Ashley:
This is Real Estate Rookie, episode 335. My name is Ashley Kehr and I am here with my co-host, Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today, we’ve got someone who’s like a born, bred, raised in the bask of all things BiggerPockets. We got Tim Yu on the podcast and he’s been a faithful listener for quite some time. He said he listened to the podcast every day for almost two years, but really use everything he learned in the podcast to really kickstart his investing journey. The guy closed on 10 deals in a year. A little less than a year actually. And you’ll get to hear exactly how he made that happen.

Ashley:
Yeah, I love how we go through every single deal. So listen to him talk about all the ways he was able to finance these deals. Not one was funded the same exact way, so he is going to break down each deal he did and how he was able to get financing for them or get a very creative… One deal, he only paid $2,000 out of pocket and didn’t have to go and get a bank loan. So he explains how he was able to do that.

Tony:
He even got paid to buy a property. He went to the closing table and got a check back. So you’ll get to hear how he made that happen. But overall, Tim is just, I think, a shining example of what happens when you’re a big part of the BiggerPockets community. He was active on the Real Estate Rookie Facebook group and the YouTube channel on the actual podcast itself and the forums. And it’s like when you do those kinds of things, good things typically happen.
So if you’re part of the rookie community and you haven’t yet, we would love if you could leave us an honest rating and review. We’re at 1,595 ratings as of this recording. So hopefully by the time it airs, we’re at like 1,700. We should be there at least. But take a few minutes, let someone know what you think about the show because honestly, the more reviews we get, the more folks we’re able to reach. And hopefully that leads to more stories like Tim’s. So take a few minutes, leave that review for us.

Ashley:
And if you have a story like Tim’s or you just completed your first deal, we would love to hear about it. Please apply to be a guest on our podcast by going to biggerpockets.com/guests. And I will tell you that if you don’t think that your story is good enough, it probably is good enough and we’d love to have you on. I’ll also tell you a little secret that when our producers go through the application, they love, love extra detail. So really take your time and give us all of the nitty-gritty about how you got into real estate investing and we would love to have you on if you would take the time to share it with the rookie community and inspire others. Welcome to the show. Thank you so much for coming on with us today. Can you tell us a little bit about yourself?

Tim:
Yeah. Hey, I appreciate you guys bringing me on the show. I’m Tim. I’m 30 years old. I’m actually a full-time Army officer stationed at Fort Knox and I live in Louisville, Kentucky. I started investing back in November 2022, and I kind of dabbled in a lot of different things throughout the last year. At first, I wanted to do long-term rentals through BRRRRs, and then I ended up having a love and passion for fix and flips. And then I went into the creative space and that’s where I’m right now.

Ashley:
Awesome. So before we go any further, just give us an overall picture of what your portfolio looks like today.

Tim:
Yes. So I have two duplexes. I have three single families in Louisville, Kentucky. I have two partnerships in Oklahoma. They are two single families as well. And then we also have a fix and flip partnership in Atlanta, Georgia. I’m currently working on a fix and flip right now in Louisville, Kentucky, which we just started renovations and then we’re closing on a property in a couple of weeks, which is a seller finance deal.

Ashley:
So you had said 2022, so this was all within a year.

Tim:
Yeah. So November will be my one-year anniversary.

Ashley:
Wow, awesome.

Tim:
… of real estate investing.

Tony:
That is amazing.

Ashley:
Yeah. It’s very cool.

Tim:
So it’s been so fun.

Tony:
I just want to ask something because… Let me ask this question first. Before you got that first deal in November 2020, how much time would you say you spent educating yourself, getting yourself mentally to a point where you were like, “Okay, I’m ready.”

Tim:
So there was a lot of things that I did. I was always an investor of some sort. I had that mindset with stocks. So I did the 401(k), I did the Roth IRA type thing. My brother-in-law is actually a big investor with stocks and stuff, so he would teach me, “Hey, if you make $50 mowing a lawn, put half of that away in a 401(k) and then you can keep that half to spend it.” He told me that when I was 11 years old. As soon as I started working a full-time job, I always decided to put money away into my investment accounts, which we’ll go into that probably later of how I used it to invest in real estate.
But prior to that, I live in Louisville, Kentucky. So if anyone is in the military, especially the army, you know that all the duty stations are terrible locations. I was single at the time, so I wanted to live in a city, so I had to commute to work every day. So I drove 50 minutes each way every day for two years and I got started on real estate by listening to you guys. So I listened to the Rookie Podcast every single day for almost two hours a day for a year and a half. And I’m sitting-

Ashley:
So you’re sick of us by now.

Tim:
I still listen to you guys. It’s absolutely incredible because I sat in my car one day and I realized I was listening to you guys for a year and a half and I never did anything about it. I always wanted to say, “Hey, I wanted to buy a house now, but maybe I’ll just do it later.” I ran into a real estate agent by chance when I was trying to get out of my rental lease. So I was asking the lady, “Hey, when do I need to tell you I’m moving out?” And she’s like, “Why are you moving?” “Well, I want to go buy a house.” A real estate agent literally walked around the corner and was like, “Hey, I’m an agent. Do you want to work with me?”

Tony:
No way.

Tim:
And I still work with her to this day. She’s incredible. And I was like, “Let’s do it. Let’s go get a property.”

Tony:
That’s a lesson learned for all of our agents that are listening to the podcast. Just lurk around corners and just wait until you hear someone say that, “I want to sell my house.” But Tim, so you have this year and a half journey of educating yourself, which is what I’ve found is the typical time range for people that really take action is somewhere between a year to two… Six months, a year and a half is a good timeframe typically, but you close on that first deal and then you just go on a rampage where you’ve got 10, 11 deals done in a year. I know we’ll get into the specifics, but just at a high level, was it your intention going into it to move this quickly from the beginning? Did the motivation or the momentum just build after one deal? What was it that allows you to move so quickly?

Tim:
This was definitely not the plan. I wanted to do one property every couple of years because I am a veteran, so I wanted to use my VA loan. So I wanted to do house hacks. That was the big strategy that I wanted to start off with, which, “Let’s house hack a deal or let’s renovate a property in BRRRR and just slowly grow from there.” I think they call it the real estate bug. I bought one house and I was like, “Oh my gosh, this is so fun.” I think the most fun I have now is going to the closing table. So I think it’s just been a rush. It’s been so much fun and the people you meet in real estate world is incredible. So I think it just snowballed from there.

Ashley:
So let’s talk about being able to fund all these deals in a year. Where is all of this funding coming from? Let’s start out with the first deal and then maybe walk through how you were able to fund the other ones.

Tim:
Okay. So the first deal originally was going to be a BRRRR. So it was around Thanksgiving time. I was walking in the park with my girlfriend at the time who is now my fiance.

Tony:
Congratulations.

Tim:
Thank you, man. I appreciate it. And she was actually yelling at me saying, “Hey, get off your phone. We’re outside. Enjoy the weather.” I’m creeping on Zillow the whole time. It was on the MLS and a house was $100,000 and it actually dropped to $50,000 overnight. So we went to go see it. There was definitely something wrong, but there was a squatter in the property that the seller had to get rid of and he was out of state. So I offered $40,000 cash to purchase the property. They accepted the contract the next day and I realized I didn’t have that money in my checking account.
So I asked my agent, “Hey, what do I do?” She’s like, “Look at hard money loans.” I had no idea what they were, so I went on YouTube and became a YouTube warrior and was just watching videos on hard money loans. I ended up linking up with a hard moneylender at one of my local real estate meetups and he was like, “Hey, if this is your first deal, I’ll fund you.” Because I actually had some issues getting some hard moneylenders to approve me just because of my lack of experience and they weren’t exactly confident on the property, but he actually took a chance, so he loaned me 90% of the deal and I had to find the rest to close.
So I begged my parents, I was like, “Hey, loan me some money. This is going to work out.” And they actually said no. So they’re very old school. We don’t have a financial background. They had all their money in a checking account and for the last 20 years, so they didn’t really feel comfortable with this type of investment. So what I did was, I was like, “Well, if you don’t lend me the money, I’m going to sell my 401(k) off and I’m going to fund this deal myself.”
That’s what I decided. It’s like we talked about earlier, my whole foundation was stocks and invest for 30, 40 years and retire off that money. I’m sitting in my room contemplating, liquidating the account.

Ashley:
Pushing that button.

Tim:
Oh my gosh. They had to call me and say, “Are you sure you want to do this?” I literally was like, “I need another day to think about it.” But at the end of the day, I think I took a chance and took a gamble. And I think a lot of investors and entrepreneurs have to take that leap one day. I said, “I think I’m going to make more money doing this than sitting in my retirement account.” And that’s pretty much how I decided to press the button and sell it all.

Ashley:
So first I just have to acknowledge this, you threatened your parents to give you the money or you’re going to liquidate your 401(k). Did they say, “Go ahead, I don’t care, that’s on you”?

Tim:
They basically told me like, “Hey, you’re an adult. If you really believe in this, you doing that shows that you’re serious.”

Ashley:
Yeah.

Tim:
Don’t support me.

Ashley:
Which I think is a wonderful response. Yeah.

Tim:
They support me in what I do.

Ashley:
Exactly.

Tim:
Do they agree on everything? A hundred percent, no.

Ashley:
It’s the support that is important that they weren’t saying, “Don’t do it at all. You’re making a super stupid decision.” It’s that, “If you’re really passionate about this, you want to do that, then make that investment.”

Tony:
Sorry, before we move on, I just want to ask one question because you mentioned this, Tim, about the hard moneylender, and you said that because you didn’t have any experience that a lot of hard moneylenders weren’t necessarily excited to work with you, which is true. A lot of hard moneylenders tend to favor working with folks that have a bit more experience. But you said you found this hard moneylender at a real estate meetup. Were you just going around shaking hands saying, “Hey, someone give me some money.” Or how did you broach that conversation? And if I’m a new investor in a similar situation, what should I be doing to find that hard moneylender?

Tim:
So I watched a video a long time ago on YouTube. It was one of the big investors out there and he said, “Hey, if you go to a meetup, don’t just go to a meetup to just network.” He said, “Have an intention and have a plan.” So I went to that meetup looking for a lender of some sort. I wasn’t sure if it was going to be a private person where it was a friend and one to just lend on the deal or if it was going to be an entity, like a hard moneylender or something like that.
So I asked everybody, “Hey, do you know any lenders? Do you know any hard moneylenders?” And that’s how I got connected with a couple of them. Throughout the week, I called every single one of them and they were like, “We have a minimum amount of money that we want to loan out.” And my deal was under that threshold. So a lot of those hard moneylenders wanted at least a hundred thousand dollars loaned out and I was asking for 70.
So they were like, “Well, it doesn’t meet my requirement and also, you don’t have a lot of experience, so we don’t really want to lend on this.” And luckily this one guy said, “Hey, I’ve been in your shoes before and as long as you can show that you have some sort of money in the back.” So I leveraged the 401(k). I said, “I have this money in a piggy bank and I’m willing to let it all go if this deal goes south.” And he was like, “Let’s do it. Let’s close.”

Ashley:
So with that first one, was it more just the experience part or was there something actually with the deal they didn’t feel good with?

Tim:
A lot of it was the experience and the amount of money I’m asking to borrow. So because it was under a hundred thousand, they’re like, “It’s not worth it for us to take the chance.” And also they asked me how many properties have we done? I was like, “This is my first, zero.” And it wasn’t in the best neighborhood either.

Ashley:
Okay. That’s what I was wondering, just because sometimes the hard moneylender will actually do their own analysis of the deal and curious as to if they said, “We don’t like the numbers on this property at all.”

Tim:
Actually, the guy who agreed to do the deal actually sent out his own appraiser and then it ended up appraising for 118. So we were all in on the deal for 70, and it appraised for 118, so then he was like a hundred percent good to go on it after that.

Ashley:
Okay. So let’s just go into how you funded some of the other properties real quick, and then maybe we can go into one of those deals and work through the exact numbers on it. But I think what a lot of people want to know, “Which I want to know is how were you able to get these 10 properties within the year?” So what were some of the ways that you scraped up money? So your first deal liquidated your 401(k), and then you had your money guy, but what are some of the other ways you’ve had to fund the deals?

Tim:
So after we purchased the first property and we were renovating it, or I had the real estate bug, so I was looking for another deal. Since I liquidated the 401(k), I had about $30,000 left just sitting in the pot. So we found a duplex on the MLS that needed a little bit of work. So I went full traditional. I did the 20% down on that property and I did the light renovations myself, and then that’s just a long-term rental. And then as we moved forward, I was out of money, so I used pretty much all my money on that down payment.
So then I started looking to use my VA loan. So the next property was the duplex. That’s the house I’m in now. We got the 0% down with the VA loan. And then we also had sellers concessions where the seller actually paid for the down payment. So I actually got paid a couple hundred dollars to close on that. So I live in one unit, and then the other unit in the duplex is actually a midterm rental for nurses because Louisville has a crazy nursing market out here.
There’s like five or six hospitals around here. Now, I’m completely out of options. I have no money, no VA loan. And I was like, “Let me try wholesaling.”

Ashley:
Real quick, Tim, before you go forward, for anyone that doesn’t know what a VA loan is, let’s just break that down as to no down payment. So you didn’t need any money for that. Did you qualify to have no closing costs or did you have to pay closing costs on it?

Tim:
Yeah. So you have to pay closing costs with the VA loan, but you can negotiate what the seller to have sellers concessions, which you can use that money to either buy points down on the loan or you can go towards the closing cost, which is what I did. And the really great benefit about the VA loan compared to the FHA is you don’t pay the PMI, so you don’t pay the mortgage insurance, which saves you a lot of cashflow. So that’s what the VA loan is awesome. And also you can use it for any residential property. So one to four plexes, you can use the VA loan on it. So it’s a great tool to house hack.

Ashley:
That was a great explanation. I think there is one circumstance where you can avoid paying closing costs, and I think that’s if you have a certain eligibility of disability.

Tim:
Yep. So if you have-

Ashley:
Yeah, I don’t Remember what the limit is though.

Tim:
So that’s a crazy program. Obviously, I’m still in, so I don’t have that disability. But yeah, if you have the disability on you, you also… The more you use your VA loan, so the first time you use it, you don’t have to pay this crazy fee, but that fee is waived every time once you have your disability. So it gets even better for you.

Ashley:
We also did an episode recently number 329 where we did a really deep dive into doing VA loans if anyone wants to learn more about that.

Tony:
Just one quick comment too, Tim, you mentioned that you got paid to close on that duplex. Can you just explain what that means for people because you glossed over that, but I mean, it’s a cool concept.

Tim:
So in Kentucky there’s a certain maximum percentage of sellers concessions. So I think I got about nine to $10,000 of sellers concessions and my closing costs were almost about that range. So since I moved all that money to my closing costs, I actually was in the net positive. So when you show up to the closing table, it’s crazy that they cut a check to you. I was really surprised, but it was enough sellers concessions to pay off everything, which is great.

Tony:
So tell us what happens from there, man. So you get to get this duplex. Move us to how you funded the rest of these ones after the VA loan is gone.

Tim:
I didn’t have any more money, so I was kind of like, “Man, I still want to buy stuff. I still got a crazy addiction to trying to buy houses.” So I started trying to wholesale and that really didn’t go well. I tried working for somebody and that’s how I started with the partnership stuff. I wanted to work for somebody and gain some knowledge and mentorship by serving as a cold caller. I realized that I really didn’t want to do that. So I started seeing creative finance options, the seller finance. The subject-to deals and all that stuff. And then I started getting really into that and that’s what kind of landed me on my next deal in Louisville was a single family.
It was a subject to deal and that’s when I took over the person’s mortgage payments. She was actually a full-time nurse and didn’t want to manage her property anymore, and it was zoned for Airbnb. So when we talked to her, she wanted to listen on the market, but it had no equity in the deal. So if she sold a house, she would actually have to lose money to do so. What we tried to do was… I actually pitched arbitrage. I didn’t know how to do that. She didn’t want to do that. She wanted to sell it outright.

Ashley:
Explain what arbitrage is real quick.

Tim:
So it’s when someone leases a property from somebody and furnishes it and lists on Airbnb and the person who furnished it manages the property and you don’t own the property at all. So the seller or the person who owns the house still owns it, they’re just leasing it out to you and you’re doing all the legwork on it. So that’s how you can generate that short-term rental revenue without actually owning the property. And I hope that was a good enough explanation.

Ashley:
Yeah, that was great.

Tim:
But yes, she didn’t want to do that. She wanted to sell it outright. So I literally talked to her on the phone for two, three hours about subject-to and if it was legal or not. We actually convinced her to do it and then I ended up buying it subject-to, and then I actually turned that into a midterm as well.

Tony:
All right. So let’s break down what subject-to is for folks that aren’t familiar with that phrase as well, Tim.

Tim:
Okay. Purchasing a home subject-to is when you take over an existing mortgage. So her mortgage was 3.96% interest rate, and I think at the time when I was shopping around, interest rates were around 6%. So I got a really good mortgage rate. So the PITI was super low. And I guess the way I explained this is if you’re buying a bag of groceries at a grocery store and you have the bag of groceries and you swipe your credit card, who owns the groceries? You do. You’re holding the bag of groceries. If you give it to your aunt down the road and you give her the bag of groceries, who owns the bag of groceries? Your aunt.
How do you prove who owns the groceries? It’s the receipt to the grocery bag. So we treat the receipt of the groceries as the deeded to the property. So they give us the receipt or the deeded to the property, and then we just take over their credit card payments or their mortgage payments and you’re now the owner of the house.

Ashley:
That’s a really cool explanation. Yeah, go to analogy.

Tim:
Thanks.

Tony:
Yeah. That’s like better [inaudible 00:22:10]

Tim:
I mean, we heard that story from Pace, so it’s burned in my brain. But I think that’s a great story to explain sub-to. So I paid her $2,000 on top, so we took over the property, we took over the mortgage and we gave her $2,000 on top and the incentive was she was going to lose $7,000 in the deal. So instead of losing seven, she gained 2000. Now she doesn’t have to worry about the mortgage and we took over the property.

Ashley:
So let me ask you this. This is something I’ve always wondered, especially when Pace talks about sub-to and I see a lot of agents who specifically go towards vacation rentals, short-term rentals saying buy houses at sub-to. Are a lot of these people selling? So if they have that really great interest rate, they probably bought it within the last three years and it seems like some of them are selling because it’s not profitable for them. Why would somebody else want to come in… So they’ll have the same expenses from them and take over those payments and then renting it out.
What is the thing that I’m missing in this gap? Is it poor management? Is they’re not taking advantage of pricing? What am I missing in that scenario is if someone’s not making money on this house, they want to sell it, why would I come in, take over their payments in?

Tim:
I think people try to get into the short-term rental business and especially if they’re out of market. So if they’re out of state, I think it’s to our advantage as creative finance investors because they think it’s going to be super profitable until they realize they got to deal with the constant turnover managing the cleaners. And then also if they’re out of state, they probably have a property manager and they’re paying a lot of money to manage these short-term rentals.
For us or for me in this market, if I take over someone’s mortgage and I keep all the PITI the same, I’m probably going to save a lot of money on managing the property myself in the market. And also, you save that 15, 20% and I think that’s huge. And then also since I’m boots on ground, I can go see the property and make sure that the cleaners are doing their job and doing all that other small stuff that actually gets people dinged up on their reviews or it just eats into their cashflow. But I think from my experience, I think it’s because of that, they have all the expenses.

Ashley:
You have that advantage that self-managing or saving that management fee, and then also you’re able to have a better product because you’re the boots on the ground overseeing it and you have that quality control I guess.

Tim:
Yeah. And I don’t do any short-term. That short-term rental, that probably would’ve done well as a short term. I just turned into a midterm because I have the midterm in the other unit right here. So I have some experience with that. I think I like the slower turnover because I do at least three month contracts with my midterm nurses versus, “Oh, there’s a weekends there and I can manage it myself with that.” But if it’s a short-term rental, I probably would’ve to hire somebody because I’d have to keep going and turning over the property and stuff.

Ashley:
Yeah. I’ve always wondered about that because it seems like it’s becoming very common that people are doing sub-to to vacation rentals. Tony, what are your thoughts on that? Have you guys bought anything sub-to?

