David:
This is the BiggerPockets Podcast show 601.

Jason:
The whole big concept of action versus mindset versus frame is really the mental environment you’re operating in. Like in the past when I did coaching, it was coaching clients around action and mindset, action, action, action. Now all of the focus I do is really helping people shift their mental environment because the right action in the wrong environment will never ever work.

David:
What’s going on everyone. This is David Green, your host of the BiggerPockets Podcast. If you are looking to find financial freedom through real estate, you my friend are in the right place. BiggerPockets is a community of over two million members where we have one simple goal, to help people find financial freedom through real estate. We do that by bringing in experts in the field that have done it before, we do it by bringing in stories of people that can inspire you, that you can follow in their footsteps. We provide as much information as we possibly can about how this world works. And we also do what we do today, where we bring in experts in mindset that will help you develop the right way to look at yourself and the world to achieve the goals you have and put into practice the information that we give you. Here with me today to join me is my good friend and co-host Rob, Robert Abasolo. Rob, how’s it going?

Rob:
Hello, hello. Man. Dude, we are right over 600 episodes here on the BiggerPockets network. Can you believe it? It feels like just yesterday we started this thing.

David:
That’s exactly right. We are picking up steam. You know, ever since Brandon Turner stepped away to focus on other things, we started creating more content and different kinds of episodes. And one of the things that we focused on is bringing more detail into these shows. We want them to feel more like a masterclass in a specific topic than just the same story of a different successful investor. So what one thing we’d like to know is if you like that, please leave us a comment. You can do that on YouTube by following BiggerPockets there, leave us a comment, tell us what you thought of today’s show, what you’d like to see more of. You can also do it on the BiggerPockets website itself. Now, speaking of Brandon Turner, we actually have his coach with us today. You all may know that Brandon has his famous text letter Behind the Beard.
Well, today we have the man who was famously behind the beard and his success. Someone mentioned countless times by Brandon Turner. It is his coach, Jason Drees. Now I’ve met Jason a few times. I’ve talked with Brandon more than a few times about the stuff that he gets from Jason and implements it. So much of this information is sort of filtered to me through my relationship and friendship with Brandon, and Jason joins us today to talk about how to realign the way that we think so that we can hit our goals. Rob, what were some of your favorite parts of today’s show,

Rob:
Man, you know, he really drove it home for me on a lot. I think this really came at a great time for me because I feel like my mindset has changed a lot over the last year, several times, and talking to Jason really reassures me. One of the things he harps on here is that we should be going after, we should be following our emotion, following what excites us. What real estate project out there scares us? What’s something that we don’t think that we can possibly do, that’s what we should be pursuing. Not necessarily the most logical path, right? Don’t necessarily always lean on logic and the analytics and the numbers, which obviously there’s a case to be made for that, but go after what scares you and that’s kind of what we’ve been doing here, right?

David:
Yeah. One thing he mentioned that I haven’t heard anyone say before is we often talk about mindset, and what Jason said is that mindset isn’t something you can actually change. You can only change your frame and then your mindset will follow. And he gets into this idea of what a frame is, how to affect it. The view that you look at the world through, the lens that you see things and then the lens that information comes back to you is really where it starts. Brandon Turner and I often talk about this as identity. Whatever you see yourself as will determine what steps you take.
Now, if you are only here to learn about real estate investing, that’s okay, you still want to listen to the show because at the end of it, you want to make sure you listen all the way to the end, Jason actually breaks down Rob and I’s partnership, our goals for buying real estate and how this information could be used for us to practically take steps to achieve our goals. So you don’t want to miss that, especially the awkwardness as we’re asked questions that we’ve never really asked each other or ourselves up until this point. What did you think about that, Rob?

Rob:
That’s right. Yeah. Today we actually get a look deep into the crystal ball of the future. And David, I don’t think you necessarily liked who you saw in the crystal ball.

David:
No, I had my little Disney moment there. I was like, oh, is that the case? And also it felt eerily like looking at my own head because my head’s kind of in the shape of a crystal ball. So that was a double doozy for me.

Rob:
Well, for what it’s worth, I like the shape of your head.

David:
I that’s pretty much why it picked you as a partner. That’s my one litmus test that I just need to see passed, and you passed it. All right. Before we move on to the show, let’s get today’s quick tip. Today’s quick tip is buy Jason’s book. It’s put out right now by BiggerPockets publishing. It’s called Do The Impossible. If you want a life that looks like Brandon Turner’s, get a book written by his coach and get some of the same coaching that he got himself. All right, Rob, before we bring in Jason, anything you want to add?

Rob:
You know, there’s always pressure for me to add some insightful tidbit here, but no, I got nothing, man. I think we should just dive straight in.

David:
I think that shows that you are a secure person and that you’re able to say no, because you know you bring enough value as is, and you bring plenty in today’s show. So everybody the buckle up, strap yourself in, grab the handles because you are in for a wild ride with Brandon Turner’s mindset coach Jason Drees, Rob Abasolo, and me, David Green. Jason Drees, welcome back to the BiggerPockets Podcast.

Jason:
Thank you, David. Quite has changed since the last time I was here and it’s exciting to reconnect.

David:
Yeah. There’s a little less beard down low and there’s a little more hair on top, you see my new co-host here is …

Rob:
I’m working on it.

David:
Yeah.

Rob:
I’m working on it.

David:
You got a ways to go before you become Gandoff. So Jason, you wrote a book for for BiggerPockets, and I’m sure that a lot of Brandon’s success comes from the stuff that’s going to be in this book. So we would all like to know what is this book about?

Jason:
So this book is really kind of the foundation of my coaching methodology, but really it’s how I understood I’ve created the success I’ve had. The book is called, Do The Impossible, and one of the things I’ve noticed being a professional coach for close to 10 years is that probably 95 to 98% of the people I meet, they’re simply not aiming high enough. They’re just not aiming high enough. So this book here basically is written to kind of give people the foundation of what their full potential is, how to start playing life at their full potential and more importantly, the power of mindset and how to shift it into alignment with playing at that level.

David:
Yeah. You know, this topic of mindset has come up a lot. Brandon and I started a mindset oriented episode maybe a year and some change ago, because we realized that just telling people what to do over and over and over is what people think that they need, but so many people have the knowledge that’s needed and they’re not actually doing anything with it, that it’s actually a mindset problem. You have to adjust that first before the knowledge and the information that we’re giving somebody’s even useful to them. So do you mind kind of maybe expanding on that concept that while people may think that what they need is answers or knowledge, it’s usually not the case.

Jason:
Yeah. Because mindset is this elusive thing, and I’ll tell you, it’s really strange being an expert in something that most people don’t understand what it is. But mindset is literally, the simplest way, it’s like a point of view. It’s your thinking. And it occurs in your brain and it’s how you view things. And one of the models I kind of use is like as human beings, especially achievers, and if you’re listening to this podcast, you’re growing and expanding your life and you’re working towards it, as human beings, I’ll give you my little graphic here. So imagine a small circle, we’ll call this action. And as human beings, a lot of times we think about action, hey, I want to hit this target. I want to get a new property. I need to push up the level. So a lot of times the action comes, but what happens if the action doesn’t work or you don’t know what action to take, right?
That’s where we get to the next layer, which is mindset, because of the mindset, your point of view, your experience, your level of thinking, determines the actions you can take. And that’s where people start to understand, they’re not creating the success they want, or the results they want, it’s somewhere around mindset. So that’s really the first component to start creating more success is to understand you are capable of more than you currently think. So it’s really a game of how much can you evolve your mindset? Because when your mindset is in alignment with a target, then you hit the target.

David:
So do you find it’s better to sort of take an offensive approach and say, I’m going to tell myself I am worthy of this, or is it a defensive approach where you have to remove self-limiting beliefs that are stopping you from thinking it? What’s the way that you tend to approach that?

Jason:
It’s kind of a combination, right? The interesting thing is that I have come to understand that limiting beliefs and the emotion we feel around limiting beliefs is actually a symptom of misalignment, right? There’s times where we have flow, where we have naturally inspired action, and there’s times where we have resistance and we have procrastination. That actually has to do with alignment. So there’s times when you actually have to shift the limiting beliefs around them. And one of the most interesting things that I’ve learned over the past 10 years is I used to work for Tony Robbins and I was a Tony Robbins coach, and as Tony Robbins coach, we would focus on mindset and action, we’d focus on beliefs. And we would literally say, okay, well, why don’t you start cold calling to find off market deals? Well, I don’t like cold calling, right?
And then a coach would say, well, what type of data are you going to be if you don’t follow through? Right? So the coach would use leverage of pain and pleasure to force misaligned action. And what I’ve discovered about 14 months ago is there’s actually a level that’s beyond mindset. So you have action, you have mindset. And then you have another level which I call frame and frame is you, right? Frame is you, because your mindset is here, it’s in your mind. And your brain is a computer that looks through everything in the past. So as you’re moving forward, it’s constantly comparing anything forward to how does it compare to the past? And what I’ve come to realize, and it’s kind of hard to explain, but I wouldn’t believe this unless I’ve proven it so many times. So what I believe your frame is it’s you.
Now, you and me, we’re made of atoms. Our bodies is energy, right? We also know that life responds to us. Sometimes life responds to us great. Sometimes life responds to us in ways that isn’t good. And what I’ve discovered is that life responds to you based on your frame. You can also think of your frame as like your expectations, right? And what I’ve discovered is that as human beings, we think action creates your reality. But what I’ve proven is that your reality creates your action, because your frame creates your mindset that creates the action. So if a person is feeling limiting beliefs and their resistance to cold calling or raising money, that’s because they’re in a mindset that’s misaligned with that, which is in a frame that’s misaligned with the target. So if you shift the frame into a frame of alignment, the mindset will shift, and then those limiting beliefs literally become irrelevant, just like that.

Rob:
So I’ve got some questions for you, Jason, because this actually really hits home for me specifically.

Jason:
Yeah.

Rob:
My life has really evolved and changed in a lot of big ways over the past 24 months, and I feel for me personally, that I was a completely different person three months ago, and I feel like I was a completely different person from that six months ago, and then nine months ago, and 12 months ago. Every three months, I feel like I have a completely different mindset change. So obviously I’m the still person, I’m being hyperbolic. But from the way I think about things, the way I think about business, the way I think about financials, the way I think about investing and all that kind of stuff, it really does change day to day for me, because I’m in a spot where I’ve set all the goals that I’ve always had in my whole life. And I hit them and it’s because I run full force, and so I’m kind of curious, for me at this point, I had a whole five to 10 bullet point list here of all my goals and I keep hitting them. And so now I’m wondering what’s next for me? I don’t know how to evolve my mindset when I feel like I’ve hit my goal. So how does that play into something like this?

Jason:
Goal setting or-

Rob:
Yeah. Goal setting into-

Jason:
[crosstalk 00:13:12] Growth expansion.

Rob:
Yeah, do you feel like goal setting is a healthy way to change your mindset or is that something that holds us back? Because it kind of sounds like you were saying, when you’re framed in a box here, it’s a little tougher to escape from said box.

Jason:
Yeah. Goal setting is absolutely a powerful tool, and it also depends on where you’re setting goals. What I’ve found to be true is that in order to hit your goal, you have to evolve into the mindset that’s in alignment with the goal. What I’ve found is instead of going through and picking apart limiting beliefs one after another, you can actually shift your frame and instantly get into alignment. And what I would say to most people who are consistently growing and expanding, I’d say, well, fantastic, Rob, because that’s what’s going on right now. We’re all growing at an accelerated rate. And the questions I use with my clients to do goal setting is we ask the question, what do you want? Which we all ask. The only problem with that question is that question is based on past reference. So you say, what do I want in 2022? Your brain’s going to give you an answer on 2021, the second question to ask self is what is possible? And when you ask yourself what is possible, you’ll actually get an answer that’s based on external reference. Okay. Now, if you’re above external reference, you won’t get that, but most people are not. The third question, and this is the question I would ask you actually, Rob, right now is what would be an impossible target for you to hit this year, impossible, but would be a lot of fun anyway?

