is very common in this area. And the kicker to this is that the basement level also has another two bedroom, one bath that’s partially converted. It has all the rough plumbing in there. Just doesn’t have the dry wall and Sheetrock up, but pretty much partially converted for. Their total PITI in this is $6,000 of paying a month. And total rent they’re getting is $3,500 for the main three, two.
Then for the ADU, that’s a two bedroom, two bath, they’re renting out one bedroom for 1,200 bucks to one of their buddies, and they’re living in the other room. In this scenario, they’re basically paying $1,300 a month to live in a good area of Oakland. So, it was an opportunity to basically reduce your living expenses by half, from 2,500 to 1300 bucks, plus with the tax incentives you get for owning real estate as well, and the value add opportunity with that basement floor that they plan to convert down the road.
I just love these type of situations because it really just takes one or two deals to really change your life. Right? A saying that I really like is you’re always one decision away from changing your life. I felt like this is like these type of decisions that we can help people understand to help them grow.

David:
100% agree. One of the things I get asked a lot is, I live in expensive market. Should I invest out of state or should I stay here? It frequently comes up, because I wrote the book, Long Distance Real Estate Investing, but when your house hacking, you can get away with 3.5% down, 5% down. When you’re investing out of state, you’re probably going to be at 20% to 25% down in almost every scenario. And when you’re investing out of state, you’re not saving in the rent money that you’re paying if you’re currently renting.
One of the things that I tell people all the time is you should house hack a deal every single year. And anything in addition to that, use the bird strategy, use long distance real estate, some combination of the two. But if you could get a house for 5% down, 3.5% down, even 10% down, that you can rent out, and then when you move out of it, you’ll have another unit that can generate more revenue, that’s in no brainer.
I wanted to ask you, Johnny, of the clients that you’ve had, have you had any that just had a hard time going forward with a house hack because they had their heart set on long distance investing or have most of them sort of understood that house hacking is going to make more wealth if you’re in expensive market?

Johnny:
I feel like a lot of them come to us wanting to understand how to invest out of state because they think it’s more beneficial. In some cases, it is. But in most cases for the people that come to us, it’s not. I would say a lot of eventually understand that starting off with a house act is a lot more viable option and a more beneficial one. Because I mean, what I always tell them is, to put things into perspective, if you look at the overall cash outlay that you’re deploying, let’s say you’re looking into a market like Texas, for example.
Let’s say average purchase price is 200K and you’re doing a 20% down. So, you’re basically deploying 40K out of your pocket. Let’s say we look at a house hack here that’s 800,000 with a 5% conventional loan. You’re still deploying that same 40K. Although in one market, you’re assuming more debt. So, essentially that’s a little more risk, versus the other market where it’s a little less debt assumption, so it’s a little less risk some would say.
But if you really put it in perspective, if you look at appreciation gain, 6%, 7% on a house that’s 200K versus 800K, substantial difference. If you look at reducing your living expenses where you can pay less in rent, which is a profit in its own that is not tax, I think when people come to that conclusion, they’re like, “Oh, okay, there’s a light bulb. I can buy something in the high appreciating markets.” It probably does make more sense right now, like buy a couple of these in a high appreciating market, build that equity, whether that’s just letting the market continue to go where it’s at or do a little forced appreciation, have that be my nest egg, take that equity, extract it and move it into a different market. Usually, people see that it’s more beneficial to house hack, but we do have certain situations where they want to go out of state versus house hacking.

David:
It’s just so uncommon to find a realtor who can break down what you’re doing and help them see the value in why it would make more sense to house hack in this case. That brings me to a problem that Rob, you and I were facing when we were looking in Arizona Area to buy a property. We were looking in a couple different cities and we had a couple different agents. I remember saying, “Look, if we’re going to do this, we need to get an agent who specializes in this type of real estate and has background into what we’re trying to do.
And you were like, “Got it, Dave, I’m on it.” I remember thinking, is he really going to be on it? Did he understand what I was saying? And you did. You ended up finding a really, really good agent. I wanted to ask you if you could share what the process that you went through was like to find that person.