Tony:
Yeah. We haven’t purchased anything sub-to, but in terms of why would I buy a property, I think a lot of what Tim said is true. It’s like, I guess first taking a step back, there’s probably a couple of different motivations as to why someone would want to sell their short-term rental. It could be because they have a property manager in place and that property manager just isn’t performing well and they don’t have the time desirability to manage it themselves. They’re like, “Hey, I could make more by selling this than continuing to pay this property manager 25 or 30%.”
The other motivations that they have been managing it themselves, but maybe they’re burned out. Maybe they underestimated how much work goes into managing a short-term rental. They haven’t really set up the tools and systems and automations and software to do it the right way. So they’re like, I just don’t want to do this anymore. And in both of those situations, like Tim said, I think there’s an opportunity for you to come in as a new host and improve the performance of the property.
Let’s say that first motivation where maybe they had a property manager that was charging them 25%. If I come in and I’m it myself, I’m immediately adding 25% to the bottom line, even if everything else stays the same. And that could be a big difference in profitability. I might have to pay my VAs a few bucks an hour, but it’s significantly cheaper than 25%. Or maybe they weren’t doing things like using dynamic pricing tools. Maybe they have really old listing photos.
Maybe they hadn’t changed the linen since the ’80s. Who knows what it is? But you come in, do a little bit of a refresh, and I do think there’s an opportunity there for folks.

Ashley:
Okay. So, Tim, sub-to, what’s your next financing you did? We’ve got the VA loan, sub-to, liquidating a 401(k).

Tim:
Yeah. So now we go into the partnerships in Oklahoma and Atlanta. So I actually met these partners through a mentorship that I joined down the road and I met those partners through there. For the partnership stuff, it’s a really scary game too because you’re not only marrying the deal, you’re also marrying that partner.
So the ones in Oklahoma, I actually met somebody out there that does GC work himself, so he does all the renovations and manages those type of projects. And those two deals were actually sub-to deals as well. I funded the deals by raising capital. So I brought the money to the table and to the deals, and then he managed the project and found the tenant buyers. So how we got rid of those deals as long-term rentals were we actually lease optioned those two houses out to end buyers. And that’s how we fund the deals.

Ashley:
Can you explain what that process is doing a lease option?

Tim:
So explain the lease option process?

Ashley:
Yeah.

Tim:
So a lease option process, I guess the easiest way for me to explain it is that you rent it out to somebody with the option to purchase the home later. So I guess the slang term is rent to own or something like that, but it’s a two -part deal where you lease the property to somebody and they rent it and then they have the option to buy it from now to however long you set the terms.
So for those two properties, we set a five-year term. So it’s a fixed purchase price for that amount of time for that buyer to qualify for a loan and then purchase it outright with a lender.

Tony:
And Tim, you’ve got so many tools in your tool belt here, man. So I guess what’s been your process for like… I guess let me frame the question this way. There’s a lot of people who read on certain topics or YouTube university, podcasts, whatever it is. But like you said, it took you 18 months to kind of feel confident to do that first deal and you went from that deal to the duplex, which was somewhat similar, but then you really took off into the creative finance space.
Was it that you were surrounding yourself with the right kind of people? Because you mentioned going to the meetups. You mentioned that the mentorship program, you mentioned all these other things you’ve been meeting people. Was it your network that gave you that confidence to try out these different strategies or was it something else?

Tim:
A hundred percent. So I know a lot of people talk about Robert Kiyosaki’s book, Rich Dad, Poor Dad. And it gets them started in investing and it’s an amazing book, but the book that I really love that I live by all the time is Who Not How by Dan Sullivan. That book really changed my mindset with business owning and entrepreneurship because it really talks about instead of you spending hours, months and years learning a strategy like lease option to finding the person in your community or in your mentorship program that has been doing those type of deals. And to find those people to help you, the who’s in your world to help you catapult your career or catapult your journey and the way that you get those people to help you is try to figure out what value you provide.
Because I know there’s a lot of people that say, “Hey, go network with people, go network.” It’s absolutely true, but I feel like a lot of people just ask people for help and they don’t really know how to ask for help. So for me, I like talking to people. I like building relationships and I think that’s where I figured out like, “Hey, that’s how I’m going to bring value to the team. Let me go talk to investors and bring some money to deals because I don’t have the money myself and I’m not generating the leads myself.”
So to find someone that has a lot of leads but doesn’t have the funding to get those deals done, that’s when I kind of figured, “Hey, this is where I’m going to sandwich myself in between these deals.”

Ashley:
So do you think a big part of this, if somebody is just starting out, is finding that money partner, finding how to finance a deal first by making those connections? Or is it finding the deal first, then going out and searching for those connections?

Tim:
I think if you find a really good deal, and you guys may have different experiences, but if you find a really good deal and the numbers make sense and it’s going to make money for you or a partner, I think the money will come once you find the deal. Because even me as a normal guy looking at properties and stuff, if the deal makes absolutely sense and I can fund it somehow or bring the money, we’re both going to win.
So I think a lot of people are afraid. I was too. I was like, “I don’t have the money to do all this stuff.” But once I started realizing once you bring a good deal to the table, the money is going to come from somewhere if you reach out to enough people.

Tony:
Yeah. Tim, I’m so glad you said that because I couldn’t agree with you more. I think finding a good deal makes everything else exponentially easier. And I heard this story over the weekend. It was this marketing guy, but he was talking about how sales is easier when you’re better at marketing and he gave the example of two different cars that you were trying to sell for $400,000 and he said, say imagine the first car is like an old beat up VW bus with blown out tires and the air conditioner doesn’t work and hasn’t been touched since 1970 and you’re trying to sell that for $40,000.
And then the second car is Rolls-Royce which retails for $300,000 and you’re trying to sell that for 40,000. You could be the world’s worst salesperson and still sell the Rolls-Royce for $40,000 because it’s an amazing deal. And you would have to be a hell of a salesman to get someone to buy the VW bus for you.
A lot of that comes down to raising capital as well. It’s like if I’ve got a really, really good deal, it doesn’t matter how big my network is because someone is going to find that deal. I could go into a random Facebook group and say, “I’ve got a really good deal and you’re going to have people breaking down your door.” So for a lot of our rookies that are listening, I think if the capital is a constraint for you, then try and focus your energies on how do I find a really good deal and then let everything else flow from there.

Tim:
Absolutely.

Tony:
All right. We’ve been talking a little bit of funding. Did we get through all the deals yet? I think you’ve got a couple more left in there. We haven’t touched on them all. Let’s quick rapid fire the last few deals and how you funded those.

Tim:
Okay. So the fix and flip in Atlanta, I actually… It’s kind of crazy. The Atlanta flip, I used a credit card, so I used a business credit card that had a promotion on it. It was like 0% interest. So I funded that deal on Atlanta. We sell it and we listed this month.

Tony:
Wait. Hold on for a second. Did you use that to purchase the property or to fund the rehab?

Tim:
To fund the rehab.

Ashley:
Okay. I was going to say how [inaudible 00:34:29] with a credit card.

Tony:
I’ve never seen anyone buy a property with a credit card.

Ashley:
I’ve seen people do a cash advance and pull out the cash off the credit card.

Tim:
So I used the credit card. I paid the 2% whatever to transfer the money into the checking account, and then I wired it to the Atlanta title company and then he’s renovating the property and then we’re going to list it actually in a couple weeks.

Tony:
Wow. Was that a business credit card or a personal card?

Tim:
Business one.

Tony:
Gotcha. Which one was that?

Tim:
It was a Wells Fargo card. So it had 0% interest for I think nine months. So it’s coming due soon. We’ve got to sell this house.

Ashley:
Well, I used a Wells Fargo one too for a funder rehab. We actually did it for all the materials.

Tim:
Oh, nice.

Ashley:
So we didn’t do a cash advance or anything, but we did it for all the materials. And they had a promotion too that if for the, I don’t know, first nine months, if you made your minimum payment every month that they would extend it to 12 months. I think-

Tim:
That’s nice.

Ashley:
… we paid it off already, but it did extend in case we have another project that comes up we need it for.

Tim:
Yeah. I mean they’re a really good tool. They’re so underrated.

Ashley:
Definitely. I mean, you could fund a pretty good rehab doing your materials and then you just have to worry about coming up with the cash to pay your contractor unless your contractor takes credit card. I just actually did a dumpster removal where they cleaned out a property and took the dumpster and everything like that and they emailed me the bill and they’re like, “All right. Pay by credit card.” I’m like, “Yep, racking up those credit card points.”

Tim:
Excellent. Awesome. And then the next deal, the one that I’m renovating now is a hard money loan. It’s just a normal fix and flip. We did a cash offer and then used the private moneylender to cover the rest of the costs and holding costs. We just started reno this week. And then the house that we close on in a couple weeks, it’s a seller finance deal, so we’re going to do light reno. Little down payment and we’re going to use a private moneylender on that deal as well.

Ashley:
Okay, awesome. So a wide variety of different ways to finance properties. I do want to go back to. Okay, so you’ve been able to purchase all these properties with this different funding, but now I’m curious about the rehab portion of it. Did you have any kind of construction experience at all?

Tim:
No, absolutely not. I looked for general contractors on the Facebook pages and networking events and that led to my first deals struggles because of my lack of experience and lack of network and having those systems in place. So are we going to talk about that more in depth? That kind of led into my first deal with the contractors and the lack of experience. I think the contractor knew that that was my first project and I lacked experience. I picked the cheapest one because I figured let me use the cheapest contractor to make the most spread on the deal, and it ended up costing me a lot more money because we had to hire a new contractor later on to fix a lot of the stuff that he originally did.
Also, since he knew that I was really inexperienced, we didn’t do a contract and it was the last third of the project and he actually asked me to pay him in advance because he had to pay his workers. I said, “Yeah, you’ve done a really great job for me the last month or two. Yeah, absolutely, I’m going to pay you.”
So I gave him the last third and then he literally stopped showing up to work. I know a lot of people have issues with their first GC and all that stuff, and it’s definitely true. He disappeared on me, so I had to paint the house myself and put all the light fixtures up myself to get this listed. And the project took really long because I had to do it myself towards the end. I remember I was supposed to BRRRR this house and I ended up listing it on the MLS to just get rid of it because I was just bleeding, holding costs and all this stuff.
As soon as that house was listed, there was a drug bust right across the street. So it was a lot of madness. I wanted to just stop real estate investing after that and it ended up selling. So we made a little bit of money off it. So I think that’s why I felt okay, but it was probably the most expensive learning experience that I’ve had. And I think that’s what’s helped me with the further projects because now I actually GC my own projects here in Louisville where I hire my own contractors, floors, windows and all that.
I think my military background helped me with that because I like managing stuff like that. So it’s a lot of fun to me. And I feel like I can sleep better at night.

Tony:
Tim, I guess the logical next question is you must’ve picked up that drug bust house on a pretty good deal. Right?

Tim:
I try to buy it. I try to buy it. I couldn’t get ahold the seller, but I tried.

Tony:
I wonder why.

Tim:
I really tried. It was all boarded up and stuff too, so I was like, “Oh, let me try to find the seller.” But no, I couldn’t get ahold of them.

Ashley:
I was at a real estate meetup once and this wholesaler came up to me and-

Tony:
A drug bust happened?

Ashley:
No. The wholesaler came up to me and I think he was a newer wholesaler. I didn’t know him. And he’s like, “Oh, people told me I should talk to you that you invest in this area.” It was one of the rural towns that’s actually close to where I went to high school and he is like, “Here, I have this house here. Here’s the address and stuff.” He was like, “Okay. I’ll look at it. I’ll email you.” And so I pull it up, I’m like, “Why does that house look familiar?”
I searched the address, just Googled the address and it was a meth lab, the people that owned it. And I remember my mom calling me and telling me that there was this meth lab, this drug bust going on in this house or whatever and this was probably like five, eight years ago maybe. So I said to the wholesaler, I said, “Well, has there been any remediation done?” And he’s like, “What are you talking about?” I’m like, “This house is a meth lab and it’s a [inaudible 00:40:32] the cops busted up.”
He had no idea or whatever. And it was just, you literally Google the address and information like that came up. So just you’re trying to wholesale houses or you’re buying houses. Just take the time to put the address of the property in and google it and see if there’s any news articles on that property. But actually I see that finally somebody ended up buying it and they’re slowly doing stuff to it.
Okay. Well, any last words of advice for somebody that’s doing a rehab or project managing? So you said your military background has definitely helped you with that. What are some of the things that you have implemented that make you a strong project manager?

Tim:
So I like to set deadlines now. I think organizing the project in thirds or quarters and having that contract laid out, I think that’s really important is to not do those handshake deals with your contractors and to have that contract that’s organizing, “Hey, I’ll pay you in thirds or I’ll pay you in halves after you finish this set list of items.” It’s actually really nice too because if you’re using a hard moneylender, a lot of those hard moneylenders will pay you for your renovations after they go see it. They inspect it or you take pictures of it.
So actually it helps us too out when you break down those payments in those organized manners because once they finish that project, then you can call the hard moneylender. They’ll inspect those items and then they’ll cut you the check and you can pay your contractors. And with that contract, it really keeps your workers in check as well. And also, I like to add a little bonus too. So if I have a 45-day project, I’m like, “Hey, if you finish it in 40 days or 38 days,” whatever it is, I like to give them a little money on top so they have a little bit of incentive. But also not too fast. So they rushed the deal and the project kind of gets messed up.

Tony:
Well. Tim, it seems like you’ve learned a lot since that first deal and sometimes things going south can be the best teacher and you tend to learn a lot when things go wrong, sometimes even more than when things just go perfectly great. So I’m glad to hear that you’re able to take some of those lessons. The next question I have for you though is about how you’re actually structuring these different partnerships and obviously Ash and I wrote the book on partnerships for BiggerPockets. Head over to biggerpockets.com/partnerships. But Tim would love to hear just your experience on how you’ve structured these different partnerships across the different deals.

Tim:
I actually had a partnership with somebody that didn’t work out, so it is not always sunshine or rainbows. But a lot of it is you find what you’re missing in your tool bag. So for me was the lead generation and finding someone in those areas out of the market or out of your local real estate market to help you. So for me, obviously, I’m not boots on ground. I don’t know how to generate those leads in those random cities like Oklahoma or Atlanta. I met some of these guys through the mentorship. And you always have to do your homework on your partners because once you work together, you’re stuck together until a good or bad outcome happens.
A lot of it is to see, instead of just analyzing the deal, you got to analyze your partner. So you got to see what their credibility is, how many deals they’ve done. So I usually try to find them on social media first to see if they’re actually posting content on Instagram, Facebook, or YouTube and to see what type of projects they’ve had. Also since I’ve met those guys in a mentorship, I actually asked a couple of guys and girls in my mentorship if they worked with them.A lot of other students had some really positive reviews about these guys, and so I felt like I can trust them.

Tony:
Got it. I love that you’re doing a little bit of homework on people beforehand. I think you mentioned this earlier, but sometimes getting… I mean, not sometimes, every time in a lot of ways getting into a real estate partnership is like a marriage. So you really want to make sure that you’re “getting into bed with”. But Tim, love your story so far, brother. I want to leverage all the experience you’ve gained this past year and let you answer a question from someone in the rookie audience.
So we’re going to head over to our rookie request line. So for all of our rookies that are listening, if you’d like to potentially get your question answered on the show, head over to biggerpockets.com/reply and we just might use your question for the show. So today’s question comes from someone by the name of Ja Mac and Ja’s question is, “In your opinion, what are the top three things that increase rental value? I’m gathering ideas for a home that we bought and planned to rent out.” So Tim, in your opinion, how would you answer this question for Ja?

Tim:
To increase rental? Are they talking about the rental income, how much you can charge?

Tony:
I guess let’s look at both, right? Both rental value and the after repair value.

Tim:
For the after repair value, you can always… If you have some extra space, maybe add another bedroom or a lot of the projects that I do is we have huge closets in the master bedroom and it doesn’t have a bathroom. So we usually add a bathroom in there because it adds a ton of value. Renovating a kitchen. I think one of the projects I did actually in my midterm, the kitchen looked like it was a picture from the 1950s. Has it been renovated? It had the weird turn knob ovens.
So we modernized that, ripped out all the cabinets and gave it a facelift, stainless steel appliances on and all that. But anything that you can add some value to your property will definitely boost your ARV. And obviously if you make things nicer, you can definitely raise the rents of those properties. If you are trying to make it even more profitable, if it’s in a really nice neighborhood or a good market for a midterm or short term, you can always add value like that by changing the amount of income you’re getting. So there’s the couple of tips that I can think of right now to boost the value and also to boost your rental income.

Tony:
Yeah. I love that answer, Tim. I think a big part for me is looking at your comps as well. So what other properties have sold in that area and what information can you get from those properties that have sold? We recently had Serena Norris on episode 330 and she came in and just gave a masterful breakdown of managing rehabs. So part of that conversation was how heavily she relies on comps to come up with her scope of work. So Ja, if you’re thinking about rehabbing a property, I’d say look at some of those other properties in your area, understand what they’re offering to folks and see what you can do to match.
All right. Let’s go to our next segment here, which is the Rookie Exam. Tim, these are going to be the three most important questions you’ll ever be asked in your life and you’re doing it in front of the rookie audience. Are you ready for the exam?

Tim:
I’m ready.

Tony:
All right, man. So question number one. What is one actionable thing that a rookie should do after listening to your episode?

Tim:
If you’re trying to get started in real estate, and I think you should find a real estate investor focused agent, it’s no cost out of your pocket to use a real estate agent. I think if you find an investor friendly agent that’s focused on investments and own their own projects, they can help you comp, like what Tony was talking about earlier, comp properties, find out what the values are and tell you what a deal is or what not a deal is. Also, when you buy a house on the MLS with an agent, you’re not paying the commission. So it’s free of charge for you and I think it’s a good way to get started and also build your network as well.

Ashley:
Yeah. I think that’s great advice. And BiggerPockets has the agent finder tool too. If you go to biggerpockets.com/agentfinder, you can see the selection of investor friendly agents to really help you out. Okay. Next question is, what is one tool software app or system in your business that you use?

Tim:
So I actually use your guys’ program for my property management. I use RentRedi. Because since I’m a pro member, I get it for free and I’ve been using it for the last year and it’s super easy. This is not an ad, but it’s super awesome. I mean it made my life a lot easier because I was super worried about being a property manager and it’s super nice to get your requests for repairs on there. Also, it literally goes directly to your bank account. A lot of your tenants will really like it too. They don’t have to cut a check to you, they can just wire the money to you. So that’s my number one software that I use.

Ashley:
And they don’t have to call you to put in the maintenance request. They can just put it in through the app.

Tim:
Put it in, super easy. But for real estate stuff, I use REIPro. My REIPro, so I use that as my system to pull up addresses, to pull up information about the properties. Now, that costs a little bit of money, but if you are trying to wholesale or trying to find some good deals off the market, that’s a system that I use.

Tony:
That’s interesting. I’ve never actually heard of REIPro before. Have you heard of that one, Ash?

Tim:
So it’s kind of PropStream.

Tony:
Interesting. There’s so many other options that are popping up. And Velo is one that has a relationship with BiggerPockets. Privy is one that I just recently found that actually seems pretty, pretty cool. Lots of options out there. But last question for you here, Tim. Where do you plan on being five years from now. If you keep the same pace, you’re going to be at like a thousand doors in five years, but what’s your personal goal where to see yourself being in five years?

Tim:
For me personally, in the next couple of years since I’ve been shifting towards the fix and flips and shorter stuff, I’m really trying to supplement my W2 income so I can comfortably leave work and start focusing on the business full-time. I started off with the long-term rentals, trying to generate a hundred, $200 a cashflow a month. But that would take me a long time to eventually feel comfortable to leave my W2. So I think in five years from now is to focus on real estate full time and start building long-term wealth with long-term rentals and still using the flip income to survive.
But I think in the long run is I would like to start getting into multi-families larger than the normal residential stuff. I think it’s a great opportunity out there. There’s a lot of cool things to get into and it’s something new, something that I’m not familiar with. So I really like learning, so I think that’s what I want to get into down the road.

Tony:
Awesome, brother. We’re excited to see you make that a reality, Tim.