Rob:
Okay. Wow. Listen, I’ve thought about this a lot. So would this be a financial goal, investing goal, or just kind of just throwing everything out there?

Jason:
We could do it in each area, but I just figured, I’d throw it back out here to see what comes up.

Rob:
So right now I currently have about 14 properties in my portfolio. I would say an impossible, in my mind, goal for one year from now would be to get to a hundred units.

Jason:
Okay. That sound exciting?

Rob:
Yeah. Yeah. It does. It does, because it would basically take the four years, four, five years of investing that I have and effectively quadruple the rate at which I achieve that, right? Because I did that over four years. So doing it in a year, to me, it sounds not really quite as feasible.

Jason:
From your current, but is it physically possible?

Rob:
Yes. Yeah, definitely. If I start going down on the route of, you know, bigger fundraising, syndications and all that kind of stuff.

Jason:
Yeah. Yeah. So if you started to aim at that target now, did you notice David, how he got excited when he talked about that?

David:
Yeah. You could hear the change in his voice, his tone.

Jason:
Yeah. And what that question does is it pulls up an intuitive answer and that’s like we start to follow our excitement. So when you ask about goal setting, there’s a concept I use called, known and unknown. Now Brandon talks at length about goal setting and visionary and all of that stuff. I don’t do it at all, because there’s two different places you can set goals. You can set goals on the known and you can set goals in the unknown. The simplest example I can give you is that let’s say you’ve got a new, new listener. They have a day job. They want to replace their day job with real estate income. They make $10,000 a month, they read David’s book and they’re like, okay, I need a hundred bucks a door. I need a hundred doors. I could probably do two this year, three next year. So I could probably a hundred doors in five to seven years. That’s known, like from today’s point of view, that’s known.
They could map it out backwards. 10 offers per deal, 10 properties per offer, et cetera. And you could like map it out backwards. Now that’s known. At the same time, that real estate investor also knows that they could get into a single deal or deals that generates $10,000 in passive income in five to seven months. They just don’t know how. The book that I’m using, the Do The Impossible book is really about how to get an alignment with those unknown targets that radically accelerate you, and when you’re doing goal setting and the known, you can absolutely set goals three years, map them out backwards, but when you’re setting goals in the unknown you have to do them one step at a time because life literally only gives you those targets one step at a time.

David:
So Jason, can you give us a hypothetical example of what an unknown goal might be? And then what some of those mile markers, like you mentioned, would be to get to that unknown goal?

Jason:
Well, absolutely. Right. My business last year did two and a half million in revenue and my impossible goal right now is to do 10, to quadruple this year after almost tripling last year. Do I know exactly how to do that? I don’t know. I’ve got one on one coaching, I’ve got group programs, I’ve got live events, I’ve got certain people here, but I have no idea which, am I going to be more successful pushing all my energy to our live event or one-on-one coaching or group coaching program or focus on books? Like, I don’t know. Right? Now I can make a guess from this situation, but what I want to do is follow the process of life to get the most exciting result, because what I’ve proven over the past couple years is like, I’m literally following my excitement.
So if I’m looking at all of those right now, it’s like, okay, what’s the plan for the year? If I look at the plan for the year to hit 10 million, I have no idea. I would just be guessing. Now, if I say, what would be my number one target it in the next 90 days? What’s the most exciting thing I can work on in the next 90 days? I actually start to get different answers. So you basically start to pull intuitive direction and excitement out, so you start to walk that path of accelerated targets.

Rob:
So that is very interesting, Jason. I actually was just talking to a friend about kind of a similar head space here. And he’s said, I don’t know, maybe he was following you on Instagram. But basically he was telling me to set your goal, like take whatever you want to make. In his instance, it was a monetary goal. So four million he’s like, I want to make $4 million next year through my Airbnb investments, my real estate investments, another company he’s starting. And he said that he found this quote or someone he knows told him, take that goal and then 10X it, and that’s going to be 40 million dollars. Set your goal for 40 million dollars. It doesn’t really matter if he can hit that 40 million or not, but then to retroactively work backwards and figure out how he can get to that 40 million, because that’s a really hard goal. But once he maps out how to get to 40 million, getting to four million dollars really isn’t quite so scary anymore because he already figured out the big, bad beast down at the $40 million mark.

Jason:
Yeah. And that’s an example of thinking from a different point of view or different perspective or different frame to start generating different thoughts, and really what this is really about, the whole big concept of action versus mindset versus frame is really the mental environment you’re operating in. Like in the past, when I did coaching, it was coaching clients around action and mindset. Action, action, action. Now all of the focus I do is really helping people shift their mental environment, because the action in the wrong environment will never ever work, right? And the simplest example I can give you about a frame is like, as far as being in an open frame is like, you can be walking down the street and someone can walk up to you and say, Hey, you look like a very nice, a nice upstanding citizen and reach out and hand you a million dollars in cash.
Now, what’s your reaction, right? Do you say, thank you. Do you say what’s the catch? Do you say I can’t take this, right? Now, regardless of what you say, just because that scenario is not likely, doesn’t mean it’s not possible. The average person walks around with expectations that things like that aren’t possible, so things like that don’t happen. When you live in a reality where anything is possible, then you start to see opportunities and connections and you start to open up. So you start to operate in a frame that’s more open and then you see ways to jump up in success.

Rob:
So I think in a sense, it kind of is the mindset of anything is possible, but that almost feels like very lofty and like a little tougher to really live by. But is that a mindset that we should be kind of adhering to that anything, like legitimately anything is possible and we just have to be open to those opportunities presenting themselves, or do you think there’s also a little bit of work that we have to be putting towards it to opening up those things that are impossible?

Jason:
That’s a great question. What I’ve found is that the frame you’re operating in creates the reality you’re operating in. So you both are successful than the average person out there, I know that you’re high level performers. And you’ve seen a lot of people who have limited points of view financially, right? They think money, it’s hard to make money, that literally, your environmental expectations, your frame determines what you think. And what actually happens is your frame determines the frequency of your brain, which then determines your thoughts, which then determines if you have naturally inspired action or you have procrastination, or you’re in alignment or fear. So what we don’t realize is that we are every day creating our operating mental environment, and most of us are resistant to what’s fully possible based on our past references. So the more you start to open and operate with a more open, more possibility based point of view, then you start to see things. And when you start to see things, then you have different ideas and different ideas create different actions, different connections, and it kind of snowballs.

David:
Do you think you could give us an example of a client you had, or even if it’s just a hypothetical one, of what their frame was like before this made it into their world, and then how their frame shifted that led to more success so we can see what this would look like in real terms.

Jason:
One of the frames that I’ve been talking about a lot, at least a lot recently with my clients is about overwhelm. Now, as you create success in life, you start to get to a point where you have more stuff and I’m sure everybody on this call has been overwhelmed before. If you’re in a place of overwhelm, it’s almost like there’s too much stuff going on. Too much stuff is too much life, but the reality is a lot of people resist overwhelmed, but the reality, the point of view, the frame that I like to point out is that the way you get overwhelmed is because you were so successful in the past, you’ve created more stuff than you can manage. So that, to me, sounds like a good thing. And overwhelm also, if you’re in overwhelm, which is a frame of overwhelm, you’re looking at the world and the current reaction is like, I can’t manage all this. If you’re in overwhelm, it means it’s possible for you to not be in overwhelm.
So you can also see overwhelm as the indicator to level up and shift your mindset. As in, the feeling of overwhelm is the indicator of the presence of an elevated frame. So a frame shift can be simply as simple as a point of view that literally blows away every roadblock and limitation that the previous point of view had. That’s as simple as a frame shift is, but when you start to make that shift, you start moving, you start thinking differently.

Rob:
I think that makes a lot of sense, personally. I think one of the easiest ways, correct me if you have kind of other points of view on this, but this is where I think someone like a mentor can come in and really help somebody. Because for me, there have been so many points in my life where I had limiting beliefs, especially about real estate and investing in this, oh, I can’t do that. I can’t finance that. I can’t finance that. And then you talk to somebody that’s done it, and you talk to someone that’s done it 10 times, and you talk to someone that’s done it 50 times. And then they’re just like, what are you talking about? Of course you can. This is all you have to do this, this, this, this, and it’s so clear for other people.
And I think having someone that you can talk to, or be a sounding board for, that to me has always helped me in my scenarios. And I think that’s probably why I’ve had so many mind shift changes this year, because I’ve spoken to so many people in my space, whether it’s content creation or real estate or investing that are all better than me. Not as a person, but in their space. They’ve mastered it. And they talk to me and they inspire me and I’m like, whoa, I had no idea that was possible. And then I see other people doing it. I’m like, well, I guess it is now. I guess it is possible, and that’s what I’m going to try to do you. And so for me, that’s always been very helpful is just kind of connecting with people that are in the same niche, but are just maybe 10 steps ahead of you.

Jason:
Mentors are a very powerful part of the equation, right? Because they can show you what’s possible. One thing that can happen though, is when you have a high level mentors like both of you and David, and David’s here kicking out real estate investor strategy 500 because he is got so much experience under his belt, a version 500 strategy doesn’t run on a version one mindset. So sometimes if you ever wonder why your mentor strategy isn’t working for the mentee, it’s because their mindset may not be high enough to run the strategy. And that’s actually a good a place where coaching comes involved to help the mindset evolve. But it’s like, you want to coach on your team, you want a mentor on your team, right? That’s a great equation.

Rob:
And can you explain to us just briefly what that difference is?

Jason:
Mentors are experts in strategy, where they typically have done something you want to done before. So they literally have a result that you want to achieve or they have expertise in the actual strategy. What a coach does is a coach helps evolve who you are, evolve your mindset. So it’s not just strategies. It’s like the mindset, because mindset generates and run strategies. The coaching evolves the mindset of you to a higher level. So you can run higher level strategies.

David:
I’ve noticed in many times in life we want to go to who we think is the most successful person we can find and say, teach me. And once I started training in jiu jitsu, I noticed, like I’m learning from a Gracie, who’s a family that’s known for bringing Brazilian jiu jitsu into the United States, and he’s been doing it since he was like four years old. It’s his entire life, under insane pressure his entire life. I can only imagine being a Gracie and doing jiu jitsu. You just have a target on your back all the time. Right? And so when I’m trying to learn, I quickly realized he’s the last person in this gym that I need to be asking questions of. He was six years old when he was learning what I’m learning right now. It is lifetimes ago that even entered into his, he has, like you said, a completely different mindset.
He’s looking at this from such a different lens, right? I’m learning a technique and he’s trying to teach me in the scenarios when I might use it and how it’s better than another one. And I’m like, I actually just need to practice moving my body in that way over and over and over until I get muscle memory down. I can’t even hear what you’re saying. And so what you’re describing right now, Jason, I see this happen and things other than just in real estate, it’s kind of a life thing where it’s not always best to go to the most successful person you could find and say, show me how you do things, right? Like you said, the information they have doesn’t work on the operating system that you’re running. You have to start with where you are at and work on improving your operating system. You have anything you want to share on that note?