Rob:
Yeah, definitely. I knew that we were going to be going into a luxury buy here. It’s not very common for a lot of realtors to necessarily have $2, $3, $4 million listings that they own. It takes an experienced realtor. I didn’t want to just call up anybody. I just went and I looked up most successful brokerages in that city. I found one, I called them, and the receptionist was like, “What are you looking for? Give us some details here.” And I was like, “Well, I’m looking for a very specific realtor. I’m looking for someone that A, specializes in luxury, and B, and this is more important, specializes in short-term rentals.”
Because it’s always really nice to have a realtor that I have some common ground with, just so that they don’t … So I can pull my weight in the relationship if you will. And they were like, “Okay, great.” They set me up with this realtor and I talked to them, and I did the mini interrogation of like, who are you? What do you do? No, but I talked to them for a bit and I started kind of asking, probing for more short-term rental related questions, to the point where they were like, “Okay, yeah. I don’t actually know too much about short term rentals.”
I was like, okay, that’s what I thought, no big deal. And they said, “But I do know one guy, one guy who’s just the short term rental sniper out here in Arizona. He’s the guy you need to talk to. He owns a property management company. He owns five luxury rentals. He is a luxury specialist in the short-term rental market.” And I was like, “Okay, great. That sounds too good to be true. You’re just giving away a $3 million lead? All right. Sure.”
He was buddies with this guy. We connected, I talked to him and he completely wowed me. I finally met somebody that I could go toe to toe with on the short term rental side and actually educate me in the luxury space. I remember I talked to him and I was so fired up, and I called David. I was like, “Dude, I think I found him. I found the guy. He’s smarter than me in short term rentals and he’s going to help us.” And David was like, “Ha-ha, yes. This is exactly what I wanted.”

David:
Well, I think part of why you really liked him was he owns them himself. Right? He owned short-term rentals in the price point we were looking at in that area. I don’t think you could find a better agent than someone who literally is doing what you’re asking them to help you do. And that gets passed up a lot, is if you’re an investor and you’re looking to find a real estate agent to help you, and they are not an investor, you’re going to be frustrated a lot when you’re wanting information that they just can’t provide. So, I kind of wanted to turn that to you, Johnny, and ask, how much do you think your own investing experience played a role in your success representing people that were trying to do the same thing?

Johnny:
I think that played a huge role in my success because I personally wouldn’t want to go to someone for advice if they haven’t done what I’m seeking advice for. It just doesn’t seem productive to my goals. I think being able to convey the mistakes and the successes I’ve had, being able to convey what plans have worked for me and what plans have not worked for me, and being able to just speak with confidence when it comes to that because I have that experience, I think it’s definitely the game changer. I definitely think it’s contributed to 80% of my successes within this space.
I think it’s just a breath of fresh air when you know someone that knows more than you and knows someone that’s been there, done the mistakes so you don’t have to do those mistakes yourself, and really has a plan in place and has executed on that plan. So, I would say it’s a huge percentage of my success in this space, David.

Rob:
I wanted to quickly kind of ask a follow up here because obviously you’re crushing it. You’re crushing it in the realtor game and you are also investing. For you, personally, where are you at right now? Are you want to heavy up in investing? Does the idea of investing fuel your desire to be a realtor? How has that arc really panned out for you personally, Johnny?

Johnny:
Yeah, sure. I feel like they both coincide with each other because I do enjoy helping other investors get started in their journey, but I also do really enjoy buying houses and building my portfolio for sure. But I think both of them coincide with each other. For me personally, I want to have the opportunity to help over a hundred people this year and I also want to have the opportunity to have 50 doors at the same time. To answer your question, Rob, it kind of coincides with each other. Because the more I learn from investing, the more I can then convey to clients as well. It just feel like a full circle in my opinion.

Rob:
Awesome, man. That makes sense. I like to see that you’re still wanting to grow, right? Because this is the same thing that I went through with my Arizona realtor, where he’s got a property management company where he manages 60, 75 luxury properties. He owns six luxury short-term rental properties and he’s a realtor. I was just like, “Why are you doing this to yourself? Just focus on any of those three things and you’re probably going to be fine.” I think he just genuinely love connecting with investors, especially investors in his specific niche because they’re few and far in between.