Tim:
I hope so.

Tony:
So before we wrap things up, I want to give a shout-out to you. This week’s rookie rockstar, this week’s rockstar is Marielle Lily Walter. And Marielle says, “It’s almost unbelievable how much life can change in just one year when you decide to get out of analysis, paralysis, fear and doubt, and go for something greater. One year ago I decided to plunge headfirst into real estate and go hard towards my goals of financial freedom. At that time, I had done just a few real estate deals. Now, I’m about to celebrate my one-year anniversary of taking the real estate plunge and decided to look back over the year.”
So she says in just one year, she’s done 12 real estate deals, including seven flips, two apartment building investments, three rental properties, and four new deals under contract. And she finishes off by saying, “Your dreams are on the other side of your fear.” So Marielle, congratulations giving you a run for your money, Tim, with 12 deals in one year. But super excited to see that success happening too, man.

Ashley:
Tony, when I first read that before you said it out loud, I thought it said, “Your dreams are on the other side of your feet.” And it was because there was like a little smear on my computer screen. I was like, “Huh, I never heard that one before. You got to move your feet to take action to reach your dreams.”

Tony:
Move your feet to make it happen.

Ashley:
Well, Tim, thank you so much for joining us on the show today. Can you let everyone know where they can reach out to you and find out more information about you?

Tony:
Yeah, thanks for having me on the show. It’s been so much fun. You can find me on Instagram. It’s @itstimyu. So we keep it super simple with my name and you can find me on there. And thanks so much guys.

Ashley:
Thank you so much for listening to this week’s Rookie Podcast. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson. And we will be back on Saturday with a rookie reply.

Speaker 4:
(singing)

The financial sector is undergoing a significant transformation, with technology at the forefront of change. Fintech startups are capitalizing on unique opportunities to revolutionize traditional financial models and introduce innovative solutions.

Let’s dive into five specific areas within the finance industry that offer promising opportunities for new innovative startup projects.

1. Personal Finance Management Apps

Financial management is not just important for businesses. Individuals are increasingly looking for more control and transparency over their finances. Personal finance management apps are addressing this demand by providing users with tools that make money management easier.

Mint, for example, is a popular platform that offers budgeting, expense tracking, and financial goal setting. Users can link their bank accounts and credit cards to get a complete view of their financial health. The success of these apps lies in their ability to simplify complex financial data and offer insights that empower users to make informed decisions.

Example business idea: a financial well-being app that goes beyond simple budgeting and focuses on personal goal-setting and priority optimization to help you make financial decisions suited to your specific situation, preferences, and ambitions.

2. Peer-to-Peer Lending

Peer-to-peer (P2P) lending platforms have transformed the way individuals and small businesses access loans. These platforms connect borrowers with individual investors, eliminating the need for traditional banks and transferring the cost savings to the lenders and borrowers.

LendingClub and Prosper are good examples of P2P lending success stories. They provide an alternative lending source, often with competitive interest rates. Startups in this niche can leverage technology to streamline the loan approval process, assess borrower risk, and enhance the overall lending experience.

Example business idea: a loan marketplace focused on educational loans. Students seeking financing for tuition, books, and living expenses can connect with investors interested in supporting education. The platform could offer flexible terms and competitive rates, helping students avoid the burden of high-interest traditional student loans.

3. Robo-Advisors

Robo-advisors use algorithms and automation to offer low-cost, diversified investment services. Wealthfront and Betterment are leading players in this space, allowing users to invest in diversified portfolios tailored to their financial goals and risk tolerance.

Robo-advisors have gained popularity for their simplicity and cost-effectiveness. Startups can continue to innovate in this area by enhancing the sophistication of investment algorithms and expanding the range of services offered. With the advancement in artificial intelligence, this niche is bound to experience rapid growth.

4. Insurtech

The insurance industry has experienced a digital transformation through insurtech startups that disrupted traditional insurance models by leveraging technology to simplify the insurance process.

Lemonade, for instance, uses artificial intelligence and behavioral economics to offer fast and transparent home and renters insurance.

The success of insurtech lies in its ability to enhance the customer experience and streamline claims processing, ultimately reducing costs. Startups in this niche can explore new insurance products, customer-centric services, and innovative risk assessment models to disrupt the industry further.

Example business idea: Develop an insurtech startup that offers travelers on-demand insurance coverage. Users can purchase insurance for the duration of their trip, and the app can use geolocation data to adjust coverage based on the user’s location. This model caters to the needs of modern, spontaneous travelers.

5. Regtech

Regulatory technology, or regtech, is revolutionizing how financial institutions navigate compliance and regulatory challenges.

Startups in this niche, such as ComplyAdvantage, employ advanced technologies like artificial intelligence to help businesses detect financial crimes and ensure compliance with regulations.

These platforms offer a cost-effective and efficient way to address compliance concerns, which is crucial in an industry highly regulated by governments worldwide. Regtech startups can expand by diversifying the range of compliance issues they address and by tailoring solutions to specific markets and sectors.

David:
This is the BiggerPockets Podcast show, 838.

Brian:
It’s an interesting thing whenever you look at recessions and depressions and everything, the amount of lawsuits almost doubles. So when times go bad, people start running out of money and start panicking. And what do they do? They start suing. Who do they sue? The haves. My landlord, I hate you. My doctor, you got that nice BMW. I want that BMW. So as things get harder, you have an increase in divorces and you have an increase in lawsuits. And then you couple that, which I broke down also because I tried to set the scene in my book. How did we get here? And it realistically is over the last 40 years, we created a society of victims.

David:
What’s going on everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast on the planet. Every week, bringing you the stories, how tos and the answers that you need to make smart decisions in this current market. Today is all about protection and I’ll be joined by the honorable Rob Abasolo.

Rob:
I hold myself in contempt.

David:
Today’s show is all about protecting yourself from potential lawsuits as well as dispelling so many of the myths that you may have built your foundation of knowledge on that are not true. And we get into that today with returning guest Brian Bradley. Brian was previously featured on the BiggerPockets Rookie episode 106 and 107, as well as our show, the BiggerPockets Real Estate Podcast, episode 595. He is an asset protection attorney and he brings the heat today. Rob, what were some of the things that you think people need to look out for to protect their wealth?

Rob:
Listen, we’re going to get into some pretty technical stuff, but we really make it digestible for everybody at home. And so whether you’ve been investing for 20 years, 15 years, or you’re just getting started, we are going to lay out the blueprint for how to protect your assets. And we get into that towards the end of the episode. So you’re definitely going to want to stick around.

David:
That’s right. No matter where you are in your journey, $0 or $100 million portfolio, you want to protect what you’ve built and we are here to help you. You’ve heard it said, measure twice, cut once. It is always better to prepare for things ahead of time than to wait until your middle of the storm and try to figure it out. Today’s quick dip is simple. In today’s episode, we talked about a recent change to landlord and tenant protections within the legal system. If you’re not sure about landlord and tenant laws, the BiggerPockets blog has a great post on this. Check out the link in the show notes and go read the blog. It’s got charts for specific issues like security deposits, lease violations and more. Rob, anything you want to say before we bring in Brian?

Rob:
Yes, a goose. 1% of people will understand that joke, but y’all are the real ones.

David:
And if you’re part of the 99% that don’t, make sure you’re following us on YouTube so you can see what Rob just did. All right, let’s get to Brian. Brian Bradley, welcome to the BiggerPockets podcast. How are you today?

Brian:
I’m doing great. Thanks for having me back on and this is going to be a lot of fun and we have a lot of important changes in the law to go over as well as myth busting a lot of misconceptions and questions that I get. All of this, I go into a lot of detail over my new book that’s coming out Over Exposed where I break all this crazy world down and this mess in that we’re living in and then investing in. But I think we’re going to have a lot of fun in today’s topic.

David:
Well, awesome man. Well, we want to bring you up to the stand if you will, and I hope you both will to tell us about these things.

Brian:
No, absolutely. Looking forward to kicking it off.

David:
And for those of you who have been enjoying the lack of jujitsu references, because I haven’t been going for a long time, I’m sorry to say that streak is likely going to end today because Brian was a IBJJ, is that what you’re competing in?

Brian:
Yeah, I compete through IBJJF and I’ll probably do ADCC afterwards in December.

David:
Well, it’s great to have you here again, to give our listeners a heads-up on where we’re headed with your insight today, we’re going to be talking about why your risk as a real estate investor has changed and what you need to know because of that, how to not accidentally commit fraud. It is way more common than you think and exactly what to do to protect your assets the right way at every level of wealth. So one of the reasons that we’re talking here today is that there’s recently been a court case with pretty big implications for people who own rental properties. Can you tell us about the Mallory v. Norfolk case?

Brian:
Yeah, yeah, absolutely. So it goes to when we’re talking about asset protections and layers. First layer of asset protection, think of cold weather, you’re going to wear a nice thin T-shirt or a nice thin shirt underneath all of your other layers. This is your base layer, your LLCs, it sits on your skin. Asset protection 101. And so there’s a lot of confusion when it comes to asset protection like where do we even set these things up? And you’re like, do we go to Delaware, Wyoming, Texas, Nevada? And this is where we really need to break down these modern myths and through the case law, because we’re talking about charging order protection and corporate veil piercing, just big legal fancy words.
And so what we have is, for example, a lot of California residents running off to other states like Wyoming to create Wyoming LLCs to hold the real estate in, the risky assets and their investments in, but then when you have to register those LLCs in the state that you’re a resident of and then pay the franchise tax. You can’t just go and take another state’s more beneficial laws and bring them to you to another state. And this is demonstrated now in a recent 2023 Supreme Court case named Mallory v. Norfolk, where the Supreme Court upheld a Pennsylvania statute that forces companies to face litigation within the borders that it’s registered to do business in.
And I’m going to repeat that because it’s very important and when lawyers and professors repeat things or cops repeat things, it’s generally going to be on the test. So I would say focus and pay attention. It forces companies to face litigation within the borders that it’s registered to do business in. This case now opens the door for other states to adopt similar registration requirements. So state courts are permitted to exercise jurisdiction over registered foreign corporations that are, let’s say, being used to hold your real estate in just as if they’re domestic corporations of that state.
So your Wyoming LLC that is now registered in California or registered in Pennsylvania or whatever the heck the state is that you’re a resident of is subject to the laws under California or Pennsylvania or that state that is registered in. And remember, you’re legally required to record your out-of-state LLCs known as foreign entities and pay the franchise tax. Again, you don’t just get to take Wyoming or Delaware tort and damage and personal injury laws with you to other states. You can’t just go and purchase other states’ more beneficial laws. And this case now has kind of put the nail in the coffin on that.

David:
So what you’re saying here is if I live in a state that has unfavorable laws, I can’t just open an LLC in a state with favorable laws, hold my properties in that LLC and then benefit from those favorable laws.

Brian:
Correct. Your general rule of law thought is we’re going to use the state that the asset is in. So if you own a rental property and it’s in California, it’s going to be a California LLC. If it’s in Tennessee, it’s going to be a Tennessee LLC. And there’s another really big distinction that’s really important when it comes to just LLCs that people are just literally not understanding. And what it is is a distinction between tort law and personal injury laws and then business law and contract law.
And when you’re setting up businesses and creating contracts, we can and should use choice of law clauses and venue provisions. You see them in every contract you ever sign. Okay, if we have a dispute we’re going to be litigating in this state, but when we’re setting up a business and we’re selling widgets or a product in a different state, we can then use Delaware or Wyoming or Nevada, those good charging order protection states.
What we’re going into there is internal disputes of affairs of the business, and I’m going to say that again, hint, hint, to govern internal disputes and affairs of the business internally. But again, when it comes to real estate and LLCs acting as holding companies for the rental properties, that’s not a business. When a person gets injured on your property and you’re getting sued or your LLC is getting sued for damages due to wrongful doings and negligence, so another legal fancy words, that’s not a business dispute, that’s a tort liability. We’re talking about wrongful acts and infringements on rights. So cases like tort liabilities do not relate to internal affairs or corporate government matters. And so they are seen as outside the entity. So you really don’t have corporate bill protection at all.

David:
So what you’re saying here relates to the belief that a lot of investors have that they figured out a loophole, they figured out a secret, there’s a way that they can get around being sued or losing things, and you’re saying it’s not as cut and dry as that sounds.

Brian:
Correct. And what it is really saying for some reason there’s become this weird thought that I have an LLC, I’m good, that’s all I need. It’s this dragon slayer and they forget first word, first letter, limited, they tell you this straight up in the name. And then we have now transitioned from ignoring the decades of case law about LLC and veil piercing and veils are very easy to be pierced and all you got to do is think about the thin, flimsy piece of fabric that goes over a bride’s face on a wedding day. It’s the same weakness. It is very weak.
There’s a seminal case on this, it’s called Associated Vendors Incorporated versus Auckland Meat Company came out in 1962. Here, the Court of appeals gave 20 reasons for justifying piercing your bill. I’m not going to go over all of them, it’s too tedious, but I’m just going to do the five heavy hitters. Co-mingling of funds of other assets, using funds for something other than corporate uses, failure to maintain adequate corporate records or the confusing of the records, use of corporation as a mere shell, under capitalization. That’s just five of them and I’m pretty sure you and your listeners have probably were like, “I probably check a couple of those boxes off already.” And that’s just five and that’s going to pierce your veil.

David:
Piercing of avail for example, is if you have a LLC for your rental properties and then you’re using the credit card for that LLC to buy personal-

Brian:
Groceries.

David:
Purchases or groceries, okay, that would be a case to pierce the veil because you are commingling personal funds with business funds.

Brian:
Correct. Like, “Hey babe, I forgot our credit card, but I got the business card. I’m going to go get some groceries.” Oh boom, now you’re co-mingling and mixing assets. Transfer the money out from your business account, put it into your personal account, declare it on your taxes at the end of the day, and then go use the money to go buy your car if it’s not a business for the business or go pay for the groceries, go on your nice vacation. But as you start mixing accounts on co-mingling assets or under capitalizing your corporation, which is very vague, there’s not even a clear distinction on what under capitalization is, especially if you’re starting up. So it’s an easy way to pierce the avail though. And so people need to realize this is why LLCs are the bottom of the rung of protection and why as you grow and you scale and you keep getting more and accumulating more, you add more layers, you add the management companies, you add the trust.

David:
And we’re going to talk about those. This is scary stuff because I think a lot of people, exactly like you said Brian, are under this impression that they got from some Instagram graphic that they read or some free webinar that they attended that said, “Hey, look at this little org chart with circles.” They’re always circles and it says, here’s you and here’s your LLC. Now if you get sued for the property, it stays within this self-contained LLC and it can’t come out and you’re protected. And what you’re basically describing is when the judge actually has that case and they look at the, you were negligent on your rental property, something terrible happened, somebody was hurt very bad, and they’re suing.
If you’re thinking, well, there’s only $50,000 of equity in the property, that’s all they can get. That’s not necessarily true. The judge is going to be looking at the intent, was this really a business or was this your house that you just registered as an LLC? Judges look at intent all the time and you’re giving examples of things judges hang their hat on and say, “No, no, no, that wasn’t its own business.”

Brian:
That’s very correct. And that’s the scary thing is especially when it comes to LLCs is you hear a lot of promoters, I’ll call them salesman promoters because a lot of them aren’t even attorneys. They’re saying, “Oh, we’ll get really creative with the operating agreement and we’ll put this on the operating agreement.” What you don’t realize is you submit that operating agreement to the judge for a judicial determination, and so you’re sitting there, “Please judge, please judge, agree with my operating agreement.” Well, that operating agreement is probably not valid and it doesn’t hold up to the statutes. And so that operating agreement gets pierced, which means in the bail gets pierced, which means now you’re held personally liable goodbye properties in the LLC and goodbye other personal assets as well like your brokerage accounts and other assets. So it’s very-

Rob:
Brian, can you just quickly define just the basic concept of piercing the corporate veil? I think we can probably get it from context clues, but just to give some very simple one line, what is it?

Brian:
Holding you personally liable. So the veil is separating out the managing member of the LLC and saying you can only get a judgment against what’s inside that LLC. The rest of the members’ assets are completely protected. Now some states are different with charging water protection. Some are stronger, some are weaker, but if the veil gets pierced no matter what, that means we’re no longer providing that one layer of separation between you and the rest of your assets. Now everything is fair game to be used to collect on for a judgment.

Rob:
Okay, got it. Yeah, yeah. And David, I feel for you on those Instagram TikTok where those reels or whatever where it’s, “Hey, do you want to not pay taxes ever again or ever get sued? Set up an LLC in Wyoming.” And I’m like, I’m pretty sure all that doesn’t work that way, but not a lawyer, and that’s why we brought you on.

Brian:
Yeah, and we’ll get into that with that’s a great one for when we start talking about fraud and scams because there’s a lot that we can dive into on that.

Rob:
Yeah, okay. We’ll get into that here in a second, but before we do, I do want to ask, with the new law change and everything, what does this actually mean for investors and what are some of the impacts that you think we’ll see as a result of this court case?

Brian:
So one, I think that now you’re going to see other case instituting similar statutes that Pennsylvania did is fair game now. And so what you’re going to see is that essentially if you went down this route and are just randomly using Wyoming to hold real estate in or as a management company and you have no connection to that state, you just bought a false sense of security, which sucks. You thought you did something beneficial, then you get sued and when you need it to work you’re like, “Oh my god, it didn’t work. What do I do.” That’s horrible. And that’s a really expensive learning lesson.
I spent money on this system, I thought it was going to work. I lose the case, spent all this money on the system paying this damage award and now I have to redo my entire asset protection plan so it’s going to cost more money. So this is really when you start going down this route of purchasing and setting up a plan to protect your assets, you really just have to look at what’s the case law, ask good questions, use these cases that we talk about and ask the promoter or the attorney, what about this case? What about that? If they don’t have an answer for you, which I had literally had a client or a potential client call yesterday who was, thank God I went through your website and was going over all these case calls so I asked this person all these questions, they said they’ll get back to me. I’ve never heard back from them and they ignore all my emails, which means their system doesn’t work.
So go through a checklist is how effective is the system, what’s the cost? Is it easy to maintain IRS compliance on? Do I maintain control of my assets or not? That’s kind of the checklist that you want to go into, especially like effectiveness and what we’re going to realize is jurisdiction shopping like this is just not going to be effective.

Rob:
Okay, all right. And I know you’ve mentioned one of the things you’ve encountered kind of a lot in your legal work with real estate investors is that people have accidentally committed fraud. Can you walk us through a story of how someone could accidentally commit fraud in the inner workings of LLCs and legalities here?

Brian:
Yeah, so there’s three realms of fraud. One is divorce, which we’ll come into because that’s not accidentally stumbling into that, that’s just you trying to hide assets. So we’ll break that one down after, but there’s two good tax scams that relate to accidentally stumbling into a scam and fraud, it’s essentially tax trust, myth busting. It’s insane how many times I get this call thinking that asset protection means not paying taxes and moving and hiding assets so that you lower your taxes and not pay it at all. The question generally is asked, I want to set up an asset protection plan, I’m tired of paying taxes. This is just legal and is tax fraud and that’s when people potentially go to jail.
But tax mitigation is legal, so just realize you can mitigate your taxes, pay less in taxes, that’s done with your CPA and wealth managers and using the tax code like a treasure map, setting up different investment types of stuff that you guys talk about and different types of investment accounts, that’s legal, that’s using the tax code how it’s supposed to be used. Now asset protection is about limiting liability of risk from lawsuits and creditors, people coming after your money and your assets through legal means, not hiding and moving assets.
So let’s start with the easy one that you can stumble into when you’re calling people in my world of the high end offshore trust, what we need to understand is that offshore asset protection planning will not reduce your taxes. If someone is telling you this, it’s a scam, and this is why we don’t use the Caymans, we don’t use Belize, we don’t use the Bahamas. They’re all red flagged and used as tax havens. The scam works by a promoter or sometimes an attorney or a CPA, generally just a salesman who’s not even a legally licensed attorney trying to sell you the idea that if you don’t have your money in the US then you don’t have to pay or owe any taxes on it until you bring the money back to the US. So just don’t bring the money back.
This is just false. The fact is that the IRS taxes you on worldwide income, plain and simple. You have annual FACTA disclosures, offshore wire transfer disclosures, 1035s, 1035 As, it doesn’t matter where you earn your money. If you’re a US citizen, you’re a US taxpayer and you owe the taxes, you have to disclose it, especially when it comes to offshore stuff. The problem with this scam is that when the IRS takes a look at your plan, it not only will not protect you, but it may leave you with this massive tax bill.
The bottom line is that asset protection planning and tax planning do not go together. It’s rule number one is oil and water. Anyone promising to help you legally evade paying taxes using any offshore entity is certainly lying to you. And if you’re involved in a scam like this, whether you were duped into it, it was not intentional, you just listened to some promoter talking to, you’re like, “God, this sounds amazing. I hate paying taxes. Great, I believe you.” Or you did it intentionally, it doesn’t matter. It all comes down to you. You’re the one that’s signing on your taxes under penalty and perjury. You’re the one going down for this.