Jason:
That’s a great point because when you think mentor, you’re like, oh, I need to go to the person way up here on the top shelf. But the reality is, a mentor is simply someone who’s done something you’ve done before and it could be just a peer of yours or a neighbor. Sometimes you just hear something that gives you one distinction that’s a game changer. So I would say, I tell people like, look for mentors and look for them everywhere, and it’s not like you have one mentor, you may have a mindset mentor, a sales mentor, or a business mentor, a family mentor.

David:
So now when it comes to deciding like what goals do I want to set? Where do I want to go? I know one of the things that you talk about is using emotion as an indicator or a guide for some of those decisions. Can you elaborate on that a little bit?

Jason:
Yeah. That’s a great question. And when we talk about alignment, because what I found is that hard work doesn’t create success. Alignment creates success, alignment with success. Hard work increases your chances of getting into alignment with success, that’s what I found. And simply through trial and error of my own, I’ve worked and had company had failed and failed and failed like year after year after year, I had things that didn’t work, didn’t work, didn’t work, didn’t work. And then all of a sudden, in 2019, I hit a wall and I quit and I’m like, all right, I’m going back to sales, I’m not meant to be a coach, nothing’s working. And then after I quit the next month, everything started flowing in. And that’s when I started to realize that hard work doesn’t create success, alignment with success creates success.
What I’ve discovered over to time is like, okay, well, if we know alignment with success creates success, how do you know when you’re in alignment? We have an internal guidance system. We all have a guidance system and they’re called emotions, right? But most of us are conditioned to follow our thinking over our emotions, because what if that thing that you’re procrastinating, you don’t want to do, what if you’re not supposed to do that? Or it’s supposed to be done a different way. So what I’ve found is that when you follow your emotions, you can actually dial into better targets because sometimes we’ll feel, we’ll think I need to do this target first before I do this one, because I’m super excited about a multifamily deal, but I think I need to do a single family first. That particular person should go straight for what they excited at even if it seems like a different target or contradicts their mind because the internal guidance is really the best path to success.

Rob:
So there are instances in your mind where it does make sense to kind of follow the excitement versus sort of I suppose the logical next step, because it does make sense to a lot of people getting started, for example, single family home, maybe I do one of those before multifamily. We do see it all the time though, people do start multifamily often, but it could be because they’re excited and they’re willing to make it work in that instance.

Jason:
Yeah. Like do you want to spend your life doing things you’re supposed to do or spend your life doing exciting things?

Rob:
Yeah. Usually the exciting thing I think. I think that’s how I’ve always approached it. I very much like to be uncomfortable. I don’t know why. I’m sure my wife and I’s life could be a little bit easier if we just took the logical step. But I do like taking big swings because I think being able to go after something that scares you a bit really, really can guide a lot of success. That’s how it’s felt for me. So you speak a lot about the sort of the resistance here and the misalignment, how does one go about removing that? Definitely understanding here, follow the excitement, but if you are misaligned, how can one prevent something like that?

Jason:
Well, you can’t prevent it because it’s always going to happen, and the faster you grow, the more you’re going to get out of misalignment, because as you start to grow, imagine this little axis is time and this is growth and the average person grows like this and as you grow and grow and grow, you need to integrate the parts of you or the lessons or the experiences that are not at that frequency of the higher level. If you’re growing at an accelerated rate, you’re going to have to integrate faster and faster and faster. So the way to continue moving is to be open to the alignment and open to when the resistance comes up, know that you’re getting out of alignment. So when resistance comes up, the best thing to do is really to stop and just breathe.
And the simplest way to frame shift out of that is just to get a sense or imagine the version of you that’s not in resistance. Frame shifting is that easy. So can you get a sense of a version of you that in this situation wouldn’t be feeling resistance right now? And with a little focus of your attention, you actually start to shift your frame and you start to get an alignment. So the first step when resistance is literally just stopping and breathing, because a lot of times we get we’re pushing and pushing and pushing and when we stop, we start to see things differently and that allows us to kind of move into alignment.

Rob:
Is there ever an issue with something like this where, because I agree, I think you hit a groove and you’re like, okay, anything’s possible, I’m chasing this, hey, it’s working. Hey, I’m really good at this. Hey, I’m now very confident about this. Is there ever a moment where resting on your laurels and letting your guard down can really lead to misalignment? Is that something that’s possible for somebody that is a high performer and someone that’s absolutely crushing it or does that tend to be a more rare case because they figured it out?

Jason:
Does like resting or pausing take them into resistance? Is that what you’re saying?

Rob:
Well, I guess overconfidence is the question here, right? Can you be perfectly aligned like we talked about and you’re crushing all your goals and now you’re so over confident that, is it possible that you’re over confidence can lead you down the path of misalignment?

Jason:
Well, I think overconfidence can lead you to comfort, like overconfidence, like there’s confidence, like you’re certain you can hit the target, like being in a state of certainty and confidence of like, yes, I can hit the target. That is a pure state of alignment right there. Can you be over overly confident? Like what does that mean? Does that mean you’re a hundred percent certain, but then you’re not open to flexibility or what does that actually mean?

Rob:
Sorry? Is that rhetorical or are you actually asking me right here?

Jason:
Yeah. Because you say overconfident, I’m like, what does that mean, over confident? Because I hear, one sign of alignment is certainty. I’m confident I can hit the target. That’s part of it. We all have different paths in life and you may be overly confident, excited, confident, things are working great for three months and you’re like, things are going great, I can relax for a month. And if I relax for a month, things may shift, but that’s also the natural process of life. It’s not necessarily a bad thing. You may be killing it, killing it, killing it. You take a little break and all of a sudden you stop killing it. But then that little discovery from the break period from restarting is what kicks you into a higher gear anyway.

Rob:
Yeah. I think that’s what I was wondering because I think that it, for me, it’s very tough to stop, right? I’m doing what I set out to do and I feel like if I stop, I’m no longer going to be able to hit my goals because I’m no longer working towards them, but it can lead to burnout. And so I have found myself taking a few more breaks and resting and kind of just digesting the world in front of me a bit, and that seems to have given me inner peace and mindset. So yeah, that answers my question.

Jason:
Yeah. And I would say like, do you have to keep working for your goals to keep working? Or are you in a frame that’s so aligned at a level where deals just find you now without doing anything, because those are both frames and you get to choose which frame you’re going to be in.

Rob:
Yeah. I think that’s the part that I’m trying to figure out if I’m being honest. I’m trying to figure out how hard do I have to work? Because I work very hard and I like it. I like this world. I like the ability to be creative and I find that creativity is what fuels me. But obviously hitting your goals isn’t everything, spending time with family is everything too, and that’s probably where I’ve kind of been pushing myself more towards is that side of things.

Jason:
What I’ve found that works best is to work in the way you want to work. If you like working hard, then work hard. If you work hard because you think you’re supposed to, well, that’s something different, right? I like doing big things. I like working hard and I also like playing hard. So the more that I follow my own unique desire and my path for work, and what I give to my team, what I do to myself, the more I do it my way, the more success I’ve seen come through, because every one of us is different and everyone is viewing our lives from different, unique perspectives. So however else someone else is doing it is irrelevant. And what really matters is what is the way that you want to do it?

David:
That’s such a good point. And I notice, I get this emotion that is not good when I hear, I don’t know how I’d describe it, like frustration or there’s just a sense of you’re asking the wrong question when maybe our listeners or people that want to learn how to invest in real estate, say, what am I supposed to do? What’s step one? What’s step two? They’re they’re looking for an instruction book that’s fool proof, that if they just do these things, they will end up where they want to go. And I’ve never understood why. I knew that was the wrong question, but I think what you’re describing right now might be answering that, it’s because not everybody is going to enjoy doing the same things. They’re not going to be good at the same things. And it’s not going to work the same way for a lot of people. I think what you’re talking about is what Brandon would often refer to as, does this feel light or does this feel heavy? Is that one of the tests that you give when trying to determine what someone should do?

Jason:
Well, part of it, right? But really you can’t, and I talk to people, investors all the time, like you can’t out plan the risk. It’s just there, you can’t. So when you get those investors who are asking, I get that, and my hallucination right or wrong and why you’re frustrated is because they’re asking you for the secrets that you worked your butt off to create. And it’s not that you don’t want to share those. The first step really is a decision to play the game, to play the game. I’m going to do it. And you’re asking what step one is-

David:
Commitment.

Jason:
Step one, yeah, are you committed to the result? That’s step one, right? And it’s really frustrating, it is to me too, when people ask for your advice or your mentoring and they’re not taking the action or not willing to do the work.

David:
I would say that’s the definitely a part of it. But it’s not just that, Jason, it’s also what step one for David Green was, is not going to be the same thing as Rob Abasolo. We have different goals. We’re going to use the same vehicle to get there, but there’s an infinite number of ways to put it together. And my personality led me down the path that I’m taking. There are aspects of real estate that I love, and there are aspects that I just cannot stand. So when you mention, work hard at the things you want to work hard at or something, I started thinking about how I used to love being a cop, and I could work a 20 hour shift as a cop and I would love 19 and a half hours of it. Even though it was hard work, it didn’t feel hard. I loved doing it.
I loved saving money. So it was not as hard for me to delay gratification and not spend because I loved watching my bank account grow and that feeling of progress that I was getting towards a goal. There are other people that don’t have my makeup and maybe saving money is very difficult for them. They might have a different relationship with money. They look at money like it’s a way to make friends or it’s a way to have fun or enjoy life. So that person’s goal might involve raising money from other people to put into the deal, not just saving up their own money. And when we ask that question, what’s the blueprint, I just want to follow it. It’s absolutely forsaking the fact that you’re a unique individual with unique skills that you’re going to have to use those to get towards your goal.

Jason:
A hundred percent, right? The success formula is make a decision and do everything you can to hit it. Adjust as needed, right? And if you don’t know what direction to go, A, B or C, which one’s more exciting? Which one feels heavy, which one feels light? Use your guidance system.

David:
And that’s really what I wanted to get at is that like for Rob, he loves to create. And the time I’ve known Rob, he has used that phrase probably 12 times. So I know in his heart, creativity is incredibly important and I’m looking forward to getting to know you better, Rob, where I can find out what it is in you that you’re trying to get out through creativity. I think that’s very cool. But I also see just like my former co-host, the infamous Brandon Turner, that time with family is incredibly important to you, right? Like Brandon would with things that, to me, I never even thought twice about because I didn’t have family in the equation. So he would have to approach problems differently than how I would approach them. And that’s sort of what I wanted to highlight is it’s so important to start with where you’re saying Jason, because we all have different motives that are driving us.
We all have a different end result we want. We all want financial freedom through real estate, but financial freedom for the purpose isn’t anything in a value in and of itself, it’s what you do with that freedom that’s going to give you value. So you’re going to structure your portfolio differently. You’re going to go about it in a different way. And I think part of what’s really cool about setting a goal like this is it forces you to sort of learn things about yourself on the way. It forces you to trim the fat off of your own steak, in a sense, as you’re trying to push towards that goal. Usually every big goal that I’ve ever set made me a better version of David because in order to hit it, I sort of had to jettison the parts of me that were not helpful, useful to others, bringing value, and I had to double down on the parts of me that were focused on other people or good in general and that’s just another reason why trying to find a blueprint, just show me the shortcut, I just want to do what someone else did. You’re robbing yourself of the entire journey that makes your skills and what you’re trying to do in life so powerful.