Johnny:
Yeah. [inaudible 00:35:21] really cool about the resale space is like, through the mentorships that we can provide to people and seeing them grow, it’s like I bought the houses to be honest. We’re bouncing ideas off of each other. We’re coming up with these game plans, and just seeing them actually come to fruition, it’s like, damn, that’s basically like my deal too. I always like that creative side of real estate where you can come up with different plans, whether that’s buying a single family house, chopping it up into three different units and really extracting the cashflow and seeing it all come to fruition. It’s pretty cool to me. That aspect of the business, I enjoy a lot as well. Just kind of the more project management side and kind of the more visionary side, if you will.

Rob:
I’ve got to imagine that, in your journey now, you’re on year two, as we’ve talked about, you’re crushing it. Year one, I have to imagine, was the year that Johnny marketed the heck out of himself. You were just out there marketing and building your reputation and your brand as a realtor. Year two, I got to imagine that maybe it flips a little bit where you don’t have to market as much and people are finding you. So, can you give us an example of how we find our Johnny, how we find this unicorn realtor that is seasoned investor that knows about cash on cash returns and house hacks and appreciation, all that kind of stuff? How do I find a good realtor like you?

Johnny:
Yeah, I would say, first and foremost, BiggerPockets, going through their forums. What I really like about their forums is because you can see how other people are … How helpful they are. I’ve had countless times where people would reach out to me from an old post that did two years ago about house hacking or about one of my flipping posts. And they just reached out because they thought my answer was very constructive and it was very helpful to them. So, I would say, for me personally, I like to scavenge through the BiggerPockets forums and look for agents that are having these good responses and people that convey that they know what they’re talking about within their market.
Agent Finder is a great place to do that. And just reconfirming that again, what the responses they have within the forums. Outside of that, I really like what you did, Rob, because that’s something I’ve done in the past as well. Just call different brokerages, different high producing brokerages, and look for the top producing agent. But I would say nine out of 10 times I did that, they always referred me to someone else. Because the top producing agent is typically pretty busy, and I think coming from a more investment background, they just wanted to refer me out to like another producer.
But to summarize everything, I would say use the forums that … Use it as a resource because it’s a really big one. That’s where I found most of my business and one of realtors, I should say. Then use your technique of just calling different brokerages and trying to find a top producer and interviewing the one that just makes the right fit for you.

Rob:
I do want to touch on the power of a good forum. I mean, just in the past couple years, I’m an online guy, I like being online. I like talking to people on the internet. I’ve posted so many things on Reddit that years later, people will still send me DMs on Reddit and say, “Hey, I really like this tiny house or the shipping container that you’re building,” or whatever, and all that kind of stuff. It’s so crazy, the DMS that I get, exactly the same way on the BiggerPockets forum too, where if you put thought into your post, if you post something or you have an answer that’s just super well thought out, the amount of DMs that just come from that, people that are just wanting to pick your brain on that subject, or work with you, it’s really pretty impressive. I think.

Johnny:
Yeah, it stays there too. Right? I mean, I don’t know what type of backend work BP does, but my post that I get a lot of traction about was almost like from four years ago. Now, I’ve seen some posts date back to like six, seven years ago that I still refer back to, and I’ve screenshotted to put into my syllabus. Those posts are there forever. So, it’s a good way to market yourself without having to really market yourself in my opinion.

Rob:
Yeah. What about you, Dave? I mean, obviously you gave me the secret sauce here.