David:
Right, so let me see if I can paint an analogy here since we’re on the protection theme. Let’s look at this stuff like body armor. There’s body armor that is really good at protecting you from ballistics heavy rounds and then there’s body armor that’s easier to move around in and it’s more comfortable. They are rarely ever or never going to both provide maximum benefits on both of those. It’s either easy to move around or it’s going to be protecting you more, but they’re not the same thing. When it comes to asset protection strategies that can protect you, that does not mean they will also be great at saving you in taxes though the entities that you create to claim your income are similar. It’s like they’re both forms of body armor.

Brian:
And then your CPA can then do their thing and what they can do within the tax code to then mitigate the taxes. And so essentially the CPA just needs to know how is this owned? Is it owned personally? Is it owned in a corporation? Is it owned in a trust? Now we know what section of the tax code we can do our magic with.

David:
Gotcha.

Brian:
But the asset protection plan is tax neutral. You can’t call an asset protection attorney and say, “Hey, I hate paying taxes.” Put it in a trust and hide it.

David:
Or vice versa. You can’t tell a CPA who wants to save in taxes and also make sure I can never get sued, those are not the same areas of expertise.

Rob:
But it’s a common thing that people, my accountants always like, “People ask me so much about LLCs and there’s a big misconception.” And starting an LLC is not going to save you thousands of dollars in taxes like that specific deck. It’s the actual tax stuff.

Brian:
But trust are magical. There’s a lot of things that you can do with them. They’re strong, they’re flexible for asset protection like we’re talking about just not for income tax avoidance, but you got a really big one, which you can stumble into. This scam is called, this is a 643 domestic abuse tax trust scam, and the IRS are heavy on this and I’ve hired 800 more auditors to check this out, and basically you get some salesman or a promoter talking about a special new trust where you can save on taxes and particularly you don’t have to pay on the sale of a business.
You can sell your business tax-free. This is just BS. At the bottom line, this is just messing with the definition and misusing Section 643, the tax code. Section 643 relates to distributable net income as it relates to how you tax a trust. The basic rule is that the taxation of a trust for income is going to be to the settler, meaning the person that created it or the beneficiary or the trust itself or some kind of combination of the three. What these promoters are doing is they reference an actual accurate authoritative source like citing the IRS code, but then they intentionally misinterpret what the code actually means.
But the taxpayers, you can’t freely self interpret the meaning of the tax code in a way that you want it to be. This is where you get in trouble and then essentially you’re up, you know what creek without a paddle. So it was very important to understand that even though trust are magical, creating a trust does not somehow magically create an ability to defer or avoid paying income taxes. Elon Musk can go and make a trillion dollars mining some sort of mineral on an asteroid in space, and so he made a trillion dollars in space, but he’s still going to have to pay his taxes on it.

David:
So that is ways people accidentally commit fraud is they are under these erroneous beliefs. All right, now what about divorce?

Brian:
So this is the other one that I get, the big D word. Asset protection plans cannot help you in a divorce. You can’t hide assets or unilaterally change the character of an asset from community to single, period. The end. A judge will determine that through the ruling or you and your ex-spouse must agree and all assets when you go up to the table in a divorce court are all presumed community, and then you have to prove what’s not community. It is hard to imagine in any scenario that in a divorce some portion of the assets are not going to be community assets. And that some of them won’t be awarded to the ex-spouse. This is just the reality.
So you start hiding assets, it’s going to be considered fraud and the system is going to be pierced. So the way you go about protecting your assets, if you’re thinking about having a potential divorce, is you plan individually, meaning only with separate assets that were agreed upon before the marriage with a prenuptial agreement or you plan with the spouse even though you’re going to get in divorce, but to protect it from lawsuits coming in while you’re figuring out who’s going to get what or you can plan individually, but exempt the divorce proceedings [inaudible 00:23:48] the protection planning.

David:
So it’s got be [inaudible 00:23:50]-

Brian:
Correct.

David:
There’s no secret. I moved here. I guess.

Brian:
And this is the Dale versus Dale case. All right. This is a 2015 Supreme Court case that made a major blow to domestic asset protection trust. The Dales were going through a very contentious divorce. Ms. Dale claimed that she was entitled to the assets that her husband placed and hid in his own domestic asset protection trust, one that he created just for himself. Then two big things happened in this case. First, the courts considered Mr. Dale’s assets that he placed in his own domestic trust as community assets and they joined those assets as a married couple.
So the Asset Protection Trust was pierced and it didn’t work for the divorce. The second thing that happened, which is why I like to use this case because it talks about both divorce and asset protection, is you can’t rely on choice of law recitals that are in the documents to establish jurisdiction. The court ignored the choice of law clause and found that it violated Utah public policy, meaning ultimately the court will decide not your documents.

David:
Now what about the popular case in the news about the soccer player that was married to an older girl and she divorced him and tried to take his stuff and he had moved his assets into his mom’s name. Are you familiar with this?

Brian:
No, I haven’t heard about that one. So yo have to give me some-

David:
So the idea was it was in another country and he was married and he felt like his wife might be looking to marry him just for his money. So he put the majority of his assets in his mother’s name. He didn’t own them. She divorced, she went after him and he said, “I didn’t own anything.” Is there a scenario where that could work?

Brian:
Yeah, no, that won’t because what a judge will generally do is consider that fraud and that you’re just hiding the assets and changing title into somebody else’s name, undo it, call it community, and you’re back into community assets.

David:
Now in another country, they might have different laws when it comes to, but not in this country.

Brian:
Correct. Yeah. And you hear something similar to that when it’s talking about doctors who are investing in real estate and then saying, “Oh, for a lawsuit just put it all in your wife’s name and then if you get sued, the assets are on your wife’s name.” That doesn’t work because a judge will just call that fraud. You’re married as community-

David:
Yeah, it’s community property.

Rob:
Yeah.

David:
So there are, again, same theme, these shortcuts when you’re actually in court standing in front of the judge, they get revealed as not being accurate as the same as the YouTube video that you watch with somebody telling you this is all you got to do.

Rob:
Or a season three of suits. I really felt like that prepared my real estate journey with the LLC stuff. So moving on, Brian, one question I did want to ask was, LLCs are always the thing that people get caught up on, especially in the real estate world. They’re like, “Oh, can I start a business without LLC?” And then I also see a lot of stuff about S-corps. I understand that there’s some misconceptions about the S-corp side of things too. Can you shed a little bit of light as to some of the misconceptions around them that you’re seeing?

Brian:
Yeah, yeah, absolutely. So S-corp fraud, you can use S-corps can use C-corps. They’re more set up for tax mitigation strategies. The problem here when it comes to lawsuits and asset protection is when a lot of people get into these situations like this, I’m creating a business, I want to go talk to my CPA, “Hey, CPA aDave, I don’t want to pay that much taxes.” So what systems should I set up or what should I do to mitigate as much taxes as I can pay? S-corp, first thing the CPA is going to do, they’re not thinking about lawsuits, they’re not thinking about anything like that. They’re just thinking about keeping more money for you.
So you create this S-corp and then you start investing in assets like real estate, or it could be you own a truck bed business and you have 100 now truck beds, or you’re a doctor and you have all your equipment in this S-corp. This is the general problem. And then 10 years later you call me and you’re like, “Hey man, Brian, I realized this was a really bad idea. I got $100 million worth of real estate all on this one S-corp, I need to take it out.”
Or, “I have my medical practice and I can’t have all my assets in there because if the medical practice gets sued, I still got to practice medicine. What can I do?” Probably nothing because I can’t take assets out of the S-corp without you owing all the deferred taxation back to the IRS. The problem with this situation is most people don’t have that kind of money just sitting around liquid in their bank account to pay the IRS back.
So the assets are stuck, I can’t do anything with it, or S-corps have shares, they can be frozen and seized by judges, which means all your assets are now frozen. So setting up an S-corp is good for tax mitigation money coming in, but what we want are assets to be held in LLCs, lease the assets back to the S-corp and that’s how you marry the two together. But your S-corp should not be just holding large amounts of assets. Because then you get sued, there’s literally nothing that we can do over.

Rob:
Got it. Okay. Cool. Cool. Thank you. Thank you. Well, I’d love to move into how to protect your assets. I think asset protection in general is a pain point no matter what level you’re at, and really there aren’t a ton of great resources. There’s not a lot of education on this. I have students ask me all the time about asset protection and LLCs and I legitimately refer, when someone asks me a question about asset protection, I refer them back to the episode we did with you about a year ago because that one was such a great masterclass in basically the basics.
But I have found personally that it’s hard to set up a system that grows with your portfolio. I have figured this stuff out as I’ve gone versus having set up the foundation at the beginning of my journey. So what I’d like to do is actually take people through the different pillars of income and maybe talk through the plan that someone might want to consider at that time. So for people that are in that $0 to $250,000 of exposed assets, what might that look like in terms of real estate?

Brian:
Yeah, so first, so what do we do shopping for an asset protection plan? This is where I think people need to before we even talk about the pillars, do it before it’s needed. Asset protection only works before it’s needed. That’s it. It’s a barrier. It’s a safe for your gold or your guns. You can’t set it up after the fact. The two big takeaways that I really want people to understand is there’s this case called SEC versus Solow. Here’s a situation where Ms. Solow’s trust was attacked by the SEC to collect her husband’s fines from engaging in fraud and a fraudulent trading scheme.
So just say bad people doing bad things, they’re the villains in the story. The court found that Mr. Solow made a fraudulent transfer after the SEC judgment was entered. So after the judgment was put up against him. So what he did was he assigned his assets over to his wife’s trust to protect them after the judgment. This is just no bueno. This is just straight up fraud. Mr. Solow was held in contempt of court. The good thing is 100% of the assets were protected because he put it in an offshore trust, but he was still held in civil contempt of court.
I liked this case because it demonstrates two things at the same time. One is just the power of an offshore trust, which we will recap as we go through the layers in a second. But it shows what really needs to be done is it goes to a timing issue. The timing of the trust has to be set up before the wrongdoing, before anything happened. So Mr. Solow was blatantly wrong. He’s the bad guy, but the strength of it 0.1, the assets were protected, but why was he held in civil contempt of court? Because of the timing issue. He did everything after the fact, after the lawsuit, after the judgment, and that’s fraudulent.
So the big takeaway, number one, when you’re shopping around for asset protection is do this stuff beforehand. You call me after the fact, there’s literally nothing I’m going to be able to do for you or anybody. Anybody that tells you that they can run away from them. They’re just trying to take your money from you. Now, when it comes to the layers. Think about winter. I always like to use a winter reference because we layer up when we go outside in wintertime. Entry level, first layer, you said you’re at 250,000 or less in net worth, maybe zero to three properties. This is when we use LLCs in insurance. It’s that thin layer that your base layer goes straight on your skin. This is where you’re starting at.
Then as you’re scaling and you’re growing, you’re adding more assets and you hit that probably four unit mark and you’re investing probably in multiple states. We got three or four LLCs set up. You have around $500,000 to $700,000 net. You want a mid-layer. You want something that’s a little bit thicker, like a Moreno wool sweater or a cardigan for you ladies that are listening, this is a management company. Some people use a Wyoming LLC, but you know why I don’t? We use a limited partnership for this layer. Then you keep growing, you kind of hit that 1 million net worth mark, or you are also a doctor, high risk professional with assets. This is where you want that last layer, that outer shell waterproof layer, that really nice winter jacket.
This keeps you nice and dry and warm when the weather’s really bad, that’s your doomsday lawsuit protection layer. That’s your asset protection hybrid trust. But by layering like this, you’re more flexible. You can adjust and make yourself more comfortable. You’re skiing, you’re getting hot. I’m going to take the mid-layer off. Oh, I’m sitting at the lodge getting some drinks with some friends. I’m just in my base layer. Oh my God, this storm came in and we weren’t expecting that. Now I’m going to throw all three layers on it. We’re going to go hit the powder. That’s the purpose, and we want the same thing that apply for asset protection trust.

Rob:
So to recap that, you’re saying when you’re starting out, it’s best to start out as soon as possible because if you don’t have these systems in place and someone sues you, there’s nothing you can do after the fact. And if you try to transfer it after the fact to an offshore shelf that you talked about, that’s fraud. So the first layer is going to be, I think you said is it $0 to $500,000? And that’s where you have a couple of LLCs.

Brian:
$0 to $250 generally is where that is. Yeah, so you’re going to start with just the base layer LLC and insurance and go get into some good insurance. Then the next layer, you’ll start growing. You’re going to expand. You’re going to need more than just the LLC because we know we just spent what, 20 minutes bashing LLCs. So now we know why we need the next layer. So we need to do something more. So that’s where those management companies come in. Some people use Wyoming LLCs as a management company. We use limited partnerships as a management company, but you need that another layer. That’s the second layer.
And then you’re going to keep growing. Hopefully you become a millionaire and you have like 10 properties or you’re high risk professional, that’s where you need that third layer, that asset protection trust, and it’s a combination of all three together that really provides you really strong ironclad protection. It’s just wherever you fall on that at the initial stage, I’m not going to advocate for somebody just starting out to say, “Hey, let’s go spend $30,000 today and create the Taj Mahal of all asset protection.” That’s stupid spending of money. I mean, honest to God. Start small. You’re just starting, LLC insurance. We scale as we go. If you’re coming in big time with me already, I’m a doctor. I got six properties, all in my personal name.” We’re going Taj Mahal, we’re going LLCs, limited partnership and bridge trusts.

Rob:
That’s interesting. That is something I did want to follow up on was when I’ve talked to a real estate attorney before, obviously LLCs are a layer of protection, but he’s always kind of maintained. And I’m curious on your POV here that really that first layer of protection is insurance. Insurance is usually what kicks in before we get to the lawsuit side, is that one of the first things you need definitely for sure?

Brian:
For sure. Insurance. Obviously, if your listeners go back to our prior episode where we talked about what’s wrong with insurance to recap that they’re good for the little things and then you have claim limits. What happens if you have an above claim limit? What happens if there’s an allegation of fraud or intentional wrongdoings in the lawsuit? Insurance doesn’t cover you for intentional wrongdoings or fraud, and virtually every case that’s filed nowadays will always have an allegation of intentional wrongdoings and fraud.
So if you have now a million dollar case with some form of intent, which could just be sending an email, yes, the plumbing was done, send, and then you have a mold issue, a multimillion dollar lawsuit now, what is the insurance company going to say? We’re not going to pay you a million dollar claim for something that has an allegation of intentional wrongdoings. If you think we’re wrong, sue us. Goodbye. That’s how they wiggle out of big lawsuits.
So do you need insurance? Yes. Get good insurance, is good for the little things. What you need to know is what are my claim limits? What are the wiggle outs? And from there, you start scaling as you go. But absolutely get insurance and get the LLC. Just realize the weakness of it, which we’ve been talking about, and the need to scale as you go.

Rob:
It’s like the first line of defense, but it’s not the silver bullet.

David:
And from the insurance company’s perspective, if we’re just being smart and taking a wide range and not just narcissistically looking at our own needs, they’re going to pay out on small claims because it doesn’t make sense for them to hire someone at a six figure salary to go look at small claims. They’re looking at, oh, we got to pay 10 million for this. Let’s find a way to get out of it. So by having them cover your small stuff, they’re not going to fight you on it as much. It’s fine for that lower $0 to $250,000, but when you get into having a higher net worth, the risk of lawsuit goes up, now that thin layer of ballistic armor that may have worked for small firearms or something isn’t going to be a good when you’re getting into light machine guns or something, right?

Brian:
Correct. And to piggyback off of that, the same analogy and principle goes to the next layer of insurance, umbrella policies because people are like, “Oh, why not just go get an umbrella?” It’s the same exact argument. Just realize all umbrella policies do is provide you more capital to fight, but generally all that money is going to be eaten up in litigation and trial expenses. So you need to realize it has the same loss, the same limitations, the same exit strategies, and then think about the cost of trial and the cost of litigation. That is generally going to be like if you’re going to go really fight, that’s going to probably be $250 to $500,000 legal battle.

David:
And then the ultimate protection for when someone gets to a net worth of a million dollars or more are these offshore accounts. But they have to be set up before you’re in trouble. Again, there is no get out of jail free Trump card that you can throw down and say, “No, no, no. The judge said that I have to pay this, but I’m just going to move all my money to the Cayman Islands and then he’ll never be able to touch it. I outsmarted the law.”

Brian:
Correct, because people are like, “Oh, well, you’re Mr. Offshore anyways. You’re doing all these Cook Island trusts. Why can’t I just put it in there and have jurisdictional non-recognition?” Because even the Cook Islands, even though they don’t recognize you as judgments and court orders, you’re doing this after the fact. So they’re going to look at it and say, if you set this up beforehand, yeah, it is completely legit. We won’t recognize it, but you did this after the fact. So they still are going to say, “No, sorry.” They can force them to bring the judgment down to the Cook Island. So we have a little bit of negotiating rule leverage there and say, “Cool, you got it.” They won’t recognize it, but you got to go take the judgment down there anyways, so that could get us back in the negotiating table. But it’s nothing like, nana, nana, nana, we threw your judgment in the trash. Take my penny on the dollar. That argument is when you set this up beforehand.

David:
I think it’s funny that as human beings, we all have that, what if I think I know the loophole because I’ve watched season three of suits or Yeah, I saw a YouTube video. If it ever comes down to it, I’ve got this super secret five-finger death punch that can get me out at any fight. And we don’t think about the fact that you have judges that are incredibly smart people with extensive law degrees at a practice for 20 years, and that is the person you’re going up against with your, I’m going to outsmart them with this strategy and that they’re going to do what you said. They’re going to look at your intent. Was your intent to get around my judgment? Because I’m not going to let you do that, versus was it in place before I issued the judgment?

Brian:
Correct. And we kind of identified what the term of fraud is, but you keep hitting the nail on it when what is the intent? So when we’re transferring assets, the judge literally is going to be, when we transferred it, what was the intent? If you had no creditor and you had no lawsuit, then there is no fraudulent transfer because you had no intent to hinder or delay a claim of a creditor. Now, if you’re coming to me after the fact and we transfer an asset, that is the exact definition of fraud. You just intended to transfer an asset to hinder or delay a legitimate creditor.

David:
Now Brian, when people are setting up these legal entities, at least in my experience, I’ve had to probably reshuffle things around four different times. That’s partially because I often have to switch CPAs and oh, I just get PTSD thinking about what it’s like. I did it a year ago and I’m still talking to them every week trying to figure out how we’re going to set it up.
But a lot of it’s because of, like you said, changing needs, equity grows, your net worth changes, the ways that you make money change. This is like a living, breathing organism. It’s not like pouring concrete and you could do it one time and you could just let it sit for 50 years. What advice do you have for people who maybe think that they’re doing something wrong because they’re frequently having to have conversations about how to structure their entities and how to take advantage of taxes?