Jason:
That is, yeah. That’s like so true, right? And everybody’s a unique, you’re not here for the destination. We’re here for the journey. And the reason I love getting people towards impossible targets is because when you start playing at the level of impossible target, it’s not really just hitting big targets. It’s really following your own path in life, doing it your way. And when you start to follow your excitement and your path, that’s where your success comes, your impact to other people comes, your financial success, when you start doing it your way. And the first way to do that is to start moving past all the limitations from your past that have prevented you from playing that way. So you can do more. You can be more. Follow that path. Absolutely. And along the way you evolve to be that person, a hundred percent.

David:
All right. So if I have to create systems and models and guides for the agents that I’m trying to teach and how to sell these homes, I have to get clarity on what worked for me in the past, what our clients are looking for. Then I have to influence the amount of agents it’s going to take to sell thousand homes. In order to do that, I have to become a stronger leader. I have to care about people more. And so what I love about when you set a big goal is it forces you to become a better version of you to get there. I think it’s one of the ways that capitalism, when it’s done well, contributes so much because if you want to have more wealth, if you want to build more money, you have to become more valuable to other people. You have to think less just about yourself, or you have to indulge your vices less. And so that’s why when you hear successful people that like, it’s never enough. It’s not always the money. I mean, sometimes it is, absolutely there’s people that get caught up in that, but for others, it’s the growth. That that might be the most addicting feeling of all.

Jason:
It is, right? And the higher you aim, the faster you’re hit with growth. So it’s really a game of saying yes to more, how fast can you get back into alignment? And then how do you continue that journey? And people ask me, how do you do that? And I call this like walking your path to greatness, your own unique path to greatness, are you playing at your full potential, going after impossible things, and doing it your way. And some people are afraid of that decision to walk the path to greatness, and what I do is I basically give myself no other option. That’s the only option is to walk the path of greatness, to explore my full potential, because if I’m going to be, I don’t know how long I’m going to be here on this planet and this body, so I made as well, make the absolute best of it as I can. And sometimes there’s a little growth and sometimes there’s a lot of growth, but it’s always growth and expansion to become something more. It’s always an evolution.

Rob:
Yeah, for me, I think just the way all are talking about it is very, it really hits home for me because I think growth is kind of seeing how you react when things go wrong. Similar to what y’all were saying, people always reach out and they’re like, Hey, give me the shortcut, give me the one line shortcut that’s going to make me a real estate pro like you. And what I always have to tell them is you don’t become a pro at anything by things going right. You become a pro by everything going wrong. And so you have to be willing to accept failure as part of your growth. And that, to me, everyone sees portfolio and content, they’re like, yeah, you’re crushing it. But I’m like the only reason I’m crushing it is because I failed the whole way and I just adapted to those failures to enable my success.

Jason:
Absolutely, right? If you would’ve talked to me 10 years ago, I would’ve said I’m going to be a race car driver flying in jets all over the planet, and I’m not. That was my path to get here that it was failure, failure, failure, failure.

David:
Yeah. And that’s why having a humble spirit is so important, because if you’re going to learn from failure, you have to be okay with it. You can’t interpret failure as you having low worth yourself because you failed. It’s bringing me back to jiu jitsu again, I was just training yesterday and I was training with a black belt, and what we would do is we would just start to spar and then he would stop me in the middle of it and say, do you see what you just did right there? Why did that happen? And I would work through, I left too much space between us. And he said, yeah, when you leave space, I can do this. Do you see what you just did right there? It was literally everything I did wrong. He just kept bringing up. But by the end of the session, I now know don’t do all those things, right?
That’s literally how we get better. He didn’t stop me and say, you did that thing great every single time. Those really aren’t the things that I need help with. And so I think that just sort of is a testimony to why mindset is so important. You got to be okay with having your mistakes pointed out. You’ve got to be okay with making mistakes. You can’t interpret those like you don’t have worth as a human being because someone’s pointing out where you did something wrong, and when you’re in that mindset, you welcome that feedback. You welcome the mistake. You go out there and you take action, and you screw up and you’re grateful because it helps you get on the right path, and I think that’s why somebody like you, Jason, is so valuable in someone like Brandon’s life and in a lot of our listeners’ lives where you can help cultivate that mindset where you don’t fear failure anymore. You almost look forward to it because it’s getting you to success faster. I think, Rob, is that more or less what you’re kind of getting at?

Rob:
A hundred percent. For me, with the platforms that you and I have, David, and just being able to impart any amount of experience, I can at least look at my failures as there’s a silver lining. Silver lining is I’ll be better from it and hopefully, maybe I can help someone else not fail in the same way, and if I can do that, then it wasn’t a failure at all, because we’ve helped people, we’ve enabled people to be the more successful version of themselves.

David:
So Jason, at this segment of the show, I would like to know if you’d a live framing exercise on Rob and I. So Rob and I are partners. We buy real estate together. We have a very big goal that feels impossible for this stage of our partnership, and I would love it if you would sort of break us down and let everybody hear, this is what it looks like when you go through this process.

Jason:
Okay. Do I have permission to coach you?

David:
Yes. Just please be gentle.

Rob:
Don’t slap us around too hard. Don’t mentally jiu jitsu us too hard.

Jason:
Won’t make you tap. Make you tap. So what’s the target?

Rob:
I think David and I have set a loose goal, I think we’re open to collaboration here, but I think we’re looking to close on a property every single month. It’s probably going to take a little bit of systems and collaboration to get to that point. It’ll probably take a couple more months to get to the point where our systems are fully lined up. That’s our big lofty goal. We want to do one luxury property every single month.

Jason:
Okay. And when do you want to do the first one?

Rob:
We’re in it. We’re doing it right now. We’re in escrow on a property in Arizona and we just had inspections and we’re set to close sometime in April.

Jason:
Is that a stretch goal or is that an easy goal?

Rob:
Initially it was a bit of a stretch goal. What do you think David?

David:
Well, I think getting one under contract was, I don’t want to say easy, but it was definitely possible. But repeating that every single month for the rest of the year would be a stretch goal.

Jason:
So let me ask you this. What are you after by closing one property a month?

David:
I think one of the things that would stand out to me is by doing it every month, it will full force us to maintain our communication and contact with each other. We will have to build, I mean, we have a system we’re using right now, but the word system is often overused. It’s not just about having something, that’s being good at doing it. So it will force us to get good at the rhythm of how we’re playing this game and how we’re working towards our goals. It will also give us more, what do I want to say here? Like kind of a case study to be able to share with the BiggerPockets audience, this is what we’re doing, this is what we’re learning, this is what went well, this didn’t go well, a steady stream of information that we can dispense.

Rob:
Yeah. And another really important thing for us is when we talked about our strategy, we were like, oh, what if we buy five houses a month? And this and that. But now I think we’re actually looking to heavy up on the luxury properties because it’s arguably, even if it’s the same cash flow, we think it’s going to be more, but it’s less work than managing five to 10 smaller properties that add up to that luxury property.

Jason:
Now, how are you feeling about this target now?

Rob:
Better, better, because we’ve actually done it. So we’ve gone from being conceptual to talking about it for a couple months to now we’ve actually implemented it. And so now there’s something tangible to hold onto so that when we know we want to replicate it, we’ve done it once before and we actually have tangible evidence and experience to guide us.

Jason:
And David, how are you feeling about that target right now?

David:
I feel more excited about it talking about it. I can see one of the things that jazzes me up about any opportunity is the concept of synergy. So I really like it if I can have success in one area that will also make a lot of other things I’m trying to do easier, kind of like the concept in the one thing. And so being able to have success in this field will make this podcast better. It will add more value to the BiggerPockets audience. It will make Rob and I’s relationships stronger. It will obviously build more wealth, but it will open up doors for ways that we can show other, we’re sort of trailblazing in this sense, because I don’t know anybody else that’s really pursuing what we’re pursuing, the way we are. We’ll have to be raising money to do this. So it’s going to stretch. That’s one of the areas I think that makes it feel extra hard is I’ve never raised money at scale before. I’ve done it for individual properties, a couple hundred thousand here, there, but now we have to have a steady stream of that coming in every single month.

Jason:
Are you thinking high enough? You thinking big enough?

David:
I think we came up with this goal as this is a pretty stretch goal for right now, for the very beginning. I don’t think in a year or two that this would be very difficult to hit. I think we would reevaluate that goal once we found like we were hitting it successfully.

Rob:
Yeah, for me, I would say, I have never purchased a property of this size. It’s really quite, quite expensive. It’s 3.25 million dollars, and every property that I’ve purchased, for the most part, the average is sub a million. So to go to something three times more expensive, I’ve already hit a really big goal. Like that to me was, okay, 3.25, that’s out there. That’s big. That’s so much bigger than what I’ve done. Now, arguably, I could go bigger. And I think doing one of these per month, that seems, I’m not going to say unrealistic, but that’s a lofty goal.

Jason:
Okay. If success was guaranteed and you could not fail, would you still aim at the same target?

Rob:
I’d go higher. No doubt. I think I would want to go from buying one a month to going out, raising a lot of money to go and build 20 or 30 of these all in one fell swoop.

Jason:
What about you, David?

David:
I would probably buy more of them that are existing properties, and I would be looking to hire more people to manage them because I can see that we would get so many of them, it would become pretty much impossible to keep the books and make sure all the work was being done. So it would turn itself into an organization if success was guaranteed. So we would need to be hiring more people and creating a more fine structure to it.

Jason:
And back to you, David, what would be an impossible, what would be completely impossible for you to hit this year, but would be a lot of fun to do anyway?

David:
With the specific goal that Rob and I have here? If we hired an acquisition manager and a person to help raise capital and just let them loose, like we’re just going to buy 10 to 15 of these things every month and this person’s responsible for raising money and this person is responsible for picking the properties and managing them. That feels impossible, but that would be a blast if we could get to the point that Rob and I were just meeting every week and picking out the 10 properties that we were going to buy and letting everybody else worry about the details.

Jason:
Do you like that target Rob?

Rob:
Yeah. Seems pretty impossible to me in a good way. I agree. I mean, I can’t really fathom buying and closing 10 to 15 luxury properties that are over two million dollars, but that’s because I’ve never done it before. And so it seems to me exciting, but also how? Like how can someone do that?

Jason:
So can you get a sense, now when I talk about frame shift, when I say get a sense, like imagine you’re at the grocery store and you’re looking straight ahead and you know the person to the left is looking at you. Right. You know, we can sense that. Can you get a sense of a version of you in the future anytime, next week, next year, 10 years, 20 years. Can you get a sense of a version of you in the future that if we brought you in today, you’d look at that impossible target and say, I can do it.

Rob:
Yeah, yeah, I can.

David:
I can.

Jason:
And can you get a sense of a version of you that’s hit that impossible target at some point in the future? The version of you that has actually hit it?

Rob:
Yeah, definitely.

David:
That’s a little tougher.

Jason:
It’s a little tougher? Okay.

David:
Yeah.

Jason:
Can you get a sense of a version of you that it knows it’s possible for other people on this planet to hit that impossible target?

David:
Yes, I’d say so.

Rob:
I think so.

Jason:
Can you get a sense of a version of you in the future that knows if other people can do it? You can do it.

David:
Mm-hmm (affirmative).

Rob:
Yeah.

Jason:
Can you get a sense of a version of you in the future that has hit that impossible target?

Rob:
Yes.

David:
Yeah. I can more now.

Jason:
Hold your awareness on that version just for about five, 10 seconds. And how are you feeling now?

Rob:
I think so purely based on just kind of running this exercise with you and taking who I am today, if I could just go talk to myself two years ago, I think I would completely blow the mind of younger Rob if he could speak to me today. And so in two years from now, I’d like to think that the same thing happen again if I could speak to that person.

Jason:
And David, how are you feeling now after that exercise?