David:
When I wrote Long Distance Real Estate Investing, I put in there several ways that you can find top producing agents or people that will help you. One of them was using BiggerPockets, and it was just like Johnny said, is you go through the forums, you look for people that are engaged, and when you call them, here are some questions that you ask. A common mistake that I see is people assume all agents are the same and you just grab the first one you see and then you go look for the house. What happens is you end up doing all this time and energy and effort and emotion looking at properties, and then you send them to your agent to say, “Tell me this, tell me that.” And you wear the agent out and then they just stop responding to you.
Then you start calling the listing agent yourself and you start saying, “What about this? What about that?” And the listing agent’s like, “You’re not my client. You have your own agent. They should be finding that out.” And you end up in this agent purgatory where nothing’s getting done and you can’t figure out why. I look at it differently. I look at it like an agent is an asset, just like the real estate is an asset, and I have to go hunting for it. I can’t just assume every deal’s the same.
I can’t treat people like that either. I have to find the agent that will help me. The one you found for us, Rob, is an asset. When we looked at our numbers, we thought, these are too good to be true. There’s no way that it’s going to generate that much revenue. And he came back and said, “No, that’s probably the low end. It’s probably going to do more than that based on these six properties that I own myself.” And the 50 properties that are managed, that he has access to seeing that data.
Johnny is an asset. He owns property in the area that he’s helping people in. He knows what they’re going to rent for. He has contractors that he can refer you to that can do a lot of this work. He can even help you with what the bid would be or what the approximate bid would be to convert a basement or add a bathroom. He’s that knowledgeable because he does this. So, you got to put the same effort into finding your agent that you do into the property. You start with that. You look for the agent first. There’s a lot of frustrated people that are frustrated because they’re going at it the wrong way.
Now, one thing that is available now that wasn’t when I wrote Long Distance Investing is BiggerPockets has actually created a way for you to find an agent faster. Rather than having to just go through the forums and look for someone that might be in that area and might be good, you could go to biggerpockets.com/agentconnect, and then type in the area that you want to invest in. And it will pull up a list of agents that are also BiggerPockets members.
I really like that, because if they’re a BiggerPockets member, they are more likely to understand real estate investing than if they’re just someone that you found on Zillow or another site. You also can then see how many deals they’ve done for other BiggerPockets people. So, if they’ve done zero deals versus my profile, which probably has a hundred or a couple hundred on there, you can see how much action we’re getting and then you can read reviews from the people we had.
You can look and see what properties other clients bought, right? So, if you go look up our profile for The David Greene Team, you’ll see, these are the areas that we helped clients in and these were the houses that were bought. You could do a lot of the research right there because BiggerPockets made it easier. Now, you still have to do the research. You can’t just find any agent on BP and be like, “Well, they’re a BP agent so we’re good.” That would be like just finding any house that’s for sale on any platform and assuming that it’s going to be good.
But when you … I get all the time, people will email me and say, “Hey, David, what am I supposed to do with this? Will the bank approved me for this kind of loan?” The answer is usually, “Well, did you ask your loan officer?” “No, I didn’t ask them. I thought I had to know.” No, their job is to tell you that or tell you how to do it. Why are you asking me a question about title. Your title company is supposed to tell you that. And there’s just this thing with investors that think they have to do it all.
Now, if you’re looking for off market deals and you’re trying to put together creative things like seller financing, because you’re not going to get a conventional loan. In that space, you do sort of have to operate by no everything yourself. But if you’re looking at something on the MLS, you should have an agent that can direct you to what to look for. They should have connections for a lot of the things you’re going to need.
The loan officer should help you the same way. And I just want to encourage everyone who’s trying to pick up some traction, if you’re having a hard time it’s because you don’t have a Johnny. If you had a Johnny, you would just say, “What can I expect to this market?” And Johnny would tell you. Well, how much would it cost to fix that? It’d be approximately 30 to 50K. Well, what would that do for the rent? It would be about this much. You get a really good understanding by using the experts. And there’s too many people in our field that don’t understand the asset class of real estate.
Rob, I know you have seen this with as much real estate as you’ve bought, where you come across that agent and you think, I know more about this than you do, and this is your job. It’s maddening. I wanted to kind of throw that back to you, Rob, and then to you, Johnny, what are some things that you have noticed when you picked the wrong agent that lets you know, I need to move on and find somebody else?