Brian:
I think that what you need to realize is those are the conversations you should be having consistently. As you’re becoming successful and you’re making more and you have more risk and you have more assets, you honestly should be talking to your CPA and your advisors more regularly. And I love it because one of my good affiliates who’s a great CPA for investors, he’s like, “God, I wish my clients would call me more than one time a year and just dump a bunch of files on my desk and say, here, work some magic.” He’s like, “You know what magic I could have done if you were talking to me and telling me about what you’re doing beforehand throughout the year.” It’s like, “I could have really done something for you.”
And so what I think people need to realize is these are conversations that you should be, get some sort of plan with your CPA where it’s not just, “Hey, you’re going to going to file all my taxes at the end of the year.” Talk to them quarterly. Tell them what your goals are. Tell them, “I’m going on vacation next month. How do I save some taxes on this?” “I’m building this business.” Involve your CPA. Maybe you don’t need to involve your attorney on it right now because some people don’t want to pay those costs for the legal fees for that, but at least start getting involved with your advisors more often and just realize that’s the business of being successful. And the more you utilize your advisors, the more money you’re going to probably save and make.

Rob:
Well, I am signing my trust tomorrow because every time I get on an airplane with my wife, she instantly goes to, “We’re going to die.” And so every time we’ve travel, she’s like, “We need to get our will in place. We need to get our trust.” I’m actually signing our paperwork tomorrow. And after listening to you, I’m like, did we do it all wrong? Who knows? Find out on the next episode of BiggerPockets, no, I’m just kidding.
So yeah, there’s a lot of, I’ve spent the past year really trying to learn the tax side of things. I certainly have not put that much effort into the legal side of things. And so I’d really like to, now I’m more inspired than ever to be, “Okay, let’s look at the system cracks here. Let’s make sure that all the credit cards are being used correctly.” I think the number one thing that people can probably do and find education on is how to protect themselves from, I guess the veil being pierced. Some small education there can really help you break a lot of bad habits that all investors probably have.

Brian:
Correct. I devoted a lot of section of that in my book. And then there’s other good books that are just written about corporate veil piercing. The problem is now there’s not a lot of, it’s hard to get access to information and sifting through what’s a bunch of BS and what’s salesmanship and what’s legit. And so that’s where I always look at who wrote it? Do they support it with case law? Do they have statutes on this or is it just a bunch of hyperbole and theories? And we need to start flushing a lot of that stuff out. And I think people need to realize some of this stuff, estate planning, protecting your assets, talking to your CPAs, yeah, it’s not sexy, but this is the important stuff when we’re making money and trying to grow and have financial freedom. That’s the stuff where the nitty and gritty needs to really happen.

Rob:
Well, we’re trying to keep the financial freedom, I guess.

Brian:
Correct.

Rob:
That’s the point of asset protection is yeah, taxes help you get there. And then the legal asset protection side-

David:
There are people out there, and this is me going into a hypothetical, okay, I don’t know this, but here’s what my gut says, with YouTube, with social media, with how fast information transfers and with the growing animosity towards wealthy people that we’re starting to see as we go into a recession, I think you’re going to see an uptick in how much people don’t like people that are financially successful. You’re going to start to see information being made that teaches people how to sue in the same way that we are teaching you now how to protect yourself.
You will start to see people saying, “Hey, I learned how to take advantage of someone by suing them in this way. This is what I did. This was the process. This is the point they settled at, and I was able to make $180,000.” As that information gets around, more and more people are going to start doing it. The protection that you need is going to need to level up as the weaponry of the other side increases. I’m not looking forward to that, obviously. I don’t think it’s good, but I think it’s a legit threat that we would be irresponsible not to be sharing that that’s very likely to happen. Have you seen Brian maybe an uptick in how often this is happening?

Brian:
Yeah, I actually was going to say, it’s an interesting thing. Whenever you look at recessions and depressions and everything, the amount of lawsuits almost doubles. So when times go bad, people start running out of money and start panicking, and what do they do? They start suing. Who do they sue? The haves, my landlord, I hate you. My doctor, you got that nice BMW. I want that BMW. So as things get harder, you have an increase in divorces and you have an increase in lawsuits. And then you couple that, which I broke down also because I have tried to set the scene in my book, how did we get here? And it realistically is over the last 40 years, we created a society of victims. And now as this victim class increases, now they want to play the lawsuit lottery, and they’re trying to get rich quick by what you’re talking about.
“Hey, I sued people like this. Now here’s the script. You can go and try to do the same thing.” And even though lawyers now can advertise and have a medium of stirring the pot, there’s no pot to stir. If people didn’t check out accountability and responsibility and weren’t so sue happy and weren’t identifying as a victim, then there wouldn’t be a pot to stir. And so it goes straight to your point of how we got into this massive mess anyways and realize things are getting worse. The world economy is getting worse. There’s no easy fix, monetary manipulation, inflated diet mentality, we got to protect our stuff and we got to be prepared for the tsunami that could potentially be coming ahead. But keeping a positive attitude about things in saying, “Where do we keep investing and growing from here?”

David:
Yeah, I look at us like we subscribe to a philosophy that more or less was captured in the book that I wrote about Pillars of Wealth, save your money, make more money, invest it wisely. And it’s all about adding value to the marketplace, improving your skills, pursuing excellence, giving your best, educating yourself. That’s how you become wealthy. There is an opposing philosophy that preaches financial freedom with the Robin Hood method. We’ll just take it from those people that are rich and give it to yourself. And there is a bit of a struggle that isn’t as noticeable right now, but I think as we head into a recession, it’s going to become much more noticeable and this information becomes more popular.

Rob:
Totally, yeah, yeah. Well, Brian, you kind of mentioned you have a book. Can you tell us where we can grab it? Is it available now? Is it available with pre-order? Where can people find you, all that good stuff?

Brian:
Yeah, so as soon this last stage of its editing, so it should be done this week, and then I hope to have it put out and published by this week or next week at the latest. It’s called Over Exposed and like I said, I break down the world of asset protection and how we got to the point of this crazy messed up legal system that we’re living in, and how do we just protect ourselves from it? And then a great way to go and find the book. You can just jump on my website. I have a whole page just for the book that people can click and go to, or I’m going to publish it through Amazon so they can just jump on Amazon and get a copy of Over Exposed.

Rob:
And what is your website? Where can people find you?

Brian:
Yeah, www.btblegal.com. And like before, I use my website just as an educational link for people, tons of case law, tons of client facts, situations, frequently asked questions, questions you should ask attorneys when you’re vetting them to create this system. And what I’ve noticed is when people actually go in and jump on my resources and start asking people questions, they can vet through a bunch of BS.

Rob:
Cool. Well, I rest my case, your honor. David Greene, where can people find more out about you if they want to learn about you on the Innerwebs?

David:
You can’t handle more about me, davidgreene24.com, or you can check me out on your favorite social media @DavidGreen24. What about you, Rob?

Rob:
You can find me on YouTube over at Robuilt and on Instagram as well. I got very diverse content. They’re both very different, so go say hi. Go leave a comment. Go leave a mean comment about my hair or a compliment about my hair because I seem to get them both every single day.

David:
Any attention is good attention when you’re an attention starved person like Rob. Well, thank you, Brian. We appreciate you coming back on again. This is David Greene. For Rob, I rest my case, your honor, Abasolo, signing off.

In the information age, media has already gone through a fundamental transformation. User-generated content, smart content recommendation algorithms, and nowadays – AI are making the traditional media landscape almost unrecognizable both on the supply and demand sides.

Most of these changes have been driven by innovative startups. The changes, however, are likely not over. Let’s delve into four specific areas within media that present promising opportunities for new innovative startup projects.

1. Streaming Services For Niche Audiences

Streaming services have become a dominant force in the media industry. However, there is a growing demand for content tailored to niche audiences. Startups that focus on providing content for specific communities or interests can thrive.

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A good example is FloSports, which caters to passionate sports fan communities by streaming events such as wrestling and track cycling.

It must be mentioned that the father of modern live-streaming – twitch.tv, is focused on a niche itself – gaming. This model could likely be replicated by on-demand streaming service startups. By narrowing down on producing and publishing content for an under-served but passionate niche community you avoid competing directly with the established players on the media market.

2. Interactive and Immersive Storytelling

Startups that venture into interactive storytelling using technologies like augmented reality (AR) and virtual reality (VR) are gaining ground. These innovations enable users to engage with content in unprecedented ways. Whether it’s interactive documentaries, historical reenactments in VR, or augmented reality apps that enhance print media, startups are reshaping the way we experience stories.

With the technological improvement in the AR and VR field, the potential for immersive storytelling is also growing. These technologies have the power to transport users to different worlds, offering unique and engaging narratives. As consumer interest in immersive experiences continues to grow, startups that tap into this trend can capture a loyal and expanding audience.

3. Crowdsourced Journalism Platforms

Thanks to user-generated content and improved content-recommendation algorithms, the era of citizen journalism is upon us. Startups that make it easier for ordinary individuals to report on events, share videos, and contribute to news coverage are gaining traction.

Crowdsourced journalism startups leverage the power of citizen reporters who are often on the scene before traditional news outlets. They enable real-time reporting and provide a diverse range of perspectives. With the rise of social media, the public is increasingly engaged in reporting events, making crowdsourced journalism an area ripe for innovation. Startups in the field can change the way news is gathered and disseminated, making it more decentralized and immediate.

In our experience, the real opportunities in this niche for new early-stage projects don’t lie in creating new journalism platforms. The reason for this is the chicken-and-egg problem for UGC platforms – you need users to generate content, but the users wouldn’t come if you don’t have good content. This problem makes the UGC platform business model a hard nut to crack for small startups. Instead, services that make it easier for people to find and report on noteworthy events while letting people publish on established platforms like Twitter, Facebook, and YouTube are likely to provide the richest soil for innovation and growth in this niche.

4. AI-Powered Video Production

Creating video content can be resource-intensive and time-consuming. Startups that harness artificial intelligence (AI) for video production are streamlining this process. These AI-powered solutions open the door to efficient, cost-effective video production, enabling businesses and content creators to engage their audience through video more easily, empowering user-generated content (one of the driving forces behind the media landscape disruption) further.

Video content is in high demand across various platforms, from social media to marketing campaigns. AI-powered video production reduces the barriers to entry, allowing even small businesses and individuals to create professional-quality videos. As the demand for video continues to surge and more and more individuals aspire to become content creators, startups that offer cheap but efficient AI-driven solutions are well-positioned to thrive.

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined today by James, Kathy, and Henry. And today, we are going to be talking about the biggest mistakes that each of us made in 2023, at least so far. I guess we still have a couple of months to make even more and make mistakes, but at least I don’t know about you guys, I’ve got plenty of mistakes to fill out this show with.
We could have a very long episode today, but let’s just start. Before we get into each of your individual mistakes, I’d love to just know what mistakes you’re hearing about right now. Henry, I know you work with a lot of students. You coach a lot of people. Are there any common mistakes or threads that you’re hearing from about the current investing market?

Henry:
Yeah, I think one of the most common mistakes people are making right now is not factoring in enough holding costs, because the cost of money is so high, and so people are budgeting. They are budgeting for their holding costs when they’re doing the flip, but then it may end up that they have to take out loans at a higher interest rate than expected, and then holding the properties for longer than expected.
It’s much more costly now the longer you take to finish a project. And I think people aren’t being conservative enough when factoring in the holding costs.

Dave:
Well, I think that’s probably going to be a theme. That’s actually a similar thing I was going to say. But Kathy, are you seeing any common errors that you think our audience should be trying to avoid?

Kathy:
I mean, the big errors I’ve seen over the years over and over again is people for buy and hold buying properties that look really good online, look cheap. They trust the agent. They don’t get the appraisals and the inspections and get the third party people to verify that the properties in a good area and that it really will perform the way that they want it to and the way it says on paper.
So it’s basically don’t trust the pro forma, what’s on paper. You always have to find out the reality of it. So not putting in the pro forma an assumption that rents are going to continue to rise. We just don’t know that. We don’t know that prices are going to continue to rise. The property just needs to make sense right now and be able to do the pro forma if things went well, stress test it, or if rent went down, could you still handle it?

Dave:
Have you heard this advice that people are saying? It doesn’t have to cashflow in year one because rents will go up. And yeah, two years ago that made a lot of sense. But I think another common mistake is thinking that rents are necessarily going to keep going up. They could, I don’t know. But if you’re counting on that to make your deal work, that’s a little bit risky.

Kathy:
Yeah, I think I do say that kind of, so I will defend myself here.

Dave:
Okay.

Kathy:
And that is that your costs are the highest in your first year. You’ve got acquisition costs, your closing costs. So if you’re just looking at your year one pro forma, it’s not going to look very good. So just be careful of that.

Dave:
I just mean your run rate. If your run rate isn’t looking good and you’re going to be down not counting those one time costs that occur in your first year, then perhaps look elsewhere.

Kathy:
Yeah, we just don’t know. We know that we had massive rent growth, and maybe it’s just going to stabilize for a while. Some of that rent growth was, what, 20% in one year of rents going up, so we should count that as rent growth for the next five years, honestly.

Dave:
Totally, yeah, yeah. What about you, James? Any common mistakes you’re seeing?

James:
Just the abuse of debt and really setting up the deal correctly. It doesn’t matter if it’s hard money, town home financing. Any type of debt out there is substantially more expensive, which is slowing things down. What we’re seeing is people are getting a little bit of trouble. Just like Henry said, these deals take a lot longer and they haven’t adjusted their pro forma to account for those extra hold times. I mean, your typical house two years ago would sell in three days. Now it can take 30, and that debt racks up.
It costs more money. In conjunction with that, people still are going in and they’re only buying because they want to get the deal done, and then they’re not setting their exit strategies. I’m seeing some people get into trouble because they close with a development loan. They’re planning on refinancing the property rate and term, and then they didn’t really understand the commercial debt side.
And they’re having to bring a lot more money in because the loan to values have shifted so much with the debt ratio coverage, and then they’re running out of liquidity. And so I feel like people are getting their liquidity locked up and getting stuck in very high payments and it can be very disastrous.

Dave:
All right. Well, those are some good common mistakes that we’re seeing right now that everyone listening should obviously try to avoid. And after this quick break, we’re going to get into the maybe uncommon mistakes that all four of us have made this year. So we’ll be right back. James, let’s hear about your mistakes. I feel like you take a lot of big swings every year. You’re comfortable taking some risks. So does that come with making a few mistakes?

James:
Well, the first thing, one of my first mistakes I think I’ve made this year is I didn’t buy enough in the beginning of the year. The market was in this overcorrection mode for a second where we’ve seen pricing jump up since the beginning of the year, probably another 5% on a rebound, not in growth, but rebounding back.
There was some no-brainer deals where you’re looking at them and you’re like, “No matter what, this is a good buy,” But we did a pass because we had so much stuff going on. They were like, hey, this is the smarter thing to do. But really the smarter thing to do is to make a bunch of money. So it’s like buy the deal no matter what and figure it out.

Dave:
Before you go on though, James, when you didn’t buy more deals, is it because you felt like you had too much risk already out there, too much money in the market and you were uncertain about it, or you didn’t have the capacity to handle it?

James:
There’s numerous reasons why we didn’t. Part of it is every time the market changes, we feel we have to rebuild our businesses and our systems at that point, like how we’re doing our renovation plans, what kind of contractors we’re bringing in, how we’re going to issue permits, what kind of staff do we want on, and how we’re implementing the plan needs to be different today than it was two years ago because it’s a completely different market. Even though the market’s still healthy, inventory is low, it’s still different, right?
Cost of money’s way up, so it makes more sense for us to bring in more higher caliber contractors and pay them a lot more because the debt will trade off. And so what it does is we’ve been rebuilding all of our construction teams, our development team. We actually brought everybody in-house so we can keep speed going. So it’s a lot of moving chess pieces around to get you going for that next market. That was one of the pauses we did. The other pause that we did is we have a lot of stuff.
We’re building 80 town homes right now. We have $20 million in flips going, which are…They’re just bigger projects. And so we wanted to get through the inventory. But as you get through your inventory, you’re not going to make what you when you bought it 12 months ago. Your performance is not going to hit the way you thought because the market has changed. And that’s just part of real estate and investing. But the best way to offset that sometimes, if you’re a no-brainer deal, you should still buy it and figure out how to…
Rather than pass or sell it off, it’s like still figure out how to collect that revenue even if it’s a simple plan. So we could have done some very simple things and still made some pretty good money, but we took that pause. Now, the pause was good because it let us reset, but we probably left a quarter million bucks at least on the table.

Dave:
Yeah. All right, good. Thank you for explaining that. That makes sense. But obviously in retrospect, it hurts a little bit. Let’s hear about this mistake.

James:
One of the biggest mistakes that I’m dealing with right now… It’s funny because people are like, “You’re dealing with that? You do so many projects.” It just happens. We are flipping a very expensive home. We have a loan for $1.8 million on it. It’s worth four and a half million. We have a great buy on it. We went through a substantial, huge renovation where we put in about a million bucks into this property, or it’s about 800 right now. Rebuilt the whole thing. It took us about 18 months to get permits, get it built through.
Actually it took us about 20 months to get the tenants out, get the permits, and rebuild it through. We’re coming to final. And one thing that we had been talking to the city about was they’re like, “Oh, hey, when you go to get your landscaping permit, just pull clear and grade. We’ll be all good.” That’s an over the counter permit typically. So during this 18 months, we could have pulled this permit at any given time. But as you’re going, you’re buying deals, you’re moving forward, you’re working on the project, you’re focused on the house and getting it stabilized.
We’re done with the house, and we go to pull our clearing and grading permit. It turns out when we already knew there were some wetlands on the property and we have to go through a formal CIPA checklist for this landscaping plan.

Dave:
Oh no.

James:
We’ve been sitting on this deal for seven months, paying $18,000 a month as we’re waiting for approval and the house is completely done. And not only that, we don’t want to sell it because part of the huge value of this property, it’s on two and a half acres in Downtown Bellevue, which is very hard to find. So it’s very exclusive, but we can’t do anything until we get this permit. There were so many things that triggered based on that.
Even though we had been talking to the city and they said, “Everything’s going to be fine. Everything’s going to be fine. Don’t worry about it,” then they changed their mind and they can do that sometimes. So the best thing to do is just lock down your permits and your game plan immediately, and we waited too long. And as of right now, if I hit the 10-month mark, which I’m probably going to hit, that’s $180,000 that cost me. When we bought the deal, we were on an 8% loan. Rates have gone up and now we’re on an 11.5% loan.
So we’re just eating that cost. And what that comes down to is just always… Even if you think it’s not a big deal, just put the plan in motion, get it checked off, and then move on. Because we’re literally finaled on our electrical, our plumbing, our building, everything, we just can’t get a landscaping permit.

Kathy:
Unbelievable.

Henry:
That hurts. That hurts.

James:
It hurts. What a waste of money.

Dave:
Do you normally just pull all your permits right at the top? Or how do you avoid that in the future?

James:
What you should do, because we knew it was a big lot, a lot of times you don’t think to pull a clearing and grading permit, but because we were clearing out two and a half acres… And we weren’t grading the whole thing. It was because we should have looked into the code more, and I would’ve done it a little bit differently. So you need a clearing and grading permit in the specific city once you clear more than 5,000 square feet. And that’s not like with a tractor. That’s just clearing out shrubs.
And because we thought we were just removing sticker bushes but not touching the soil, it was going to all be good, which in the code it says that’s okay, unless you do more than 5,000 square feet. Well, we have an 80,000 square foot lot. And honestly, because of the 18 months, the sticker bushes kept growing. If we would’ve kept maintaining it throughout the whole project, it probably wouldn’t have been a big deal either.
But why spend money maintaining it when you’re going to rip it all out, throw 100 grand in the landscaping anyways? And so it’s just one of those things where you coulda, woulda, shoulda. It would’ve been very easy to put it into our plan. We just didn’t, and now we got to pay the piper on it.

Dave:
That hurts. Sorry to hear that, man.

Kathy:
Yeah, that’s just another day in California, right? That’s just how it works here. That’s why flipping in California terrifies me.

Dave:
You just expect a 10-month wait.

Kathy:
Yeah.

James:
But you know what? It’s my fault. It’s my fault. And you got to own your own mistakes as an investor, and that’s just the way it goes sometimes. It sucks, but the good thing is we’re going to get through the project. We’re going to sell it. We’re going to make a little bit of money or get our money back, and then we’ll go do it again.

Dave:
Well, that’s a good attitude to have, and luckily you have 180 grand to lose. In the deal, I mean. There’s so much equity in it. Not you personally. But if you could still lose 180 grand in potential profit and still even break even, it shows that you had a great buy on that deal.