David:
If I’m being honest, there’s some resistance that I don’t know that I would like the version of me that I’m seeing that I would have to become in order to hit that goal.

Jason:
Okay.

David:
I see somebody who would have to be way or matter of fact, a little bit sterner when it comes to the people that work for me and the goals that they need to hit. I wouldn’t be able to sort of be like the Disneyland version of David that we could be on this podcast where we’re inspiring people and we’re trying to find those underdogs and coach something out of them. When you get to that level, it’s much more like you can’t quit the underdog anymore. They have to be experienced. I wouldn’t get a lot of the joy out of helping teach people. And I think that’s where I’m sensing, like I can’t see a version of me that it would still do what I do right now and be able to do that well. I feel like the part of me that’s encouraging would get in the way of running an enterprise that big because I would allow for performance that wasn’t where I would need it to be. And then if I did sort of become like that traditional hard nose CEO, this is the way it has to be, I would lose some of the fun that I’m having right now. That’s what popped in my head when I went through the exercise.

Jason:
Yeah. That’s great awareness because that’s your present frame trying to make sense of how to do that, right? Your present point of view. But when you get a sense of version of you in the future that was able to hit the impossible goal, doing it the way you wanted and had someone else running the business and being that person that needed to be.

David:
That would be the only way it could happen. That’s exactly right. There would have to be a person between me and the people that I talked to that sort of acted like a buffer that didn’t have the responsibilities that I have that I could trust to be able to make it happen. Yeah. That’s, as you were talking, that’s what was sort of like rising itself to the surface.

Jason:
Yeah. Because either direction that you two go, it’s unknown, you need to figure it out. Whether you’re going to do one property a month or 15 properties a month, either way, you have to figure out how to do it. So in this situation, you can continue the frame shift exercise, like, okay, what’s more exciting now? Is it 15 or one? So let me ask you the question, can you get a sense of the version of you that knows which target you should aim at next?

David:
Yeah, I think I can.

Rob:
I think so too. I mean, we’ve got our goal now. Maybe we are thinking smaller. I think David and I can have a chat about this later today and say, Hey, let’s recalibrate and what’s a bigger goal that’s a little scarier than what we’ve laid out in front of us? It doesn’t have to be 10 or for 15, maybe it’s three to five, but that’s still scary, but achievable, I think.

Jason:
And that’s awesome awareness, right? And what I would also advise you and all the listeners is like, when we start to go, I had this thought process myself. I’m like, okay, how am I going to do 10 million this year? I’m like, okay, well, oh no, I’ll get my executive assistant who’s detail oriented, because I’m not, and she’s going to sit down and we’ll do two hours of weekly planning every Monday and we’ll plan this out. And I was like, wait a second, wait a second. I don’t want to do that. I don’t want it to be that way. I want it to be 10 million and fun and easy. And then I asked myself, well, how do I hit 10 million this year? And my brain told me you need to increase your impact. How do you increase your impact? You increase your impact with more focus. How do you become more focused? You put more space around the action you’re taking.
And then I started to realize I’m in a leveraged model, so the more space I create around myself and build my team up, the more power I get, the more impact for things to really explode. So when you start to say, hey, I’m going to go after something big, let’s play with that idea for a little bit. Your brain’s going to give you its old perspective on how to do it, and like David said, I don’t want do it that way. And I’m saying don’t. Find the other way. What is the way? Get curious about that because you just don’t know what it is yet. It’s a new frame and you can every day just say, hey, can I get a sense of the me that knows how to do it? Yeah. And do that for like 30 seconds. And literally you’ll start shifting your thoughts, just like that.

Rob:
Well, thank you, Jay. Thank you. I feel I got new perspective on how to approach this project specifically. I’m sure David does too. We’ll have some chats behind closed doors that’s like, we’ve been thinking about it all wrong. But I wanted to ask you just from your side of things, do you have any final thoughts or any final words of wisdom that we can impart on our audience here at home before we wrap up here? I mean, we’ve already said a lot, so no pressure, but anything that comes to mind for you, man?

Jason:
You know, I would say go after what you want and give it all you got, because what I’ve learned along the way is that the most satisfaction I’ve ever had in my life is giving it all I’ve got. It’s far more satisfying than actually getting the prize because I knew I left everything on the court, everything I could. So don’t hold back. There’s no reason not to.

Rob:
Jason, thank you so much. We appreciate your time, my friend. How can people at home, where can people find you on Instagram? Give us the finals on that too, the final details there.

Jason:
Yeah. If you’re interested in what I’m doing and you’d like to know more, I do group coaching, we do one on one coaching. You can go to jasondreescoaching.com. You can also check out my Instagram page. I have lots of free coaching content there as well. And I do launch a mindset academy group coaching program with a foundational six week program that kind of puts this in place. And one book that I’m going to give you, it’s not a business book, but it is a business book, it’s called The Alchemist by Palo Coelho, and it’s about the journey of life. And when you start to approach your career from the perspective of the journey of life, it all starts to make more sense and it gets much more fulfilling, and that book is an amazing example of that.

Rob:
Okay. Adding it to my cart right now.

Jason:
And the book, Do The Impossible is available on BiggerPockets now.

David:
Okay. My question, what is the ideal person who should buy this book and what should they expect if they do?

Jason:
That is a great question. This book is for people that want to learn how to do more and be more. So if you’re looking to expand your career or expand yourself or make more money, it’s applicable to all of those subjects, it really teaches you how to open up and play life at a higher level.

David:
Rob, any last questions from you?

Rob:
Yeah, man. I want each of us to buy this book and have our own personal book club meeting to kind of really set the foundation for our business plan moving forward. David, where can people find you if they want your own personal knowledge bombs on the interwebs?

David:
Every time I hear someone talk about a book club, I remember the office episode where they had the finer things club. They would sit around in like fancy hats and eat [inaudible 01:03:54] and talk about Pride and Prejudice or whatever. It cracks me up every time, I just picture us sitting there saying quite quite with our pinky up drinking a cup of tea. Yeah, you can find me all over social media at David Green 24, LinkedIn, Instagram, there’s a TikTok that we’re making for our team called the David Green Team. We’re going to start making more content with that. I’ve hired a social media company, actually, that’s going to help me put out more content. So thank you for asking that Rob. And then you can also message me through BiggerPockets. So I do my best to try to keep up with all the notifications I get through the BiggerPocket system, but if you’re cruising around a BiggerPockets, find my profile, send me a message on there, let me know what real estate questions you have. We live to serve. How about you Rob? Where can people find you?

Rob:
You can find me on YouTube at Rob Built, go and smash that subscribe button and the like button, drop me a comment. You can find me on Instagram at Rob Built and on TikTok at Rob Builto, and feel free to hit me up on MySpace too. I don’t know. It’s probably still out there somewhere.

David:
There it is. Well, thank you very much, Jason, for the free coaching session we got, at least I hope it’s free. I don’t know if I’m going to be getting a bill when we get done with that. We didn’t discuss it, and thank you very much for writing the book as well. I know that’s something, when I first got into educating people about real estate, I assume like most people do that the information, the knowledge is all that’s needed. If you just tell people what to do, that it’ll work and they’ll go do it. And I quickly learned that it’s more nuanced and complicated than that. And how you think the way you look at the world, what you believe about yourself, plays a much bigger role in what you do with that information. So thank you for providing value in that area that people really need. And Rob, thank you for doing a great job as my co-host today as always, and sort of sitting in the seat that Brandon Turner used to sit in, as we talked to his coach himself, is there anything you want to tell us? Jason, do you have like a fun fact about Brandon that you can share that he would not get super mad about you sharing?

Jason:
That’s not confidential?

David:
Yes, exactly.

Jason:
You know, he talks about it, but it’s pretty funny. When he told me he’s not good at raising money. I thought that was one of the funniest things I’ve ever heard.

David:
I might have to talk to you about that too, because I’m following in his footsteps and I’m going to have to be raising money as well.

Jason:
Well you know how to reach me. Yeah. It’s been an interesting journey. I remember when he was putting the money for the house in Maui together and I was like, can’t you just do this? So, it’s a continual growth and expansion for all of us.

David:
All right. Well thank you very much for your time, Jason. Everybody go get the book, do the impossible by Jason Drees, Brandon Turner’s personal success coach. This is David Green for Rob, my partner in crime, Abasolo, signing off.

David Greene:
This is the BiggerPockets Podcast show 603. I like to take a bigger perspective. I like to look at the whole country and say, “What’s going on and how does that affect individual markets?” And then when I find the market that I like, that’s when I get involved and say, “What’s the ROI on this property versus that?” I think, my humble opinion, too many people start by looking at a property, finding what cash flows, and then trying to justify buying it based on whatever macroeconomic stuff that they look at or ignore.

David Greene:
What’s up, everybody. This is David Greene, your host of the BiggerPockets Podcast, here today with a Seeing Greene episode. On today’s episode, I will take your questions, your comments, your concerns, what the people want. I will do my best to give an answer, taking my advice and perspective into account, about what they can do to overcome their challenges and how they can build wealth through real estate. If you are new to this podcast, I’d like to invite you to check out biggerpockets.com.

David Greene:
This is the best real estate investing platform in the world. We’ve got podcasts like this where we interview people that have been successful at real estate investing and share their secrets, as well as bringing industry experts to educate you on individual components to real estate investing. We’ve also got a huge forum with tons of questions that you can ask or read that people have asked in the past, as well as an amazing blog where you can read tons of articles written by other real estate investors that all want to help you do the same.

David Greene:
There’s also over two million members that are all on the same journey as you. I’m David Greene, like I said before, and I will be your host for today’s episode. This was fantastic. In today’s episode, I actually have been confronted with a little bit of smoke. There were some unhappy people that didn’t like some of the comments that I made about cash flow, and I will address that about halfway through. In today’s show, we’re also going to cover topics like scaling quickly without using hard money or what your expectations should be with how to scale safely.

David Greene:
We talk about vacation areas or areas that people are moving away from and how to find the right personality of the area that you’re in so you could pick the right strategy. We talk about looking at a deal, whether you should sell it or whether you should keep it, how much equity you have in the property, and where your biggest challenges are going to come from. And then we talk about, should I keep saving to buying this market, or should I find creative ways to be able to get a deal now before prices get higher, and more.

David Greene:
Look, today’s show is from the people for the people. You guys submitted some great questions, and I do my best to give you the answers that I possibly can, and then explain the reasoning behind why I’m giving that answer. I hope you guys love it. I hope you join me on this journey and continue liking it. Please stay connected. You can follow me online @davidgreene24. You also can follow BiggerPockets themselves on Facebook, on LinkedIn, on Instagram, on YouTube.

David Greene:
They’re everywhere. Just put BiggerPockets into a search engine and see what you get. There’s a bookstore with tons of good content. If this is the first time that you’re coming here, you’re going to love this. And if you’re someone who’s returning, thank you so much for staying loyal, for taking this journey with me, and for following along. For today’s quick tip, I’m going to ask all of you that own real estate to take a look at your portfolio. Ask yourself how hard your equity is working for you.

David Greene:
We have seen a big increase in prices, as well as rises in rents, but home values and the rent you can get for a property do not appreciate at the same pace. Oftentimes values outpace rent. When that happens, you can sell a property and buy two or three more, spread your equity out over several different properties, so now you’re going to be appreciating at a faster rate, and most importantly, increase the cash flow that’s coming back to you.