Johnny:
For me personally, well, we’ll start with, what’s wrong in an agent? Or what I find to be not as attractive in an agent. My expectation of an agent is to find the correct deals for me and convey why the deals will work but based on the criteria I’ve given him. Red flags for me is someone that’s not communicative, someone that doesn’t send me deals, someone that doesn’t put an effort to be in front of me.
Versus a good agent, I’ve noticed that is one that’s constantly sending me deals. Hey, Johnny, this is one you should buy. These are the reasons why I should buy it. Here’s the Rentometer. Here’s the P&L. Worst case scenario, I think you’ll be here. Best case scenario, you’ll be here. It’s literally just like laid out for me like, oh crap, he put everything together. They’re in these organized folders. And all I have to do is reconfirm the math, do my due diligence real quick and say yes or no. That experience works really well for me.
I’ve noticed that when I’m on the other side as a real estate agent, helping our clients, it works really well for them as well. Because they’re coming to us looking for some type of guidance. Of course, as a client, you still should have a game plan in place and double check everything. But I really like the experience where they lay everything out on the table and it’s as simple as yes or no. And I think that’s what makes a good agent, someone that does a lot of good follow up and someone that can just lay everything out for you and consistently provide you deals where you can look at it and review everything they’ve given you, and it’s as simple as, does it meet my criteria or does it not? And you say yes or no.
I think the ones that create challenges are the ones that just blindly send you deals and say, has a little bit unpermitted work. I don’t really know what to do with it, but let me know what you think. That becomes an issue of, okay, now I got to take time from my W-2 job and look at this and spend hours researching about it, which it is part of the game. It is part of buying real estate, but what I would prefer and what I find in a good agent is someone that has listened to me in the very beginning and conveyed all the items that I need to understand to be comfortable to move forward.
Switching it back to the client side, I think that’s very important too, to be able to come to the agent with some type of general consensus of what you’re trying to do. Not saying like, “Hey, I have to 20K. I’m not really sure what I want to do. I don’t really know what the next couple years look like. Can you just find me a deal and get me a return on it?” Versus someone that says, “Hey, Johnny, I have about 50K. I’m looking to reduce some of my living expenses. I’ve looked through Zillow and looks like the price points of these homes are 800.”
“I’ve talked to a lender, they said I can get approved for 800. I’m just trying to figure out how to get started. Can you help me?” They’re vastly different in terms of the two outlooks. So, to summarize my thought process there, I would say a good agent is someone that’s proactive, someone that’s communicative, and someone that just lays everything out for me so I can make an easier decision. A bad agent is someone that’s completely opposite of that, that’s not as responsive, that gives me an extra job when their job’s supposed to be making me more comfortable and making me understand that this is the right deal for me or not. That’s basically how I’ll grade the two different sides.

David:
What about the clients, Johnny, that are going to ask you to do a lot of research that you may think is not an agent’s job? Before Rob you answer, I just want to get Johnny some follow up. What are something people will often ask of their agent that you would say, that’s something that they should be doing on their own?

Johnny:
I would say, although I know a lot about permitting and how to do those things, because I’ve done it multiple times personally, I still think a client or a newer investor, they should put the legwork to do it themselves the first time around so they can understand how that process works. Although I do run numbers for our clients, I always tell them, “This is what I came up with. These are the tools I use. I want you guys to then do it yourself to see what you come up with.” And we can both put our heads together to see if it makes sense.
That was kind of not a direct answer to your question, David, because I think it really depends on what type of expectations are set in the beginning. Because I do have clients that they’ve purchased a couple deals, and they’re like, “Johnny, I just need you to send me a good deal, give me the rents, and I’ll run everything else myself.” Then I have the other end of the spectrum where they tell me, “Johnny, I really want to learn how to invest. Can you walk me through what it looks like for the first couple deals and show me how you run the numbers, and eventually I’ll get to a place where I can do it myself?”
It’s hard for me to directly answer that question because it’s different for every client. But my standard answer to that, I guess would be, whatever you’re trying to figure out from your agent, you should try to look for the answer yourself from two different resources and then go to the agent to ask them. But it also, again, ties back into what expectations were set from the very beginning and what that communication log looks like between the two of you and what you decided on before working together. Again, David, that was kind of a running around to your answer because it’s just so different client to client.