James:
A great buy, but I mean, think about what you can do. You can go buy another house with 180 grand.

Henry:
You can buy a couple in Arkansas.

Dave:
Oh yeah. Let it go, man.

James:
You could be making a high interest rate loan. You could be buying a deal. What a waste of time and money. Again, sometimes the plan goes bad.

Dave:
All right. Well, thank you for sharing that one with us. Henry, what’s your biggest mistake of 2023?

Henry:
Oh man, my biggest mistake of 2023, so I just closed the deal where… This was my first flip where I lost money.

Dave:
How many flips have you done before you lost money on one?

Henry:
A couple hundred.

Dave:
Oh, okay. That’s an excellent win percentage.

Henry:
I got pretty close to losing money earlier in the year, but actually when I did the math, I made like $8. I still counted that one as positive.

Dave:
Just don’t count the rate of return on that one. You made money.

James:
As long as you’re in the green, it’s all good.

Henry:
Green is green, my man. Green is green.

Kathy:
Just lost time.

Dave:
What was your hourly rate on that deal?

Henry:
But this one, so this is a house I bought. It was in a more rural part of town, but it was on three acres. It was a good deal, man. I paid 180 for it and ARV was 350 to 375. Needed about a 70,000 to $80,000 renovation. And so I bought it thinking and understanding I had multiple exits. So a lot of things factored into what made this a mistake. It was a good deal. I bought a good deal. It wasn’t that I bought a bad deal, but it was a case of I grew too quickly.
And so during the time after I bought that, I ended up having to hire a project manager because we were buying so many deals at the time and working on so many projects. It’s not like I had this established project manager process in place. I was coming to train this guy, and he’s fantastic. He’s doing a great job. But the timing of it was just not great because the holding costs were expensive. I mean, we had owned it for four months before we even looked at what are we going to do with this thing?
Are we going to go ahead and do this renovation or are we not? Because we had so many other projects that needed to get done. So by the time we got around to figuring out what we’re going to do with this project, I just decided to go ahead and stick it on the MLS and try to whole tail it. And I tried that and I couldn’t get a bite. So the mistake with the property was the layout just seemed difficult for most investors.
So in order to make this one work, you were going to have to essentially create a hallway in the middle of what’s an existing bedroom, because you got to essentially walk through one bedroom to get to another and a bathroom to get to another. So the layout was just funky. And so if you’re going to flip that, you got to fix that. And me, that’s not a problem to me. I’ll just fix it. I’m optimistic enough to know we can go and we can fix that, but a lot of investors just didn’t have that vision.
They didn’t want to deal with that problem. And so when I stuck it on the market, it was hard for me to find somebody from an investment standpoint that wanted to solve that problem. We ended up selling it on market to an owner occupied who’s going to live in it and fix it over time, but we sold it at a pretty significant discount. Everybody else made money. My agent made money. My money lender made money. Everybody involved made money. I was the only one that didn’t make any money, but it was more of a conscious choice.
I just wanted to stop the bleeding of the high interest, sell the property, get done so I can move on to the things that I know are working and are going to generate the income that I want, plus the opportunity cost of what I can do now that I don’t have that sitting over my head ahead. I could have done the renovation myself and spent the 70 and then sold the property for a higher amount, but it would’ve took me another four or five months, maybe six with everything else I have going on.
Just doing the math of that monthly payment and I said, you know what? Let’s just go ahead, call it. I think I ended up losing about 11 grand, so it wasn’t the end of the world. Call it and move on. So everybody else made money. So it was good for everybody, just not me, but a case of growing too fast and the market conditions. And if I had it to do again, I probably still would’ve bought the property and just made sure I got to it sooner and probably just managed that one myself, because it was a great opportunity. I got too busy.

Dave:
I mean, that’s sort of what happens. I guess since this is the first one you lost money on, this might not apply, but when you do the volume of deals that you and James both do, do you give yourself an allowance knowing I’m going to take a lot of swings this year, and if I miss on two of them, it’s okay. Do you think that way, or does it really hurt? I guess I’ll ask you, James, since you’ve lost probably money on more than just one deal.

James:
Definitely more than one deal. I’m a 2008 get your butt kicked investor. I always have that kind of little bit… I call them battle scars. That you’re just like you kind of remember that things can go wrong really quickly. I always tell people, if you buy 10 deals and you’re really good at this, you’re most likely going to lose money on two of them. Three if you’re going to get pretty average, or maybe be duds. Two are going to go a little bit better than average and you’re going to hit a couple two.
Two are going to crush, and that’s if you’re good at it. And that’s just the law of statistic. I mean, that’s just statistical averages. It’s going to happen. You’re in a high risk environment. It’s going to go great, it’s going to go bad, and you want to blend it together.

Dave:
Well, Henry, I appreciate for your first loss. You’ve got a pretty good attitude about it.

James:
Your batting average is pretty good, Henry.

Dave:
Yeah, yeah, you’d be in the hall of fame.

Henry:
I mean, the expectation is you’re going to lose some, right? I don’t expect to never lose money. I’m really fortunate that it hasn’t happened before. I’m fortunate that even though I lost money, nobody else did. My investors got paid. Everybody got paid, and that makes me feel good. I’m okay losing some money. I don’t want to have anybody else ever have to lose money because of a deal I’m doing.
And so we didn’t have to do this. All in all it’s like a win for me because now I’ve moved on and I’m making money on other deals. But it wasn’t fun having to bring a check to closing on a deal I’m selling. That wasn’t a good feeling.

Dave:
Yeah, that’s probably a weird feeling.

James:
I got to give Henry some props on this because I was actually, turns out, I was the lender on this deal.

Kathy:
And you made money.

James:
I made money. That’s why I love private money lending. It’s less work. But at the same time, as a borrower or an operator, I didn’t even hear about this. Henry borrowed the money. He had to step to the plate, do what he needed to do, move on. That’s a good operator. So hats off to you, Henry, because I never even heard about this.

Henry:
Thank you. I need you to give me more money, so that’s why I didn’t want…

Dave:
Pretend you didn’t hear any of this, James.

Henry:
But in all seriousness, that’s a phenomenal… I tell my students this all the time. I’m like, if you’re going to borrow money, guys, you got to make your investors whole no matter what. No matter what. You’re going to have to bite some bullets sometimes if you get yourself into a sticky situation. But if you want to grow in this business, man, you got to make your investors whole, period, point-blank. That is the most important part. You eat last, man. That’s just always how it’s going to be as an operator.

Dave:
Absolutely. Well, Kathy, as someone who raises a lot of money from investors, what is your biggest mistake in 2023?

Kathy:
Well, in 2023, it’s been a good year. Like James, I would say my biggest mistake was not raising more money for our single family rental fund, it’s coming to an end, and buying more because it has been phenomenal. We just have not had competition. We’re the only people at the table so often. The only one the wholesalers call and our deals have been phenomenal.

Dave:
That’s great.

Kathy:
That’s the positive side. But the issues that I’m dealing with in 2023 come from decisions I made a decade ago when I didn’t know the things that I know today and the reason why I love to teach and share so that other people don’t make these mistakes. Back then, I was, like Henry was saying, growing too fast, had too many opportunities, too much money being thrown at me.
And I would get excited about cool things. And one of the projects that came to me, things like a wine village, something that a lender doesn’t know what that is. Basically it was just commercial property where wineries would lease from you and have tasting rooms and so forth because they only need a small space.

Dave:
I mean, a wine village sounds pretty cool.

Kathy:
It’s very cool, and it’s in California. And it’s in a part of California that doesn’t have this. It was outside of Napa, on the way to Shasta. All of it looked great. The pro forma looked great, but what we discovered is that lenders didn’t understand it well enough, so we had trouble getting the financing. So the big lesson… Okay, that’s one, but I learned that years ago. But this year the thing I learned is that in some of these syndications, the way I would structure it, and I know the way that other people structure it, is different layers of lender.
And we’ve been talking about lending. Some will be a bank loan, some might be private equity, some might be where you have a syndication. You have an LLC and you bring in one kind of investor who’s on the equity side, and then you can bring in another investor that gets a lower rate because they’re coming in as a lender. And that tends to be you get paid first as a lender. So I would structure these because a lot of people investing in their IRAs… I’m going to get a little technical here, but it’s important for people to understand this.
If you invest in your IRA, you take your IRA money and you invest in somebody’s syndication, somebody’s apartment deal or a wine village, and you are equity, meaning you’re a part owner of it, you get what’s left after everybody else gets paid. Well, in your IRA, it’s considered investing in a business. It was an operational business. If you’re building homes and selling them, that’s an operational business versus an apartment that’s more passive. You get UBIT, unrelated business income tax, within your IRA, and that could be like 50%.
So that’s a big shock, but it doesn’t happen if you’re passive. So I would bring investors into a deal that was… They could come in as a lender, but then they’ll also be equity investors. Well, if the deal goes bad, and I have one from 10 years ago that did, which a lot of people say, “No one can lose money in real estate over the past decade,” but you know what? You can when you invest in things that are different and weird and shiny objects and so forth. So in this LLC, we had lenders and equity investors.
Now what I’m learning is if there’s losses and you can’t pay everybody back and you can’t pay the full amount of the loan, the equity investors pay loan forgiveness tax. In addition to losing their money, they pay tax on the loan forgiveness, the part of the loan they didn’t pay. So here I’ve got two groups of investors. It’s just complicated. So again, before you ever do any syndication, always make sure you’ve spoken to your CPA and they truly understand the position that you’re in and what the tax consequences would be.
But I’m concerned that a lot of people in these multifamily deals where there was like 10% equity and then there was like 10% that was a bridge loan and then the bank loan, well, those equity investors, if there’s losses, they’re also paying debt forgiveness on the part of the loan they didn’t pay. So I think there’s going to be a lot of investors out there shocked that not only did they lose their money, but now they pay tax. Hopefully the losses offset.
But if the loan is massive, and I didn’t do any of these multifamily deals, I’m just saying for those who did, if they leveraged up to 90%, which again I would never do on multi. My mentor was like, don’t leverage over 60%. He was conservative, but that’s why I didn’t do any deals. Going to 90%, let’s say… You’ve seen some of these deals that have gone bad where 20% is lost. Now those equity investors pay. They’re paying taxes on top of losing their money.

Dave:
It’s just kicking someone while they’re down. That’s just rude.

Kathy:
I don’t get it, but the IRS looks like it. Well, you took this money to do this deal. So if you’re not having to pay that money back, that’s income. That’s how they see it. I hope that wasn’t way over complicated.

Dave:
No.

Henry:
You explained that well.

Dave:
That sounds terrible, but I’m still focused… Can we go to the wine village? Does this exist?

Kathy:
So we never could get the financing on it, so no. We’re just trying to sell it now is land with all the entitlements. And if anybody out there wants a wine village, it’s ready to be built. We just couldn’t get the financing. It’s a cool project.

Dave:
I want to visit a wine village. I’m not sure I want to build one.

Kathy:
There’s some really good ones. We were modeling it after some in Washington, actually. I don’t know. James, do you know of any wine villages because there’s been successful ones in Washington State?

James:
Are they in Yakima probably or Chelan?

Kathy:
Isn’t there a wine area of Washington? I think it’s there.

James:
Yeah, Yakima has gotten pretty nice wineries now down there, but I don’t do wine. I don’t even drink.

Henry:
You need a rockstar village.

James:
You repurpose it to a rockstar village.

Kathy:
A rockstar village. These ones in Washington are killing it because you’re just leasing a tiny little space. Because they’re not making the wine there, they’re just tasting it. They make their wine elsewhere. But all these wonderful wineries that are hidden out in the hills, nobody’s going to go visit.
The wineries could come and have little tasting rooms in areas where there are people and they’ll pay a lot because then it’s direct to consumer versus having… They pay like 50% to go through a wholesaler. They were willing to pay a lot more to rent the space. So the numbers looked fantastic. Just you have to build it to make it work.

James:
It sounds like a cool concept.

Kathy:
It’s permitted. Anybody got money, let’s build it.

Dave:
Well, for my biggest mistake, I guess my biggest investing mistake for this year, because there have been plenty of other ones, is probably something that everyone here identifies with, but it was not firing someone as soon as I should and just waiting too long, even though I knew I had to, but I was being lazy about it. And it’s going to cost me a whole lot of money. I have a short-term rental. Most of the deals I buy now are passive. So I still operate a couple of deals in Colorado, and I have this short-term rental that I hired a full service property manager for when I moved to Europe.
And they’ve just been bad since the beginning. And every couple of months, you probably get this, you get on them, they start doing well for a couple months, and then it slacks off again. And it goes up again and it goes off again. And I just waited for so long. And finally it got to the point where we were getting really bad reviews. There were some issues with the property that really needed physical rebuilding, and so we figured that. I came to the conclusion that I just finally had to pull the bandaid off, but it was right at the beginning of the summer in Colorado, which is the busiest season.
And so I lost all of my bookings for June, July, and August, which was probably 10 or 15 grand. And then I also lost all of my reviews, which when you think about all the money you lose from losing 50 or 60 good reviews, all the lost bookings for the last year. So if I had just done it in a smart way, Colorado where the short-term rental is, there’s like a mud season, I could have just done it from March to May and it would’ve been completely fine. But I was lazy about it and now I’m licking my wounds a little bit.
So that one hurts. And I think probably relatable to everyone, because whether it’s a property manager or a contractor, sometimes you just delay that inevitable, uncomfortable situation that you know you got to get yourself through.

Kathy:
Hire slowly, fire quickly.

Henry:
It’s easier said than done, man.

Kathy:
Yeah, it is.

Dave:
I know. Living so far away, I didn’t really want to figure it out, to be honest. I just wanted them to do a good job and they didn’t. But it’s okay. Like you said, you get a lot of good years. Sometimes you miss for a little bit. But as long as you’re trending upward over time, it’s good.

James:
That’s interesting to me. So when you hire a short-term rental property management company and it’s your property, they own the reviews technically?

Dave:
They did on this one, yeah. The new one I’ve figured out a way to not do it, but I did not realize how they had structured it the first time around. So that really sucked.

James:
It’s like kind of golden handcuffs because you don’t want to leave it.

Henry:
That’s terrible.

Dave:
Yeah, exactly. Exactly.

Kathy:
Yeah, that’s interesting because when I hired a property manager for my first out of state short-term rental, I thought they were going to handle it all and they said, “No, no, no. It should still be under your name and your Airbnb.” And I ended up firing them before we even started because they were terrible.

Dave:
Really?

Kathy:
Yeah, yeah. When they’re not answering your messages right away at the beginning of a relationship, this is problematic. And then I was so glad that I got… Oh, that’s why you’re supposed to keep it in your own account for this reason, but I didn’t know it at the time. It was just luck.

Dave:
Yeah, it’s an important lesson. And now I’m offering discounts to people I know or giving it away just so I can get some reviews. So if anyone wants to go to ski in Colorado, hit me up on Instagram. I got a very nice house. You could go visit this winter, or we can all go. You guys want to go?

James:
I will happily go check out your pad.

Kathy:
Yeah, let’s have a reunion.

Dave:
There’s no one there.

Kathy:
We’ll just trash it.

Dave:
Honestly, it’s like a 16 person house in a party town, so it gets some wear and tear for sure.

Kathy:
Perfect.

Dave:
It wouldn’t be the first time I’ve trashed it, at least. That’s for sure.

James:
Well, I’ll be in Vail for Thanksgiving, so I think we should all just go to your place for Thanksgiving dinner and have an OTM Thanksgiving proper. Henry, you cook the turkey and let’s just go.

Dave:
I’m going to be on my honeymoon. I’m going to be on my honeymoon Thanksgiving.

Kathy:
Well, we’ll just join you there then.

Dave:
You guys can go. Yeah, You guys want to come to Thailand?

Henry:
Oh, I would love to go to Thailand.

Kathy:
Where are you going?

Dave:
We’re going to Cambodia and Thailand.

Henry:
So jealous.

Dave:
I’m very excited.

Kathy:
Yeah.

Dave:
It’s going to be very nice. But you guys can have the house. You can cook your turkey there.

Kathy:
Henry’s cooking.

Dave:
All right, well, thank you all so much for sharing your mistakes. I think this is an important part of real estate investing that I think we do a decent job sharing our mistakes on this show. We’re probably going to do some more of this because today was our mistakes with investing, but we’re going to have to come clean about some of our predictions for 2023 at some point too. There will be some admissions of mistakes definitely I think on all of our parts. I know I have a couple that are haunting me, so stay tuned for that.

Kathy:
It’s not the end of the year yet.

Dave:
Yes, that’s true. We will see what happens, but we will also have a reckoning before the end of the year for that as well. If you want to learn more about our wonderful hosts here, James, if anyone wants to talk to you about losing 180 grand, where should they do that?

James:
Best way to figure out how to lose money is go to my Instagram at [crosstalk 00:32:10] jamesdavid.com. I got lots of stories for you.

Dave:
All right, Kathy, what about you?

Kathy:
At RealWealth.com is our company, and then Kathy Fettke on Instagram.

Dave:
All right. Henry?

Henry:
Yeah, you can catch me at my website, seeyouattheclosingtable.com, or Instagram. I’m @thehenrywashington.

Dave:
All right. And if you want to find me, you can do that on Instagram @TheDataDeli. Thank you all so much for listening. We’ll see you next time. On The Market was created by me, Dave Meyer and Caitlin Bennett. The show is produced by Caitlin Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

David:
This is the BiggerPockets Podcast, 837.

Kevin:
My real estate point of view is if I buy a place for 500K and I’m into it for 5 with fix up, I want $100,000 of equity. That’s my goal. Which percentage wise is 20%. So now if I look at investing a million dollars, I want $200,000. I’m actually not the biggest fan of caring about so much what the rent is and the rent cashflow percentages. I want that equity because that’s tax-free money. I hate paying taxes. I paid enough taxes and I’m tired of it.

David:
What’s going on, everyone? It’s David Greene, you host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the world every week bringing you the how-tos, the stories, and the current events that you need to make good decisions in today’s market. And in today’s show, even though I’m recording this from BiggerPockets’ conference in Orlando, I’m going to be with Meet Kevin of YouTube, Kevin Paffrath. We are in LA at his place, and we’re going to be taking questions from you, our listener base, and we have a great show for you. Kevin and I get into a lot of interesting topics from the greater economy to individual specific deals, a little bit of everything today. And most importantly, we cover a lot of people who should not be buying deals. Not every single situation is something where you should pull the trigger. We have several today where we say, “Hey, you should not buy this deal. You should not partner with this person. This is a bad idea.” You’re thinking about it the wrong way, and here’s why.
Very excited to bring this show to you. But before we get into it, today’s quick tip is simple. Get your tickets for BiggerPockets Conference 2024 now. Many people are trying to get into this one in Orlando, but unfortunately tickets were sold out and the best hotel rooms were taken. If you would like to meet me and other BiggerPockets talent as well as a lot of other jazzed up real estate investors, go to biggerpockets.com/events and get your ticket now. All right, get ready for a great show.
The first question will come from the forums. This is from Don K. in the Woodlands, Texas. Don says, “I target 12% on my passive real estate investments. 20% or more for active real estate investments without taking excessive risks at a maximum leverage of 50%. What is your target for return on investment annual on your passive real estate investments? On your investments, which require a more active participation, how do you calculate that and has it changed as years go by?”

Kevin:
Wow.

David:
So Kevin, target ROI, what do you shoot for?

Kevin:
It’s really interesting. I am not a percentage guy, which is crazy because I’m like Mr. Finance, especially with stocks, and we’ll talk percentages there and growth rates. But when it comes to real estate, I have a really different way of looking at real estate. My real estate point of view is, if I buy a place for 500K and I’m into it for 5 with fix up, I want $100,000 of equity. That’s my goal, which percentage wise is 20%. So now if I look at investing a million dollars, I want $200,000. I’m actually not the biggest fan of caring about so much what the rent is and the rent cashflow percentages. I want that equity because that’s tax-free money. I hate paying taxes. I’ve paid enough taxes and I’m tired of it. So that’s my point of view.
I will say, when I hear these numbers, the question was phrased as this is someone’s target, and then they say, without risk, it doesn’t sound like reasonable. Especially if this is cashflow, it doesn’t sound reasonable. If you got maybe this is a flipper and it’s in an appreciating market, maybe that’s realistic then. But otherwise, I think if we’re talking cashflow here, I think it’s a little loony.