David Greene:
We have a metric that we call return on equity, where you look and say, “Hey, with the money that this property makes me in a year, if I divide it by the equity in the property, how high is my return?” Many of you will find, if you look at your current portfolio, your equity is not working very for you. I’d love for you to sell that property and go buy a couple more. Get that cash flow higher and spread the wealth out over several more properties. All right, that’s all I had for the quick tip. Let’s bring in our first question.

Sharon Pace:
Hi, David. My name is Sharon Pace. I’m with 4p Homes based in Galveston, Texas, and looking to figure out better ways to scale in our business. We’ve flipped four properties already. We have two more that we bird into short-term rentals, but looking to find out how we can scale faster, but yet smarter in this, I guess, market that we’re in. We’ve been using hard money and private money, but we’re finding it’s harder to pay back our private money lenders when we’re trying to refinance out of these deals. Looking to figure out how to gain more capital and scale a little bit faster. Thanks.

David Greene:
Hey, Sharon, thank you so much for this question. I love how honest you’re being. What I’m hearing you say is, hey, we got a good thing. We’re buying short-term rentals that cash flow really well. Obviously we want a lot of them, but we’re not able to get them as quick as we want. Because after we refinance at the end of the BRRRR, the repeat, the last R, is kind getting slowed down because we can’t pay off our entire hard money note that we took to buy the house.

David Greene:
We can only pay off part of it, which means it’s tougher to get money to go buy the next deal. Let’s break down how you ended up in this situation and what my advice will be for you to improve it. First thing I want to say is there’s this theory that in most things in life, you’re looking for three benefits, but you can only get two. For instance, if you want a contractor, you want one that works fast, does a great job, and is cheap. Those are the three things you want. Pick two of them.

David Greene:
Because if they work fast and they’re cheap, they’re not going to do a great job. If they do a great job and they work fast, they’re not going to be cheap. That’s just the way that life tends to work. Because if you’re really good and you’re really fast, you can now charge more for your services, so you stop being cheap. At different stages in our investing career, we have to value different elements differently. When you’re new, cheap probably matters more and maybe fast matters more, but you don’t get great quality of work.

David Greene:
And then you start to want more quality of work and you realize the speed’s going to go down. And then ultimately you realize price is the least important. You want the other two? Let’s talk about how I look at scaling. You can do it quickly, you can do it safely, and you can do it profitably. Which of those two do you want to highlight as far as what you’re going to do? Because you can’t do all three. If you want to do it fast, you’re going to sacrifice on doing it safely or on doing it profitably.

David Greene:
If you want to do it profitably, you’re going to sacrifice on doing it safely or fast. Here’s part of what I think that you may have been led astray. There’s a couple rules to BRRRR. A lot of people think that when you BRRRR, you need to pull 100% of your equity out every single time, all your capital or more to put in the next deal. If you don’t get that, then that means you did it wrong. I don’t know where this came from, because I wrote the book on BRRRR and I say that makes it a home run deal.

David Greene:
If you get all your capital out, you crushed it. You should never expect every single time you swing the bat to get a home run. If you normally were going to put down 25% and you leave 16% in the deal, even though you may think you failed, you’re still better off than if you put down 25%. If you leave 11% in the deal, you’re still better off than if you put down 25 or 30%.

David Greene:
Maybe your expectations when you first started to think about scaling were off because you thought you were going to buy a house, fix it up, rehab it, payoff all the money, get all your money back, and bam, be right into the next deal. And you’re finding that adding value to real estate is harder than you thought. I think a lot of people are in this boat. And here’s why I think that happens, where that comes from. When you’re evaluating real estate, the easiest part to evaluate tends to be the cash flow.

David Greene:
I can look at the income. The expenses are relatively easy to control and understand. The only expenses that are really hard to control would be things like vacancy and repairs. The rest of it, more or less, you can sort of account for it. Cash flow is the easiest thing to calculate, and therefore gives us the strongest filling of security. The ARV, man, that’s tough. You depend on appraiser and you don’t control it. You don’t know what comp they’re going to pull from. The rehab, wildly unpredictable.

David Greene:
Sometimes they go fast. Sometimes they go slow. Sometimes they find stuff. Sometimes they don’t. Sometimes they come back and say, “Hey, we actually don’t have to fix that. It’ll be cheaper.” Other times they come back and say, “You need to borrow a whole bunch more money. There’s a lot more that’s wrong.” Rehabs are very tricky to control. Now, in a BRRRR, it’s all about the appraisal on the rehab. You’re adding value to the property through the rehab, and then you’re hoping it appraises for as much as possible to pull the money out.

David Greene:
This is where BRRRR investors get messed up is they approach it like buying hold investors that are only having to calculate one metric, which is just cash flow. We’re having to juggle several balls as a BRRRR investor. You’re having to juggle the cash flow you’re going to have at the end. You’re having to juggle the rehab and how you’re going to add value, and then you’re having to try to make sure that you get the highest appraisal possible. With more ball as in the air, it’s more likely that you’re going to drop one.

David Greene:
And if you look at it like you have to have a perfect finish, you’re going to think you’re doing something wrong. But you’re not doing anything wrong. You’re still better off than the traditional buy and hold investors if you’re leaving less money in the deal than they did. You’re just not going to be able to scale as rapidly as what you thought. Now, what I think that you will find is as time goes by, rents go up. Your operating system becomes slicker, smoother, and more efficient, so your expenses go down.

David Greene:
You will start making more money on these properties. They will become profitable. That will give you more money to buy more property with. If you don’t have a perfect BRRRR and you end up still owing some money on the note, you’ll have cash flow from the properties to make up the difference in what you weren’t able to pay the hard money lenders that you’re talking about. Basically if you give yourself a couple years to build up some momentum, you’re going to find that what you think you don’t have right now will be naturally happening.

David Greene:
I say this to people all the time is they just think it’s going to be easier than it really is to get started. Every new agent thinks that they’re going to walk in and in their first six months they’re going to sell 12 homes. And if I say it’s going to be hard, they go, “Okay, maybe in my first 12 months, I’ll sell 12 homes.” And then they find that they don’t sell maybe one or two houses for the whole year. It’s very tricky. But when you’ve been doing it for 10 years, it’s very hard to fail. You just have leads coming in all the time.

David Greene:
All these people know who you are and they’re just coming to you. You actually need some help with your business. Remember that as you’re building your portfolio, it will always be harder than you thought in the beginning, but it will get easier than you thought the longer that you do it. Okay, next question comes from Nadia Chase. This is a written question. Number one. What do you think about investing in an area where people are moving away from like Joshua Tree, California and the surrounding areas?

David Greene:
Number two. Where do you research whether or not a market will appreciate over time? All right, let’s start with question number one here, Nadia. It’s a bit tricky because you’re sort of asking two different questions. You’re saying… Well, you literally did ask two questions, but part one was two different parts. You’re saying, “What do you think about investing in an area that people are leaving? “And then you’re saying, “What do you think about Joshua Tree?” Those are actually different questions.

David Greene:
I’m largely opposed to investing in an area where population is decreasing. In most cases, if you buy real estate and you have significant reserves and you do it wisely, you don’t lose, unless the one Achilles heel is you can’t get a tenant. If half the population was abducted by aliens and just disappeared, if you see what happened in Detroit where the entire industry was based on one table leg and the auto industry collapsed, all those jobs leave, there was nothing you could do at that time if you owned in Detroit to not lose money.

David Greene:
There was no tenants. Nobody was living there. You absolutely want to pay a lot of attention to where people moving, how much rent are they paying, what kind of wages are they earning to determine what kind of they can pay, what jobs are paying those wages, and what’s moving to those areas. I talk about this all the time, which is kind of part two of your question. But Joshua Tree is a vacation destination. That’s what makes this different. People largely buy short-term rentals in that area.

David Greene:
I don’t think I’d be looking at are people leaving Joshua Tree. I would be asking of the population that vacations in Joshua Tree, which largely are going to be living in Southern California, the Los Angeles area, how many of them are leaving? Because people leaving an area doesn’t necessarily change real estate values a whole lot. It depends on the demographics of the people that are leaving.

David Greene:
When the Bay Area, there’s a lot of expensive housing that’s paid for by people that are executives of really wealthy companies like the Google, the Netflix, the Amazons. If those companies move their headquarters out of Silicon Valley, I would be very concerned about the luxury real estate. I would think it would have to change because the people who own it are leaving the state. Now, let’s say that people are leaving the state that are at lower income brackets. That tend to be people who rent.

David Greene:
They don’t own. I would be concerned if I own some of the low income multifamily properties in the area because your tenant pool is the one that’s going to be leaving. The question I think you should be asking is, are people leaving Southern California? Because yes, a lot of people are. The City of LA is falling into disrepair. There’s a lot of people that are very unhappy about how it’s being run. I don’t know it’ll stay that way, right? At some point, usually the pendulum swings the other way and people come back.

David Greene:
But for right now that’s true, the population is decreasing. But we have such a shortage of housing, it’s not really changing home prices. We still have more people that want to buy than people that want to sell even with everyone leaving. And that’s why we haven’t seen a decline in prices. The question would be, are people leaving Southern California that would vacation in Joshua Tree? I haven’t seen any indication of that being the case. The vacancy rates are very low for that area.

David Greene:
The demand is very strong. I think people that host this podcast, Rob Abasolo and Tony Robinson, are literally building and developing a lot of tiny homes in that area, and there’s a ton of demand. It’s not as simple as are people leaving or are people coming in. You got to look at what type of people are leaving and coming in, what demographic they’re in, and what type of housing that they are using. As far as where I research that, well, a lot of it, to be fair, I learn from people I know in the industry that do the research.

David Greene:
I’ll spend a lot of time talking to multifamily people that are super good, that have to know this type of stuff. I’ll ask them what they see and they’ll just… They’ll tell you everything, right? These guys are analytical nerds that love to talk about it. I get a lot of my information from there, but I know they get their information from places like the US Census Bureau and even places like online news sources like Fox Business News or CNN Money, Yahoo! Finance.

David Greene:
Those types of places will often post articles that talk about where people are leaving and where they’re moving to, where home prices are going up and why. I, as a real estate investor, I’m a little unique in the sense that I don’t just focus on what’s my ROI on this one property if I run it on a calculator. I like to take a bigger perspective. I like to look at the whole country and say, “What’s going on and how does that affect individual markets?”

David Greene:
And then when I find the market that I like, that’s when I get involved and say, “What’s the ROI on this property versus that?” I think, my humble opinion, too many people start by looking at a property, finding what cash flows, and then trying to justify buying it based on whatever macroeconomic stuff that they look at or ignore. If you fall in love with the property because you really want that cash flow, but it’s in the Detroit, you find yourself wanting to buy it even if the numbers are saying don’t do it.

David Greene:
I just removed that temptation from my life. I look at the big picture. I see what’s going on in Detroit versus what’s going on in Birmingham, Alabama, or what’s going on in Madison, Wisconsin, or what’s going on in Lakeland, Florida. And I say, “Hey, I like those areas,” then I niche it down to which city would I want to buy in or what part of town. Then I niche it down to what price point. Then I niche it down to what type of property. Then I niche it down to what can I actually get under contract instead of the opposite way. Hope that that helps you a little bit and good luck in your investing journey.

Mike:
Hey, David. I’m a newer BiggerPockets Podcast listener and recent pro member. Looking this start building some momentum. Now, I currently live in Renton, New York City. My career allows me to work remotely on the East Coast. Now, I’ve been wanting to relocate out New York City, given the cost of living here, but I still want to be in the city with a strong social scene and quality of life, so think Boston, DC, North Virginia, Richmond, Raleigh kind of deal. Now, here’s where my question comes in.