David:
No, I was more getting at the idea that a client may say, “Hey, agent, I’m not pre-approved and I’m not going to get pre-approved until I find the perfect house, but here’s 50 houses I want you to show me. And I just want to text you randomly and have you take … Because that’s your job is you should take me to see these homes.” Then you go look at the house. You say, “What do you want to do?” And they say, “Oh, I’m not in a rush. I’m just going to wait and see.” And you find yourself in the situation where the client is kind of running the show.
And they’re telling you, “This is what I want. Go do it for me. That’s your job.” You can see, as the agent, they’re never going to get success from that. At what point do you feel it’s appropriate for the agent to put their foot down and say, “If you want to hit your goal, the way you’re going about this isn’t right, that’s not something that I can help you with?”

Johnny:
Immediately. I feel like you have to do that right away. Right away, upfront. Because at that point, you’re setting the wrong expectations, and then the relationship is just going to be bad throughout the whole time period. It’s funny because I think a lot of agents do this. I feel like, when you’re working with clients, and this is for clients as well, you’re entering into a partnership where you guys are both helping each other build wealth,.
Whether that’s through someone that’s selling the house or whether that’s through someone acquiring their property, you’re still in a partnership together. So, you have to lay out all of those things and really, really find a level of commitment on both sides, right? Because it’s just, it doesn’t make sense for someone that’s not pre-approved, but expects an agent to show 50 houses to them, because it just shows that you’re not committed and you’re not committed to making this partnership work.
I feel like people should understand that because time is very important and you should enter into a partnership with someone with a win-win attitude. So, in that situation, David, to answer your question, I think you really have to have that difficult conversation up front and immediately because that’s just going to tarnish the experience for both people as you get further into it.

David:
Rob, same question to you. When you are working with an agent, what are some of the red flags that you notice and you think, “Ugh, I don’t think this one’s going to work out, I need to cut bait and find another one?”

Rob:
There are a couple things here. I would say one, I do like to know that they have some investment experience. I mean, it’s not required, but I do want to know that they play the game a bit. That way they’re not just speaking to me in conceptual terms. They actually have tactical things that they can help, anecdotes like Johnny has, that helps me understand certain situations. That would be one. Two would definitely be the Rolodex. Hey, do you know a contractor that can help me with this basement conversion or a landscaper that can help me de-weed this plant box, or an electrician that can help replace that floodlight?
If the answer is no on the majority of those vendors, I’m just going to move on because it’s so much easier for me to find somebody that knows all these people. That way I don’t have to Google electricians, landscapers, pest control, all that kind of stuff. It’s very helpful. But really, I would say there’s two things that really irk me when I’m looking for my realtor. Thing one is when I call and I lay out my expectations and what I’m looking for. And I say, “Can you put me on a list?” And they say yes, and then they don’t put me on the list. That’s very frustrating.
Usually, I give it about a week depending on how urgent it is. And if I follow up and say, “Hey, haven’t gotten that list yet.” And then they say, “Oh so sorry. Yeah, sorry. I’m working on it.” And if they don’t send it again, then that’s basically, I’m like, okay, I’m going to move on. That would be one thing. Second thing here is whenever … And I’m a little bit more flexible than Johnny here. I mean, I don’t necessarily expect a deal to be outlined because I can do my own research.
But there’s a really big difference to me when a realtor out a deal, right? Like crazy off market deal. And I’m on BCC list. Versus when they shoot me a text message with a deal that they’ve picked out. Like, our Arizona realtor, he texts me houses from Redfin all the time.

David:
[crosstalk 00:52:43], Robby.

Rob:
When he sends me a Redfin listing, I’m like, oh, he actually was in the Redfin app. And he said, “Rob would like this.” And then he sends it to me, and I’m like, oh, this fits my criteria. This is exactly what I was looking for. He doesn’t have to bring me the off market juice. It doesn’t have to be the craziest off market gem. I just want something that’s curated based on my expectations.