David:
You’re making a really good point. Also to highlight, when you speak with more experienced investors, successful people like yourselves, it’s not that cashflow doesn’t matter, but the conversation trends away from cashflow.

Kevin:
Oh, quickly, yes.

David:
Right?

Kevin:
Yeah.

David:
When you’re new, this is all that people talk about. It’s all they think about. I have a book that’s going to be coming out soon about the 10 ways you make money in real estate, and the natural cashflow is one of them. Well, that’s the only one we all hear about. There’s different reasons why that may be. My gut tends to believe it’s because the influencers, the gurus, the people that want you to take their course, they have to sell you on cashflow because cashflow is how you get out of your job, it’s how you get a girlfriend, it’s how you make your dog like you, it’s how you get on the yacht with the hot chicks. All the things that have nothing to do with the reasons you should be pursuing financial independence are related on cashflow, right? So it becomes this magical carrot that everybody wants to chase. Now, what you’re talking about with equity, great point, not taxed. What’s your take on how you buy properties that aren’t going to cashflow without losing them?

Kevin:
Right. Well, so this is very risky, and I want to finish off also on just one of the last things you said. I think that’s so interesting because you’re right. It’s this idea of selling this goal of financial freedom. I think as soon as people start getting dividends, like in stocks, which I think are a complete ripoff, you shouldn’t touch dividends unless you’re retired, and then cashflow and real estate, the problem is people then take that cashflow but then they spend it on going to the mall or going on a vacation or whatever. And so now you’re paying taxes and you’re not even building your wealth because you’re just blowing it. It’s so stupid. So I wanted to add that part.

David:
That’s a good point.

Kevin:
So-

David:
When you don’t spend equity, it’s hard.

Kevin:
It’s hard. That’s the point. The harder it is to spend your investments, the less likely you are to do it. Harvard did a study. They said if you have cash in a savings account, you are nearly 100% likely to spend it. If you have cash in an investment account, a brokerage account, you are nearly 100% likely not to spend it because it’s psychologically punishing, “Oh, I’m going to rob from my investment to go spend money.” Whereas if there’s a dividend or a rental income coming and it’s going right into your checking account, you spend it. Now, I’m going to have to ask you to repeat your question.

David:
No, no. The question would be, let’s say that we have someone here in this, they’re like, “That makes sense. My take is equity is easier to build in cashflow. It’s very hard to control cashflow itself.” You are dependent on what market rents are and expenses are going to be what they are. You can’t just eliminate expenses. But equity, you do have some control over. You can improve a property, you decide what you pay for it, you pick the market you buy in. You have an easier ability to build wealth when it’s through equity. The downside is, how do you make these payments? So what’s your advice for someone who says, “Yeah, I can understand the wisdom of this, but I don’t want to lose the property”?

Kevin:
Right. So when I bought my first house, we realize the payment was going to be about $1,950, PITI, plus we figured there’ll probably be some things that break or whatever. So add another couple hundred bucks. That was around 2,150 bucks, and we went into that barely making 2,100 bucks. We did not make enough money to comfortably make that, but we’re like, “But it’s a great deal.”
So we were in a situation where I was just starting my real estate career so I wasn’t making money. It took me 11 months to close my first real estate deal. That’s 11 months of no income when you’re making these payments. So it’s really scary, and I would never recommend that to anyone. The reason I did it with my wife is we looked and we said, “Look, worst case scenario, we could rent this place out for $2,500. Next worst case scenario, we could move roommates in. It was a three bedroom, two bath. We’ll be in one. We’ll rent out the two other rooms for 600, 700 bucks a piece. That’ll help offset a lot of the payment, the traditional house hacking.”
So we created these little hedges, we’ll rent it all out if we need to. We’ll rent out the rooms if we need to. We’ll go move back in with mom and dad if we need to, whatever. And I realize not everybody’s as lucky to be able to say, “Oh, we get to be able to have a fallback of moving back in with mom and dad.” But I also realized when you have nothing, it’s really hard to lose. So I was willing to take that risk with my wife. We’re like, “Well, worst case scenario, we’re going back to zero.” We’re like, “We already are at zero.”

David:
Good point.

Kevin:
So now, if somebody has already… If they’re looking at interest rates today and they’re 7, 8%, unfortunately I see people doing this, and this really scares me, as people are saying, “Well, I’m betting that rates are going to come down.” So somebody sent me a message, they’re like, “Hey, I want to buy this duplex and the payments going to be $4,500 was the payment in Florida.” I’m like, “Okay, well what’s the rental income?”
“Oh, 2,500.” I’m like, “This is a terrible idea.” It’s a negative 2,000 guaranteed. With it, 100% rented out, and you have to pay for yourself to live somewhere else. So then the next question is, “Well, what is your capacity to float basically a negative almost…” It’s 24,000, but add in maintenance and other stuff. “What’s your capacity of float?” $30,000 of additional investment every year? “How much money are you making?” Well, so this is where we have to consider individual suitability. If you’re making 5 million a year, who cares, right? Sure, okay. Maybe you think you got a great deal, you really wanted that property, whatever. But if you’re making an average income 50, 60, 70, 100K, hell no. That’s stupid. So I think that’s number one, is what’s your income. And your goal, I’m pretty sure you talk about pretty regularly in your book, which is increase your income, right?

David:
That’s exactly right.

Kevin:
Yeah. So if your income’s low, increase your income first. Focus on that. How could you provide more value to society? Realistically, you’ll probably make more money focusing first on making more money. Anyway, different topic. So for most people, I think big negative cash flows are a very bad idea. If you’re negative 100 bucks or 200 bucks, you ask yourself, “Well, can I float another 1,200 bucks a year or 2,400 bucks a year?” Well, most people can.

David:
Right.

Kevin:
So that’s my line, is what’s your ability to float that as an additional investment? And is that an investment worth throwing more money at? If it is, maybe 100 bucks a month makes sense.

David:
Would you give up $100,000 of equity so you don’t lose 100 bucks a month? Does that sound smart?

Kevin:
No. No, no, no, no. So my thing is I would rather lose 100 bucks a month and have 100K of equity because it’s going to take me 10 years. Or no, it’ll take me like 80 years, you know?

David:
Yes. That’s exactly right. The cashflow method takes a lot longer to build up that wealth, but the downside is you can lose it. So what I hear you saying is focus on ways to manage finances outside of that individual asset.

Kevin:
100%.

David:
The stronger of a financial position you’re in, the less you have to worry about the return on the cashflow and the more you can get into the spaces where big wealth is made and you’re not taxed.

Kevin:
Well, consider the principal paydown as well. If you’re negative 100 bucks, your principal paydown is probably 400 to 700 bucks a month. Well, that’s literally money you’re putting into that forced savings account you can’t spend. So you’re technically not really negative. You’re technically positive.

David:
That’s in this book that’s going to come out after Pillars. That’s the argument I make, is that real estate makes you money in so many ways, but when you only focus on cashflow, you stop paying attention to the money you’re saving in taxes through depreciation and the principle pay down that’s happening and the amortization schedule that favors you the longer you own it and the equity and the rents that go up every year if you buy in the right area, that there’s a chess aspect to real estate investing and when you’re just trying to play checkers, you’re just looking at cashflow. So I think that’s a great answer.

Kevin:
Yeah, it’s incredible because I think that’s the problem though, is people discover us on social media, but the mainstream idea on social media is cashflow. And so then you get the… Let me put it this way, what tweet’s going to go viral? A tweet where you break down, “Hey, if you buy a house, you get these tax benefits principle pay down. You get all these long-term, 10 different ways to make money.”

David:
[inaudible 00:11:29].

Kevin:
Right? Is that going to go viral? Of course not. How about, “Why would you buy stocks or real estate if you could make 5% on a money market fund?” Well, those tweets do a lot better because it’s simple and it appeals to everyone, like, “Yeah. Real estate sucks. I’ll get it in a money market.” Well, how long is that money market going to offer you? 5%. What wealth are you going to actually build?

David:
Great point. So when you’re getting your information from free sources like the internet, expect that you’re not going to be getting the most accurate information. You’re going to be getting the most sensationalized, which is why they’re listening to us because they’re going to get real talk.

Kevin:
And I’m not anti Elon, but it’s one of the reasons I’m so frustrated with platforms like Twitter, is they incentivize how do you get somebody to stop scrolling and interact with your post. Well, the way you do that is with something sensational. Whereas don’t get me wrong, I feel like the sensational title guy on YouTube, but the point is, when you get in the video, you’re now listening to a 20-minute video or whatever it is on real perspective, which you’re not getting in a ten-second tweet that you’re committing.

David:
All right, Don K, hope that helped. Our next question comes from Jaron W. in Indianapolis. Jaron says, “Every one of our single family rentals have trapped capital. They’re all BRRRRs. I believe that’s a fancy way of saying equity. I’ve never heard of trapped capital. That’s interesting.” I think that means he left money in the BRRRR. He didn’t get it 100% of it out. “It’s nearly impossible to not trap capital if you’re buying and holding rentals right now. It’s a good problem, I suppose, but it’s nearly impossible to grow a portfolio without finding more cash. As an experienced investor, what advice can you give to younger people tackling this issue? Should I leverage more? Should I partner up? Should I stop trying and sit on the sideline?” So Jaron here has the issue of he’s doing some BRRRRs and he didn’t get all of his money out and he’s just run out of capital, but he wants to scale a portfolio. Common problem. What do you say?

Kevin:
Well, first of all, look, everybody’s got a different strategy. I hear partners and I think, “No thanks.” I have seen so many partnerships destroy families, friendships, relationships out of stupid things like what color the doorknob should be. It’s absolutely insane. And so if you’re going to ever do partners, you got to have somebody who’s making the decisions and somebody who’s not. If you’re going to have a partnership, please have that relationship established. I have found that I like control. As a result, I have found I don’t work well with partners. I can work myself making decisions with a team of people who are [inaudible 00:13:56]-

David:
Executing your decisions.

Kevin:
Yeah, my decisions and my formula. But yeah, anyway, so I hear partners, I shut down. Stop trying, I think, is the wrong answer. I think you should be trying in a different way. Leverage is, I hear risk.
So my thinking is, what can the individual do to increase their other sources of income to make sure that you can keep investing> this idea of trap capital makes it sound like it’s bad. That’s how you build wealth, is you don’t need to be leveraged to the hilt. I remember just over this last decade post the financial crisis, seeing my properties over time, they get to leverage ratios that would start at 75% on refinance and then all of a sudden they’re at 65%, then they’re at 59%, and I’m like, “Oh, I can pull money out of this.” But what I always told myself is I’m going to leave those there on purpose as little piggy banks, because one day something’s going to hit the fan in markets and then I’m going to go break those piggy banks. I’m going to take the hammer and I’m going to break the piggy bank and then the cash will be there when I need it, rather than always trying to be perfectly leveraged.
And I suspect Mr. Trap Capital, I think it’s Mr. Trap Capital, is a spreadsheet kind of person, and they’re looking and going, “Oh, There’s 20K left in there. I don’t know. Now my ROI is slightly less. If I had that 20K, my ROI would be slightly higher.” Usually, folks who get so in the weeds of spreadsheets don’t succeed long in real estate. I don’t know. That’s just my impression.

David:
Because the spreadsheets are an idealized version of how you want the world to work. Then you get into the business and it doesn’t work the way you’re thinking.

Kevin:
Real estate’s a people business, not a spreadsheet business.

David:
I really like your points there, especially the part about you should be making money outside of real estate. That does not get talked about in our space. It’s one of the reasons that I wrote Pillars of Wealth, is because I was frankly tired of people coming to me and saying, “David, I have no money, no credit, no job, no skills, nothing to offer the world, and I really want to invest in real estate. Can you show me how to do it?” And I’m like, “Look, if that’s where you are in life, we need to have a conversation about how you get money, credit, skills, value, not how you go invest in an asset that can hurt you if you don’t have sufficient capital to weather a storm.”

Kevin:
Bingo.

David:
So let’s say you’ve got a little brother and he comes to you, you love this little brother, and he goes, “Kevin, I keep getting fired from my jobs because my boss wants to be there at 9:00 AM and I like to sleep in. I can’t get a girlfriend because I’m 80 lbs. overweight and I don’t make eye contact with people. I have no confidence. Can you help me get a job that I make a lot of money, but I don’t have to wake up early and can you help me find a girlfriend that doesn’t care that I’m 80 lbs. overweight and have no confidence?” Would you tell him, “Oh yeah, there’s this crypto thing”? Right? “There’s this NFT where you can make all this money and you don’t have to change anything.” Or would you say, “Look, I love you little brother. We need to get you on a treadmill. We need to build up your confidence by doing some hard things in life, or you need to get out of bed earlier”?
What is the answer? Do we give them an easier route or do we say that the problem starts with improving what they’re doing?

Kevin:
I think we have to remember that we’re in a world that rewards capitalism and capitalists. So you have to become a capitalist. And so then we look and say, “Okay, we’ll watch what successful people do and copy them.” What do capitalists do? As much as that word can be negative to people who just want stimulus checks every day, that word comes across as negative when we want to sleep in. But the reality is what do successful people do? Well, they work hard. They work long hours, they wake up early or they have routines, they have systems, they have value that they can provide.
And so sometimes that means if we’re starting at zero, we go, “Okay, well fine. I want to become more like a capitalist. Where do I start?” Well, how many licenses do you have? They’re not that hard to get. Licenses, surprisingly, have very few requisites. Go become a real estate agent, become a lender. Just by going through those tests, you’ll learn so much about… And look, don’t get me wrong, we forget most of the stuff that we study for these tests anyway, but it gets you in the mindset of thinking, “Oh, there’s 10% here that actually really applies to the business of lending or real estate or finance and you learn.” Now when you sit down with somebody at an open house as a realtor and somebody says, “Well, how do I run this amortization or a discounted cashflow or how do I do whatever?”, you know because you’ve actually trained yourself. If you don’t have a skillset and a way to provide value, you won’t make it.
So the beauty though is there are plenty of people who don’t provide value, which as soon as you figure out how to, you can succeed. And there are plenty of ways to do it, whether it’s in finance or real estate. That’s the whole reason the BRRRR method exists, which is buy a place that’s a fixer upper and renovate it. The reason that’s not arbitrage to zero is because it’s hard. You need people skills. You need to be able to work with contractors. You need accounting skills, money management skills. The way you get it is by working in business. And so working really hard and getting underpaid for many years while you build experience will help you in the future be able to work less and be overpaid.

David:
That’s great. It’s investing in yourself. When you hit the ceiling that you can’t get where you want to go, that’s a good thing because it makes you reanalyze what you’re doing. So Jaron, you’re trying to make money through one pillar, which is investing, and that’s great. This is why you need to incorporate other pillars like other ways to make more money just like what Kevin said. All of a sudden these problems go away when you’re not trying to just do it all through real estate investing.
All right. Our next question comes from Albert Knoe out of Boston. “I need a sanity check here if what I am thinking makes sense.” I like how we started this off. “I own two triplex properties, one of which I’m trying to BRRRR. I’m a buy and hold investor and in this for the long game, which means I have to break even for a few years while I still get appreciation, tax benefits and raising rents, then I’m willing to make that sacrifice. A lot of investors I know are pushing me towards cashflow and leaving the current deal as is until interest rates get better, but this of course cuts me off from the repeat and BRRRR.” Here’s the details. So Albert Knoe has a BRRRR here that’s 100% leveraged and is breaking even. Is this a bad investment or is this a good investment?

Kevin:
Yeah, it’s incredible. We’re just looking at the details and we’re like, “Wow.” At first I’m like, “Oh my gosh, he’s 100% leverage because he funded his down payment from a HELOC.” And then we’re looking at it going, “He’s going to be massively negative cashflow.” And then we’re like, “Wait a minute, he’s breaking even, 100% leverage?” Look, we have this rule of thumb, it’s called the buying window. The buying window is deemed to be open when you could borrow 100% and break even or have cashflow. That’s what he has here. I think one of his comments was, “Well, I’m only going to break even for a short period of time and everybody’s pushing me to sell it.” Why? This seems great. It blows my mind. I mean, I think if interest rates go higher, maybe there’ll be some risk, but he’s even got cashflow on top of that. It was like a thousand bucks or whatever. I don’t see an issue here. It looks like he’s got $300,000 of equity. He got a great deal and he’s got extra capacity to be able to make the payments.
The only way I would sell this is if I just got injured in a car accident and I couldn’t work anymore and I was screwed basically. But other than that, if you’re capable of capable of functioning in society, providing value and making money, why? Tell your friends to shut up and go invest in real estate. How much real estate do they own?

David:
Yeah, presumably it’s in a good appreciating market because he bought it for 815,000. That’s not a cheap market.

Kevin:
Right. And a price for what? 1.1 or something?

David:
Yeah.

Kevin:
Yeah. Well, but to triplex, so 300K a door-ish, a little less. Yeah. I mean, look, it’s a great asset. I don’t know why sell it here. I don’t see this friend’s argument at all.

David:
There you go. So moral of the story is cashflow is a thing to look at. It’s not the only thing to look at. This guy basically paid 815,000 and appraised at 1.1. He’s walking into close to $300,000 of equity. How much money do you have to make at a job to keep 300,000 after being taxed, right? 400,000, $450,000. That is a good investment and it’s probably going to get better. But you made a great point. It only works if you have income coming in from other sources to float you during the period of time that you’re waiting for the rent to appreciate and cashflow to grow.

Kevin:
Exactly.

David:
All right, we hope you’re enjoying this shared conversation so far. Thank you everyone for submitting the questions that you did. Please make sure that you like, comment, and subscribe to this channel as well as checking out Meet Kevin on YouTube who came in for backup with me today. At this segment of the show, we like to go back and review comments that you have left on previous shows. So let’s see what some of you said. The first from Julian Kovard8345. Oh, I recognize Julian. “It feels so good to hear this adversity story at the end. I just recently closed on a townhome that was a five and a half month transaction. Sometimes I feel as if I’m the only one going through all the BS. Glad to know that there’s someone else out there who had to struggle as well.” This comes from episode 357, so if you want to know what Julian is referring to, go check out podcast episode 357.
From Donya Salem. “David: when you get a deal, you’re literally getting a problem. You’re getting someone else’s problem.” Oh, this is me. She’s quoting me right here. David says, “When you get a deal, you’re literally getting a problem. You’re getting someone else’s problem. Damn, that’s a nugget of knowledge.”
And then Fine Art on Fire said, “Isn’t it though? That’s wisdom really.” Well, thank you guys for that. Definitely appreciate it. This comes from people that are trying to find a great real estate deal that cash flows and as equity and is in a great neighborhood and is easy. Those things are never going to exist in the same deal.
Jamal Adams says, “Volume over perfection. Fine leads, run comps, make offers. I had to refocus on this concept when I got in a rut.” Good comment there.
From Technically Human GX, “This is the real estate version of when Charlamagne Tha God came onto the Joe Rogan experience.” Definitely check out episode 357 if you want to see what Technically Human GX is referring to there.
And from podcast episode 822, Street King says, “I don’t leave comments often, but you and Brandon have helped change my life. I’ve been interested in real estate investing for some time. I read a few books by Brandon and yourself and finally took the leap and purchased a property in February. It was exciting and nerve wracking at the same time, but had been so much fun with a lot of learning on the way. With your words and knowledge I receive from the BiggerPockets podcast, I feel I have the knowledge I need to be successful. I am thankful for this episode and the info on building equity. I can’t wait to purchase my next property and continue to build my portfolio. Thanks for all you guys do.”
And our last comment from Keith Manseneli. “Wow, I listened to as many of these as I can, but with so many investors in different situations, they don’t necessarily apply to us at this moment. Almost all of the QAs in this episode were directly relevant to us right now. Thank you for all your answers and breaking each subject down for us to understand. Thank you, David, and to all of you on the BiggerPockets Podcast show.” Thank you for that.
As always, we love and appreciate everyone’s engagement, so please remember to like, comment, and subscribe on our YouTube. And if you would like to be featured on the show, go to biggerpockets.com/david. We would’ve had this link set up sooner. We just couldn’t think of a name for it, finally got that figured out. You can submit your video or your written question to be answered on the Seeing Greene episode.
All right, jumping back into this, Kevin, our next question comes from Hayden McBride in Asheville, North Carolina. Hayden is new to investing and saves a good portion of their income. In about a year, they will be moving to Wilmington. “I currently work as a housekeeper for a company that manages short-term and midterm rentals. I think this is a different perspective than most people who come into the real estate business and could potentially be beneficial. I see what types of homes are rented out more often and are more desirable depending on size, type, location, amenities and many other aspects. My question is, do you think that a background in the hands-on work of the upkeeping of rental properties gives me any sort of advantage for getting started in the real estate business, either investing in real estate or in being an agent?”