Mike:
I’d like to start some real estate momentum by investing in a duplex or triplex to relocate into. Now, given where the market is today for these cities and that they’re not in close proximity to me, it’s harder for me to scope out and evaluate rental opportunities. What would you recommend for somebody looking to start their real estate journey while relocating?

Mike:
Should I stay patient, be creative, continue looking for that duplex, triplex remotely, or perhaps invest in a condo in one of these cities instead and continue my rental hunt when I’m living in the city I’d like to invest in. Thanks, David.

David Greene:
All right. Thank you, Mike. This is a very practical question and I like that you’re asking it. If I hear you correctly, you’re saying, “I want to leave New York and I want to move to one of these other cities. Should I go buy the duplex, triplex, fourplex that I want so I can house hack in that city and stay here until I find it, or should I just go buy a condo in that city and live there, and then start looking for my next property once I’m already there?” I don’t know that either of those are your best options or your only options.

David Greene:
I think you can get a lot of work done from where you are. My advice would be you start looking for people to help you. I don’t know this because you didn’t mention it, but it sounds like you’re doing the typical consumer. I go on Zillow. I go on Realtor.com. I look at houses. I try to figure it out. I call that analyzing it, even though I’m not sure of what I’m supposed to be looking for. I don’t know the area. I don’t know if I’d want to live there. I spend a bunch of time noodling it in my head.

David Greene:
By the time I come to some kind of conclusion, somebody else bought the property. I think we could just improve your system. I think the first thing you need to do is find an agent in that area that you feel comfortable with that’s going to hunt them for you. I think the second thing you need to do is go visit whichever city you think you want to move to and get to know that area because you’re going to be living there.

David Greene:
Now, I do say in long distance investing, you don’t have to visit the area you’re going to, or you don’t have to visit the property, right? There’s still some value in visiting the area if you don’t know it. But that’s for investment property. If you’re be living in it and you want to know what type of places it’s close to, you want to know if you like the restaurants that are close by or how busy the streets are. This is your quality of life, so you definitely want to go visit that place and see which part of town you want to be in.

David Greene:
When your realtor says, “Hey, I found a triplex. It’s over here,” and they see it on a map, you can tell from that map what you’re actually getting and if you like that part of town. Now, when you visit, meet with the realtor. Maybe meet with a couple realtors if you don’t get a good vibe off of the first one. Then when you go back to New York, they will send you the properties that you could potentially buy. Now, you’re in a position where you know if you’re going to like it. Analyzing it makes a lot more sense.

David Greene:
You can put one under contract. I don’t think you need to move to the area and buy a condo to learn the area. I think you can visit it. Now, if you’re the type of person who just says, Nope, one or two visits won’t do it. I need to really soak in the entire atmosphere and get a feel for it,” then, yeah, moving there and buying a condo would not be a terrible idea. You just got to make sure that the condo you buy has a solid HOA. They’re not in any kind of trouble.

David Greene:
It’s in a good area where you think that if you decide you want to rent it out, you can still make some money on it. That there’s some demand. I would recommend buying a two or three bedroom condo, not a one bedroom condo, so you can rent it out by the bedroom after you leave because they’re a little bit tougher to cash flow. But I don’t think that the two options you presented are your only options. Build your team. Find out from your lender how much you can afford and what your payment is going to be.

David Greene:
Go learn the area. Find out which parts are zoned for multifamily, because that’s where your duplexes, triplexes, and fourplexes are going to be, and go drive those areas and see if you like it. See what’s within walking distance. And then tell your realtor, “Here’s the preferred places I like to live, tier one, tier two, tier three. Send me the listings that come from there,” and you can take it from there. Good. Look on your search, buddy. All right, we’ve had some great questions so far.

David Greene:
Thank you for submitting these questions. I’ve got some comments that I’m going to read from previous episodes. I’d love it if you could leave me comments on this episode. If you’re watching this on YouTube, please tell me what you think, what you would like to see, what you didn’t like and what you did. Now, I’ve asked this on previous episodes and you have been faithful in responding. We actually got a lot of comment on a particular show that I did where I talked about cash flow and how I think people have erroneous views of cash flow.

David Greene:
One of the comments comes from All Phase Landscape & Building Services, Inc. and they said, “I really am disturbed by how BiggerPockets has abandoned cash flow as the most important thing in investing. It feels like they have gotten too rich or too California to remember the fundamentals for smaller investors. Literally everything said in this podcast was in stark contrast to Brandon’s freedom number concept and the fundamentals laid out in his book.

David Greene:
I understand the game has changed since then, but only because we’re at a different point in the cycle. It feels a lot like 2007 right now and I’m not banking on appreciation. If it happens, that’s just a bonus. Why is cash flow unreliable if you are analyzing setting aside money for management, repairs, CapEx, and fixed expenses?” Now, this I assume is coming from when I talk about how so many people or maybe too many people think that they’re going to buy a handful of properties and retire and not have to work anymore.

David Greene:
And if they just find a couple of properties, they can be done. We’re seeing massive changes in our economy with inflation in rules regarding real estate and in the way that real estate investors are being treated. The tax code could be changing. I think, this is just my opinion, that the way things have worked for a long time is going to be changing. I think that there could be a point where the way real estate investing work changes, and I’m trying to put people in a better position to not end up losing their properties.

David Greene:
Now, here’s my opinion, this is not BiggerPockets. This just me as David. Cash flow is amazing. I love cash flow. I invest for cash flow. I like cash flow, but I believe cash flow in residential real estate is intended to stop you from losing the property. It is not intended to grow you wealth. What I’m getting at here is if you’re cash flowing $200 or $300 a month, it takes a lot of properties to be able to have a significant amount of wealth that gets built from that cash flow.

David Greene:
If your goal is to quit your job, it takes a lot of properties before you can quit your job if each of them is making 200 or $300 a month. When you own that many properties, like I have, it becomes a full-time job to manage those properties. What happens is you trade one secure job for one less secure job because your W-2 income is reliable, in most cases, and your rental income is not in almost every case. When I say it’s not reliable, what I mean is things break you didn’t anticipate.

David Greene:
Tenants trashed your house that you couldn’t have accounted for. You don’t know what’s going to go wrong. Everyone that’s bought rental property will admit, you catch them at an honest moment, when they first bought their property, they didn’t do as good as they thought. Things broke that they weren’t aware of. This still happens to me today. Sewage pipes that you didn’t know that you should get checked on end up leaking and cause significant problems.

David Greene:
Trees need to be pulled out of a property that you didn’t realize. There’s a rat infestation that you didn’t realize. Like lots of stuff happens. And if you get a couple properties and quit your job thinking that, “Hey, I’m making 300 bucks a month in cash flow. I’m good on six different properties,” you’ll find that $300 in cash flow rarely comes in every single month. What I’m trying to advise people against is prematurely celebrating the win. You’ve got a couple properties.

David Greene:
That’s great. You’ve got some momentum. You’re learning how to be a better investor. You’re building your skill level. Don’t quit and become a vampire sucking all that cash flow to pay for your living expenses right away. Continue to build. When I talk about appreciation being how people build wealth, that is partly referring to the value of a property going up. You will build wealth faster from that than cash flow, but I’m not only referring to the value of the property.

David Greene:
I’ve said many times, appreciation applies to cash flow too. The properties that I bought that at cash flowed $500 a month when I bought them, now cash flowed $2,000 a month over like eight to 10 year period. I bought them in areas like California, like Arizona, like Texas that were growing. People were moving there. Wages were growing in those areas. Rents went up faster there than they did in other parts of the country where nobody was moving to.

David Greene:
Once they’re going at 2,000 a month instead of 500 a month, I can now start to rely on that cash flow more. If I want to quit my job, like I did when I quit being a police officer and I got into a commission-based system, that cash flow was much more reliable for me to do it. And that’s all I’m trying to highlight here. No one at BiggerPockets and me is not saying don’t care about cash flow. We don’t know what’s going to happen with our economy. We don’t know if a recession is coming.

David Greene:
We don’t know if laws are going to be passed that limits how much you can raise your rent or how much you’re allowed to make as an investor. There’s already talk in California of like taxing short-term rental income an extra 25% by the state. If you ran your numbers and you said, “Hey, I’m good to go. I can retire. I have three short-term rentals,” and then that law gets passed, you’re looking for a job again. I’m just trying to keep everybody safe. I’m not saying don’t chase cash flow.

David Greene:
I’m saying don’t let cash flow become the savior to the life you don’t like. Continue to build your skills. Continue to work hard. Find ways to work at things that you like more. Don’t get a handful of properties and say, “Oh, I’m done. I’m at the front of the race and I can stop.” That’s what the hare did when it was racing the tortoise. You want to be the tortoise, slow, steady, continue to live beneath your means. Don’t let lifestyle come in. Continue to accumulate properties. Over time, you fix up those properties, less things break.

David Greene:
You get more stable tenants. You realize which areas work and which areas don’t. Your rents increase. Your cash flow grows, and then it stabilizes and then live on the cash flow. All right, next comment comes from John Moore. My first few properties didn’t really cash flow much 10 to 15 years ago. I used to feel lucky if I could use some of that money to go out to dinner or buy some new tools once in a while. But now I live on it and don’t miss running my painting business one bit.

David Greene:
All right. Oddly enough, John here is sort of highlighting the point that I just made. When he first bought the property for the first 10 to 15 years, they didn’t cash flow well. And if he had been looking at, hey, I need to buy a property that after all my expenses and setting aside money for maintenance and setting aside money for vacancy and setting aside money for CapEx and setting aside money for what ever surprises come and having the money that I need to spend myself on this property, he probably never would’ve bought anything, because real estate tends to not work that way when you first buy it.

David Greene:
But buying it and continuing to run his business, he bought more and more properties. I presume he got better at doing it. He bought in better areas. He got better deals. He had better management. And after 10 to 15 years, just like what I said, his cash flow probably grew similar to how mine did. And at that point, John exited the game and he said, “I don’t want to run the painting business.” This is the right way to do it, everybody. Now, a lot of my advice is coming from the fact that we don’t know what the government’s going to do.

David Greene:
They’re printing so much money. We don’t really know if we’re at the top of a cycle, or if we’re actually at the bottom of one. They might print a bunch more money and we could have another run in prices. Just take a second and think for a minute, what was housing worth 30 years ago? When someone that you know bought their house 30 years ago, what did they pay? All right? My parents bought their first house about 35 years ago in Manteca, California, and they paid $62,000.

David Greene:
That house right now would probably be worth 500 to $600,000. It’s gone up times 10. That’s without all of the money that’s been printed and the ridiculous amounts of inflation we’ve had. I would expect over the next 30 years that what I’m buying to be worth more than 10 times what I’m paying for it now. I know that sounds insane because I’m talking about a $2 million property being worth $20 million, but that’s because we’re looking at $20 million from today’s lenses, right?

David Greene:
When my parents first bought that property, maybe it would’ve cash flowed like $17 a month or something, but what was $17 worth back then? It would certainly be cash flowing more a lot now. Again, play the long game. Don’t get a little bit of cash flow and immediately quit your job, lose your safety net, go all in on drinking the beach or sitting at the beach and drinking Mai Tais and living the dream and telling your boss that he should shove it. Okay? Cash flow is great, but it’s very unreliable.

David Greene:
I have problems happen in properties all the time. I notice that certain areas problems don’t happen, certain areas they do. If I quit after my first three years of investing, I’d be stuck with a bunch of properties right now that don’t cash flow well because something’s always going wrong. Because I kept in the game and I kept buying, I learned what areas work better, what areas work worse, which neighborhoods. I got better at investing and now my cash flow is more reliable. All right, next comment.