Johnny:
I love that you said that, Rob. I really do because I think that’s what separates a successful agent versus a unsuccessful agent, is someone that’s more proactive in just sending the deals and not just putting people on listing alerts. I know that was your first thing. Because part of what I think made me very successful in this space is, what I’ll convey to the clients is, before we even hop in a car to go view any houses, I’ve already done some research on it to see if that meets the criteria that you’re looking to get into.
For example, if we’re going to go look at three houses, I’ve already called the listing agents ahead of time to understand what offers we have to be at, what type of offers are coming in, if they have any special terms, like a rent back for example, and just see that those type of turns meet what the client’s looking for. Then once I do all that research upfront, I’ll present it to the client because we know that we have a good shot at it. I know that, this is more advice for the agents, I know that takes a lot of upfront work, but it creates such a good experience for both people, right?
Instead of going to all these houses and then finding out after you view 10 houses, you only have a shot at maybe one, right? Opposed to just canceling out all the noise and digging deep and doing that upfront work to provide a better experience for your clients. I think that’s another thing clients should look for as well, is someone that can do that research on the backend and bring deals to you that are tangible.
Especially in a high appreciating market where it’s very competitive, half the time you don’t even know, this is what people have told me, half the time their realtors took them to places they didn’t even know they can compete against. I think that’s another thing to look for in an agent and that’s another thing to do as an agent, because it just saves everyone so much time and creates a better experience.

Rob:
Awesome, man. Well, I really like to hear it from the other side, Johnny. I appreciate you putting it out there because I’ve learned a lot, even just doing this podcast. That my expectations or what I want oftentimes, aren’t necessarily realistic, and it’s because I don’t just sit down and talk to my realtor and say, “Hey, what would you like to see?” I think you summarize it perfectly. I don’t actually hear a lot of people say that it’s a partnership. I’m in a partnership with my realtor.
I have to put forth effort, and so do they. And if they put a lot of effort out there and I don’t reciprocate, well, they’ve just put a lot of time and wasted it. I think, if you could start thinking of your realtors as partners in your investing journey, that will be a very fruitful relationship for many, many, many years.

David:
All right, Johnny. If people want to reach out and contact you, I know you’re pretty active on BiggerPockets, but let’s say that they want to use you as an agent to buy or sell a house out in this area, how can people find out more about you and where can they reach you?

Johnny:
My Instagram handle is investingjohns. Spelled I-N-V-E-S-T-I-N-G-J-O-H-N-S. And yeah, that’s how they can reach me.

Rob:
And by the way, do you happen to know your BiggerPockets profile name, or your username, or handle on there?

Johnny:
Yeah, so they can find me at [email protected] That’s spelled J-O-H, and then [email protected]

Rob:
Awesome. What about you, David? Where can people find you, my man? And how can people find you on the BiggerPockets forum too?

David:
I’m not too hard to find on BiggerPockets, believe it or not. If you search for David Greene, you should be able to find me. I think my profile name on BiggerPockets is also davidgreene24, just like on all social media. My YouTube is youtube.com/davidgreenerealestate, but everything else is davidgreen24. And if you are an agent, if you’d like to get trained by us, if you’d like to join our team, if you’d like to join what we’re doing, please do reach out.
Johnny is a great example of what it looks like when you get an agent that loves real estate, invest in real state, wants to help people, and is pretty smart, and they all come together. And he’s one of the top 100 agents in the biggest real estate brokerage in the world in his second year. Johnny, I’m very proud of you. I’m very glad to be in business with you, and I appreciate you joining us today. Rob, I got to say, I’m proud of you too. You asked some really, really good questions.

Rob:
Thank you. Thank you.

David:
I thought you were going to say, do realtors poop in the toilets when they’re showing homes? No one knows, and I was wondering if that’s where it’s going to go, but you actually avoided the poop joke and you stuck to really relevant stuff.

Rob:
Well, I did ask it, but it was edited out in post, so what can you do?

David:
All right. Well, thank you very much, Johnny. Anything you want to leave us with before we get out of here?

Johnny:
No, I think this was a great talk. Thanks again for having me, guys. This was awesome. This was very surreal to me. Yeah, my utmost gratitude to you, guys.

Rob:
Awesome, man. Well, thanks so much.

David:
All right. This is David Greene for Rob poop joke Abasolo, signing off.