Kevin:
Oh my gosh, absolutely. I mean, if I had a list of people who were like, “Hey, I want to apply to work with your startup house hack,” and they gave me that background of like, “Hey, I basically am a property manager and I’m doing all these,” I’d be like, “Please, apple.” This is great. I think sometimes people don’t even realize the advantages that they have. They need somebody else to tell them like, “Go do it. You’re good. You’re good.” You got to have that self-confidence. This background, amazing. This is what you need for real estate. You got to have real estate property management background, and you’re either going to get it by learning it yourself when you do it and you don’t have it. Or if you go in, so much easier. And I was listening to some of these comments like, that you’re taking someone else’s problem, the five and a half month transaction, yeah, totally normal. That’s why there’s so much money to be made. If you’re able to solve these problems, you can make a lot of money.

David:
It’s the barrier to entry. People run away from it and they need to be running to it.

Kevin:
Yep.

David:
All right. Next question from Boris Slutsky. “I’m currently looking for private money investors who can help me to fund a portion of the entire down payment.” That’s funny, a portion of the entire down payment. “Portion of the down payment for my next property, and I have a few people who said they might be interested in being debt partners in the deal. My question is, how do I provide a proof of funds for the lender or to the listing agent to even get pre-approved for the loan or to get the deal under contract? Is there a way of using my investor’s financial statement, showing the funds available, plus a broad letter of intent stating that they have general interest in investing with me or something like that?”

Kevin:
I mean, look, as a real estate broker who’s dealt with nonsense offers for 10 years, I wouldn’t touch this with a 10-foot pole. So what they really need to do is cash in the bank, baby. If you’ve got debt partners, then maybe make an agreement that, “Hey, there’s no interest for the first month, or we’ll add that to the back or whatever,” but get that money funded. If somebody is interested in providing debt, you got nothing. If somebody provided you capital and it’s in your bank account and they’re now out of the picture, well now you have the capital. Now you can actually put it to work. But my next concern on that is if you’re asking, “How do I now get pre-approved?”, well now it gets even harder because lenders look for debts if they’re going to count this debt against you, because it sounds like you haven’t gone through the pre-approval process already-

David:
They’re going to source those funds for sure.

Kevin:
They’re going to source this unless you leave them sitting there without making payments on them. But then really you’re not disclosing this debt to the lenders, which is defrauding the lenders anyway. Really, it sounds like somebody got an idea and they’re way ahead of themselves. How about we go back to step one in real estate, qualify, demonstrate, close. Oh, step one, qualify. Call a lender. “Hey, hey, mortgage loan originator.” You literally go to Yelp, type of mortgage loan originator. I used to be an MLO. “Hey, here’s my situation. Here’s how much money I make. What can I qualify for? What do you need from me? Oh, okay, tax returns, W-2s. Here we go.” And if their follow-up is, “Oh, well, I don’t have a job,” well then that’s really where your first step is, is get a job, right?
People are always like, “Oh my gosh, it’s an investing channel, Kevin. How could you say get a job?” That’s like an insult. I’m like, “Well, the easiest way to actually build your investments is have a job.” In fact, there are a lot of people who didn’t like their job and then they got into investing and they realized, “Wow…” I used to be a law enforcement explorer. There were cops that were like, “I hate this. I can’t wait to retire.” And then they get into real estate investing and they’re like, “Now I love it because I take my W-2 with overtime.” Some of these officers, staff or whatever who were ranking, they’re making over 100K. They’re like, “I now milk the fact that I have a W-2, I qualify for real estate all day long.” It’s great. You’re self-employed and you have income. It’s a pain in the butt to get qualified.
But anyway, so the structure of this person’s question somewhat implies to me that they don’t have a job, they haven’t been qualified and they don’t know what they’re talking about, which when those three things come together, I also get really nervous about them wanting to take on debt because I think they’re going to mismanage this.

David:
And it only gets explained in our space as a positive thing. Take on debt, make real estate, make a bunch of money because you only hear about the deals that work. Nobody goes on these podcasts and says that, “I did that and it was a complete disaster.” We did an episode with Luke Carl and he talked about how he worked his W-2, saved his money, invested. That’s the same way that I got started, literally as a cop working crazy over time buying properties. I said we need to rename the W-2, which has a bad connotation and start calling it the down payment generator.

Kevin:
Oh, that’s a great idea. Absolutely.

David:
Yeah. How do you get better at your job so you can make more money so that you can buy more real estate? And I know that this sounds different than what people get used to hearing, but really if you showed up at the gym and said, “I want to start lifting weights, I want to get stronger,” you would quickly realize it’s not just about lifting weights. “I’m going to have to eat different. I’m going to have to sleep different. I have to learn the form.” There’s a whole thing that goes into this. You guys were training martial arts, right? The person comes in, they go to training, you realize, “Oh, I need to improve my cardio. I need to improve these areas of life.” Anytime you want to be successful at something that you start, you quickly realize where you’re deficient, and that’s okay. You just make improvements in those areas. And I don’t think real estate investing is any different.
So Boris, if you’re having a hard time coming up with the down payment money for the house, what if you just use an FHA loan and you house hack and then in a year you go do it again and you turn what you bought into a rental property. You don’t have to borrow money from people and put this complex Rubik’s cube together of how you can get a house or a lender. Just use a primary residence loan.

Kevin:
Yeah, it’s funny. I wrote that down and didn’t mention it. So thank you for saying that because you’re so right. It’s like just borrow from the bank. And if you can’t qualify for an FHA loan, maybe you shouldn’t be in the deal anyway. But I mean, that’s how I got my first property, is 3.5% down. And then the bank will even finance the renovation for you. Now, that takes patience and it’s kind of hard. I don’t really recommend it because it’s a pain in the butt.

David:
The 203(k) [inaudible 00:31:30], yeah.

Kevin:
The 203(k)s, yeah, that’s exactly what we did. And they gave us 50K, but then we borrowed from a second later because it’s so hard to get the draws on those 203(k)s. So we borrowed from another source, used their money to do the reno-

David:
And then replenished it with the 203(k) [inaudible 00:31:45].

Kevin:
Exactly. Yeah, yeah, yeah, because it’s such a pain in the butt, the process otherwise. But anyway, the point is, you only need 3.5%. You know what? On 500K, we’re talking about under 20K.

David:
There you go. All right. Next question is from Wesley Abercrombie. “Hey David, I love your content. I saw you post a video on Instagram about how the BRRRR model doesn’t make sense for every home. Instead, sometimes a flip could make more sense depending on the profits. What would you say that the profit margin is where you decide to flip the house? 50K? 70K? Or do you use a different metric?

Kevin:
I hate flipping. I think there are so many expenses involved in flipping. Flipping makes great sense in an appreciating market because you have less risk. In fact, the appreciation can sometimes offset your selling fees, but that’s just being in an appreciating market.
In this sort of environment that we’re in, flipping, I think, has a lot of risk. There’s a reason a lot of the institutional flippers, the Open Doors, the Zillow, Zillow got out completely, Redfin got out completely, and Open Doors slowed down dramatically, there’s a reason they’re slowing down with flipping. So is there a metric for when it makes sense to flip? I mean, boy, I think if it makes sense to flip, it probably makes sense to BRRRR, unless it was a very expensive property. For example, you go buy a $1.5 million house, it’s harder to justify buying and holding because the rents often don’t catch up. The rents makes a lot more sense between usually that 300K to 800K range. Start going over a million, at least in most markets I see, the rents… I mean your cap rates are like 1.9%. It’s like, what’s the point? Again, you have the equity, you could BRRRR it out, but still, I’d rather have a bunch of 600K homes than keep those.
So I suppose if I walked into a smoking hot, I can make 300K by flipping this on one and a half, would I do it? Sure, I’d rather have the smaller rentals anyway. But generally, that wouldn’t be my goal. So hopefully that answers that question.

David:
That does help. I can simplify this for you, Wesley. You created equity through this fixer upper, which was good. At least that’s the goal. The question is, “Do I get the equity out via a cashout refinance and keep the house, or do I get the equity out via selling it to someone else and get their money?” Like Kevin mentioned, if you’re going to sell to somebody else, you’re going to have some inefficiencies where you’re going to pay closing costs, you’re going to pay realtor fees, you may have to make some repairs on the property. It’s not the most efficient way to get that equity out. Then you’re going to go pay a bunch of taxes on the profit. If you refinance, pretty much you just have the closing cost of the loan as those are the only inefficiencies you’re going to have.
When I’m looking at the situation, I ask myself a couple questions. The first is, is this an area that I want to keep the house? If this is a really bad location and it’s going to be nothing but headaches for you, flip it. Let somebody else buy it as their primary residence. They’ll be happy with that location. Don’t try to rent to tenants in a place that’s going to cause you headache or isn’t going to go up in value.
The next is, is their cashflow? If you’re going to be bleeding 3 grand a month on this property and you’re not in a strong enough financial position to take that on, sell it to someone else, take the money, go invest it in real estate where it is going to cashflow. If you are getting cashflow, in most cases, it makes most sense to keep it as a BRRRR. And then you not only benefit from the equity that you created in the process, you benefit from the future equity that you will get as the property appreciates. But it’s not a hard and fast rule. You can’t put this into a calculator. You have to actually look at all of these dynamics holistically and then decide, “Is this an asset I want to hold and how can I keep my inefficiencies lower?”

Kevin:
That was great added perspective. I think you’re so right. I mean, “Is it even where I want to own real estate?” That is such an underutilized statement or even question, because if you don’t feel comfortable doing a Craigslist transaction there at nine o’clock at night, do you really want to be renting there? Do you really want to be an owner there? I don’t know. Some people do. I mean, there’s a firefighter, he’s a course member of mine. He’s like, “Kevin, the cashflows out here are like 7, 8%.” I’m like, “Well, where are you?” And it’s like Atlantic City and it’s like 30% poverty rate. He’s like, “I deal with all this,” but he’s like, “But the reason I get all the deals is because I know street by street where to buy” because he’s a firefighter so he’s dealing with… He’s on the streets every day. Well, the days he’s working. So again, competitive advantage.

David:
Yeah. And what if there’s no tenants in that area?

Kevin:
Yeah. Well, that’s also true.

David:
If there’s no one to rent to, then it doesn’t make sense to keep it, right?

Kevin:
Also true, that liquidity of renting folks forget. See, the two things you want in real estate are liquidity of sale and liquidity of renting. If you need to sell it fast, can you? If you need to rent it fast, can you? And sometimes folks get into rural horse property in the Midwest and it’s 30 minutes away from the next gas station. It’s like, “Well, how long is it going to take you to find a tenant for that?” If it’s going to take six months to find a tenant, I don’t want that. It’s going to take years to sell it.

David:
Good point. Or maybe in that market, there’s a lot of people that want to buy, but there’s not a lot of tenants that are going to be there. So if you flip it, you can get money out. And if you keep it, it’s going to be sitting vacant for six months. Those are the things you got to look at. It’s not as simple as if I put it in a calculator, the Excel spreadsheet’s going to give me the answer. It can help you with the decision making. It cannot be the thing that makes the decision.

Kevin:
If you need to analyze a deal on a spreadsheet, you should not buy the deal. That’s generally my rule of thumb. If I can’t napkin math or even mental math the deal out, then A, I don’t know enough about the area because I should know the area enough to instantly see a listing and a list price and go, “That’s going to be a great deal. I know how much to spend on it. I know what it’s going to run for because you already have that market knowledge.” If you’re sitting on a spreadsheet, maybe you don’t even have that market knowledge yet. And the second question is, is it so tight that you really have to create this idealistic spreadsheet scenario? If that’s what you have to go through, probably not as great of a deal.

David:
Interesting perspective. So you’re saying sometimes people use spreadsheets to justify a bad deal because the numbers make it look better than it is?

Kevin:
Of course. Spreadsheets are designed to be complicated. Spreadsheets are designed so that when you present it to somebody, you have a little highlighter over the bottom line that’s like, “This is the ROI. It’s going to be 10% cash on cash return every year.” But then you get into the realities. And the realities are, “Oh, you’re dealing with evictions every three months on different units and you’re dealing…” Spreadsheets don’t account for that. And you change these little variables like, “Oh, the market rents are $2,500.” So what do people do in spreadsheets? “Well, I’m going to get $2,700.” And then they realize like, “Oh, at $2,700, I’m getting professional tenants,” basically people who you’re going to have to evict all the time, watch Pacific Heights, as opposed to if you ran the math at slightly under market rent. Market rent’s 2,500, you’re at 2,450. Now you’re getting high quality tenants over 700 credit scores. No headache. Now, the numbers don’t make sense on the spreadsheet, right? If you have to go to the spreadsheet and trick yourself into it, you’re probably-

David:
Yeah, it’s tempting to play that spreadsheet magic, move things around.

Kevin:
It’s what it is. It’s magic, and then it’s a farce.

David:
All right. Our last question here comes from Dan Kelly in Charleston, South Carolina. Dan has some relatives and investors that want to partner buying a short-term rental in the Mount Pleasant area of Charleston. And Dan doesn’t have a ton of money himself, so they’re looking at how to put this deal together where Dan would be the boots on the ground and would handle the day-to-day responsibilities for his contribution while his partners would be providing the capital, and he says, “Do you have any recommendations for how the investors in a project like this could organize ourselves in regard to financials, physical contributions to the properties and the management of the rental?”

Kevin:
Yeah, don’t do it. This sounds literally like cancer, like… Okay, I shouldn’t make that comparison because that’s insensitive. People have cancer. But this sounds miserable. Literally miserable. First of all, this is not the time, in my opinion, to be getting into the short-term market. I think the short-term rental market, at least what I’ve seen in my experience flying around the country analyzing these markets, is short-term was great during COVID because there was a lack of people providing short-term rentals.
Now, there is a surplus of people providing short-term rentals in a time where we’re going through economic difficulties. And hotels have done a really good job at catching up at providing the amenities that were missing previously. COVID’s not an issue as much anymore. Regulation on short-term rentals has gotten extreme. Just last Sunday, I was in Vegas, went through a property, I’m like, “Why are they selling this?” They’re like, “Oh, it’s short-term rentals. It’s a short-term rental. We should show you 12 month cashflows for 2022,” they wanted to show, and I’m like, “How about 2023?” They’re like, “Well, the rules changed and the numbers aren’t as good [inaudible 00:39:55]-

David:
Isn’t that funny? Isn’t that the real estate version of catfishing?

Kevin:
It’s a scam, man.

David:
Here’s a picture of me eight years ago when I was at my best.

Kevin:
Yes. It’s a scam. So first of all, I cringe when he said short-term rental. It sounds like a horrible idea right now. There will be an opportunity again. I wouldn’t be surprised if we go through some kind of little short-term rental reset or little bubble pop or whatever it is. So that made me cringe.
Then I heard partners and then I wanted to vomit, but that’s me personally. We already talked about that earlier. I’m not a big fan of that. Then I heard, “I don’t have a ton of money,” and then I’m like, “Oh my gosh. It’s literally checking off a bingo card of what not to do in real estate,” literally. So you’re telling me you want to get into short-term rentals when we’re possibly peak short-term rentals behind us already. You want partners when you’ve never done real estate before. It doesn’t sound like you have experience. You don’t have the money. You’re trying to set up like, “Well, how do I…” What he wants to hear from you, by the way, is, “So you’re going to set up an LLC and then you’re going to have a contract between all of you and you’re going to do 30% of the work and you’re going to track all your hours, and then you’re going to do 25% of it.” it ain’t going to happen. Don’t do it. This is a terrible idea.

David:
I got to say I agree with you here. This is risk stacking, okay? Haven’t bought real estate before, haven’t invested in short-term rentals, don’t know the market that good, bringing in partners which we always tend to look at the positive of a partner and we always forget about the negatives because they’re probably not super experienced either if they’re considering letting this person who doesn’t do this pick out the property and manage the whole thing, lack of experience, lack of capital. This is a situation where if it worked out, you would’ve gotten lucky, right?

Kevin:
Yes. And it’s important to remember too that most of the folks who were really making money with short-term rentals, the net income they were making was basically just their salary. I see this all the time. People are like, “Oh, my Airbnb business brings in $3 million” and they’re like, “Okay, well that’s gross.” So now let’s take off principal interest, taxes, insurance, cleaning, all the Airbnb… Take off everything. And now all of a sudden you’re down to like 200K, which don’t get me wrong, that’s great. But now, oh wait, you’re working 80 hours a week because you’re basically working two jobs, managing the rentals. So when we actually generally look at people’s financial breakdowns of how much they’re really netting, they’re netting enough to pay themselves a salary. It’s a job.

David:
Yeah. And often a lower paying job than they would get if they took a normal job, right?

Kevin:
Yes.

David:
That’s a great thing to highlight because when it gets shown on TikTok or Instagram, what they say is, “My 25% ROI on this deal.” We go, “I can’t get a 25% ROI anywhere I want to go do it.” And then you say, “Well, we’re assuming that’s with zero work.” If I got 25% in the stock market, I didn’t do anything. That’s 60 hours a week of working that maybe comes out to a $9 an hour wage. This was a terrible idea, unless you got a ton of equity in the deal or something like that. But that is a great point that you highlight. It is very misleading. And I think that Dan here is probably hearing these great stories of short-term rentals and maybe getting sold a bill of goods.

Kevin:
But you know how I doubled my income between 2010 and 2011? I went from making $5,000 a year to $10,000 a year, okay?

David:
Yeah. It’s a great TikTok video how I doubled my income. I was doing this, yeah.

Kevin:
Exactly. I went from working part-time at Hollister to having a full-time job at Jamba Juice, okay? The numbers and these percentages, because you talked about this 25% ROI, it’s so easy to mislead people.

David:
All right, Dan, our advice is maybe don’t jump into this deal with a bunch of inexperienced partners. If you are really serious about investing in real estate, again, house hack. Look at buying a house in a great neighborhood that you can rent out the rooms or maybe you even short-term rental parts of the house. Get yourself some experience with a 5% down loan where you can gain what you don’t have without using other people’s money and getting yourself in a big, nasty, messy partnership. Earn the right to buy those houses later. And then you might not even need the partners because you might’ve made your own money. So that was the last of our questions, Kevin. Thank you for tag teaming this Seeing Greene with me. Anything you want to say before we get out of here?

Kevin:
Hey, I’d like to pitch. We’ve got a startup. It’s actually called House Hack. It’s a little different from the traditional form of house hack, but go to househack.com. You can learn all about it. Make sure to read the offering circular. The SEC will get mad at me if I don’t say it. There are risks involved with investing in startups or fundraising. One-to-one valuation, read about it at the website. And read the offering circular. But that’s it. Otherwise, I’ve got a channel, Meet Kevin on YouTube. And thank you. This has been a blast. I love these questions. See, I sit down and I’m like, “What kind of videos should I make today?” And I bias towards like, “What’s the latest going on with Congress or the Fed?” But these are the real questions where people have these burning desires like some of these scenarios we went through and they need somebody to tell them, “You have a competitive advantage here. Do it.”
“You should not do that. Do this instead.” So this is a great format. Thank you.

David:
Thanks, man. That’s how we do on Seeing Greene. If you would like to be featured on an episode, submit your question at biggerpockets.com/david. And if you’d like to know more about me, you could follow me @davidgreene24 on Instagram or your favorite social media, or check out davidgreene24.com. All right. If you’ve got a minute, check out another BiggerPockets video. If not, I will see you on the next episode. This is David Greene for Kevin House Hack Paffrath signing off. Thank you.