David Greene:
“California is so frustrating for investors. Yes, I look long-term and don’t plan to sell, but we have rent control in Los Angeles. Even worse, restrictions are placed on rent with duplex and multifamily properties. How can a person upscale beyond single family homes if these restrictions are in place?” This is from Higher Spirit. That’s a great point. Southern California, particularly Los Angeles, is known for these type of rent control policies.

David Greene:
And to be frank, there is a lot more vitreal towards landlords now than I think there’s ever been. There’s hate groups out there that target real estate investors, and at times they’ve even targeted BiggerPockets because we raise rent when it comes to the market rent. Now, different people have different political opinions on why that should be.

David Greene:
But what I would like to maybe posit for you to all think about is if you buy a property and you expect the cash flow to be a certain amount, and then the government changes the rules and say, “Nope, now we’re going to put rent control. You can’t raise the rent,” but your taxes keep going up and inflation keeps going up, and that $400 a month that you thought was really good money is now worth the same as $200 a month after inflation, you can find yourself in a big jam.

David Greene:
Can you guys see where I’m getting at here? It’s dangerous to get a couple properties and think that you’re good to go, because these restrictions do get put in place. Higher Spirit, to you, here’s something I would think about. If you’re going the multifamily road, that might not be the best market for you to be investing in. Okay? That’s a great market to house hack in. You own the house and you rent out parts of it. You are keeping your own living expenses really, really low.

David Greene:
You’re generating additional rental income for yourself and some of those rules to protect tenants don’t apply the same because you own the house as your primary residence. You have more rights in that case than being a pure landlord. What I’m getting at is different markets have different strategies. We talked about Joshua Tree earlier. That’s clearly a short-term rental strategy. House hacking wouldn’t work that great in Joshua Tree because there’s probably not a ton of people looking to live there all the time.

David Greene:
That’s a vacation destination. LA is strong on the house hacking side. It’s strong on just owning versus renting, if you just buy a house and you’re not even an investor. It’s going to be a lot weaker on the cash flow side. If you’re looking to scale something and grow more cash flow, you probably want to get out of a market that has those kind of restrictions and get into a different one. I would recommend my book Long-Distance Real Estate Investing because I lay out the systems that you need to invest in a different market.

David Greene:
Now, I do invest in California. I live here. Someone mentioned to California, that’s probably a shot at me because I live in California, but I also invest in other states. I know I have different strategies in the different areas that I’m going to. I don’t think that that should be any kind of a shock to people. You should expect different children to have different personalities, right? Well, every market I invest in has its own personality.

David Greene:
Real estate has a personality itself, and we want to use a strategy that works best for the personality of the market that we’re in. Some of them are long-term plays where you get a lot of appreciations. Some of them are shorter term plays where you’re going to get a lot more cash flow. Sometimes it’s a short-term rental play. You’re going to put more time, but you’re going to get a higher return. Other times it’s a set it and forget it. I’m not going to make a ton of money, but man, it’s going to be easy.

David Greene:
I’m going to forget that I even own the house. Understand the market you’re investing in and pick a strategy that’s going to work for that specific market and you can avoid some of these frustrations. Thank you for your comment there, Higher spirit. All right. Are these questions and replies resonating with any of you? Were you thinking the same thing, “Why does David keep hating on cash flow?” Well, I hope I just explained, I don’t hate on cash flow.

David Greene:
I hate on the way that people look at cash flow as it’s going to be their savior from life. Or maybe you’re like, “Yes, praise David. I have been thinking the same thing and this makes sense.” Whatever it is you’re thinking, we want to hear your honest perspective. Tell us in the comments what you’re thinking. Maybe you didn’t get clarity on something and I can explain it more. Maybe you want to hear more about a certain topic or you hear my view and you want to know what information I’m using to present that view from.

David Greene:
I want to interact with you guys, and I want you to be a part of the podcast because this is your show. You are here and I am here to help make you money. Let me help you do that. Go on the comments. Leave one. Also, subscribe to this page and please like the channel.

Nick Vincent:
Hey, David. My name is Nick Vincent. I’m from the Shreveport, Louisiana area. I’m new to real estate. We just acquired our first property back in December of 2021. We just called a lot of for sale by owner signs until we found somebody that was willing to give us a good deal. We got the house at $50,000. I put 20% down to a 10 down. We owe 40,000 on the house. The house appraised for $78,000. There was a lot of meat on the bone when we bought it. We did about 8K worth of rehab.

Nick Vincent:
Got the tenants in there. Didn’t have to put a for rent sign up. We had some people that knew us and ended up getting into the property. That one has worked out pretty well. We just got our first rent check on it last month. I’ve also been trying to get into a partnership for a couple years now. I guess because of that deal and a couple other things that I’ve been doing, there’s a guy I’ve been talking to and we decided to go in a partnership together. I found an off-market deal, and I guess here’s kind of the meat of my question.

Nick Vincent:
On this off-market deal, we are looking… The house is $120,000. That area appraises for anywhere between 180 to $220,000. The house is actually in a really good condition. The guy just wants to get rid of the property. It’s just a very good deal. I was going to do it on my own, but I figured it was a good opportunity to get into a partnership with somebody. We’ve been talking about this for a while. The options that we have and what I’ve been curious about is, do we obtain this property using a DSCR loan?

Nick Vincent:
I was going to go through Caliber SmartVest Line. That way they’re not looking at debt to income and anything like that. And then once we obtain the property, do we then do a cash out refinance for the leftover equity that’s just sitting there and then go out and obtain more properties? Because that’s our goal is to obtain rental properties. And along the way, if we could do a fix and flip, do it. But really we want to do buy and holds and really get up to like 50, 60 rental properties.

Nick Vincent:
I see this as a really good opportunity for our partnership to get going. The options that we’re looking at is that, one, the mortgage route, or two, we have an option to where my partner can leverage his house. He’s got something that is worth about 160. We have friends with a president of a bank that is willing to give us a line of credit on that money, and we can go over there and buy that house. And then we were thinking about just selling it within a month.

Nick Vincent:
The market’s hot and that’s a really good bulletproof area. Selling the house, taking that $100,000 equity, and then going out and buying four or five other properties off of that one. Our area, we can generally get properties anywhere between the range of like 40 to 60, maybe even $80,000 and then really move from there. My question is which option is the for quickness and to just be more efficient in what our goal is, which is to just obtain more rental properties? With option one, I do have to put out some cash reserves.

Nick Vincent:
It would be about… We’re going to do a split on it. It’d be $15,000 from my reserve cash and the same for him on option one. Option two, I don’t have to do that at all. Basically I found the deal. He’s going to put up the money, then we sell it, and then we do a split on it. And then that’s going to be the money we use for our company to continue to buy more properties. I hope that question kind of makes sense in what the dilemma seems to be.

Nick Vincent:
I’m leaning more towards getting the property and renting it out, because why not? You do the cash out refinance, have a tenant in there paying the mortgage. My partner’s leaning more towards like it’ll look really good for us to go ahead and obtain a property and then sell it, and then our company be worth anywhere between 80 to $100,000 from the jump that we started, and then go out here and obtain more properties.

Nick Vincent:
But I just want to make sure that what we’re doing, because it’s such a good deal, that we’re going to be in a good position to move forward to really start loading ourselves up with as many properties as we can. We’d like within this year to get anywhere between like six to 10. And just from this one deal, I think that we’re going to be able to do that. I would really, really appreciate your advice on this situation. Thank you so much. Your content is amazing. Thank you, David.

David Greene:
Yes, my content is amazing. Thank you for that. No, that’s not true. This is just real estate that we’re talking, and I do this all the time. This is actually pretty simple. Your question is what’s amazing. You listeners that are listening, you are what’s amazing. Let’s talk about this dilemma that you find yourself in. It is the classic, should I hold or should I sell? I’ve got a way that I like to analyze this, and I’m going to break that down. I’ve probably done this before, so I’ll go through that, and then I will try to apply it to your specific situation.

David Greene:
When asking a question of, should I sell it or should I keep it, you did a good job of explaining, “If I sell it, I can get a bunch of cash and that can sort of launch me into the business. But if I keep it, I can have a rental property.” The first thing that I want to say is, what is your biggest challenge? Is it finding more deals? Is it not having enough money to buy them? Is it not getting lending? You basically want to know what your biggest challenge is and work around that. For a long time for me, my biggest challenge was financing.

David Greene:
It was just very hard to get banks to let me borrow because I had so many rental properties already. They saw it as a bigger risk. I know that’s weird because you’d think the person who owns more would be better at it, but that’s not how they see it. Like as a side note, there’s a bank that will remain unnamed in Jacksonville, Florida like six years ago that it said, “We don’t want any more exposure to residential real estate. We think it’s going to collapse. We’re only giving commercial loans.”

David Greene:
Tell me how that one worked out when it comes to residential real estate. No one really knows how these things are going to work out. But my point is, I would start with someone that would give me money and I would find out where will they underwrite. I would have to go my strategy work there. This idea of knowing what’s the most scarce resource will help you with making the decision when it’s specific to you and your partner versus just everybody else who’s listening here.

David Greene:
I’m assuming that money is probably more scarce than deals, because you’ve mentioned that you found these first two deals relatively quickly. I’m going to give you advice operating under that assumption, that it’s easier for you to find deals than it is to find money. Now we’re starting to see things weighing towards selling. It might be better. But let’s not jump to that right away. Let’s go through my ROI versus ROE matrix. When it comes to selling a property, I have clients ask me this all the time, right?

David Greene:
Like especially if they’re in California, those are the ones I love, because they come to me and say, “Hey, I own this rental property, or I own my primary residence, David. Should you list it and sell it for me and we can reinvest the money, or should I keep it and rent it out?” The first thing that we want to figure out is if, is this a property you want to keep? If the answer is no, we look for a way to justify selling it. If the answer is yes, we look for a way to justify holding it. What goes in too, is this a property that I want to keep?

David Greene:
Well, the first thing is, is it a headache? Are you going to get bad tenants? Do you have legal restrictions like what… I think it was Higher Spirit mentioned in the comments about Los Angeles’ rental controls. Is the property itself just a money pit and things keep going wrong? Is it in an area that you don’t want to own in long-term? If the answer is, I don’t want to keep this property, that should become pretty apparent as you’re asking yourself those questions. Is it going to appreciate?

David Greene:
Is it on the way up? Are rents going up and is the value going up? Now, let’s say the answer to those questions becomes a yes, I do want to keep this property. The rents are going up. It’s appreciating. It’s no headache at all. It’s in a great location. I’ve already fixed everything up. It’s performing wonderfully. At that point, we started asking the question of, okay, how much money can we pull out of it and then go put that into the next deal? To sum this up, the first question you ask is, is this a property I want to keep?

David Greene:
If the answer is no, just sell it. You’re not losing real estate when you sell. You are gaining equity through the form of capital to put into new real estate. As long as you buy something new, you’re not losing a property when you sell it, which is how I want you to look at this deal you guys have under contract. There’s 100,000 in equity there. You’re going to turn that into more rental proper. Selling it isn’t losing a rental.

David Greene:
It’s gaining potentially more as long as you can find them, which is why I started this question off by asking, can you still get deals? Now, the next thing work on is our ROI versus ROE matrix. ROI is return on investment. Roe is return on equity. What I would like you to do, Nicholas, is to look at your average return on investment that you can get if you invest a hundred grand in Louisiana, wherever you are. Let’s say you can get a 10% return buying real estate.

David Greene:
If you have 100,000 and you can go put that into investing at a 10% return, you figure out what your cash flow would be on that money. Now we would look at if you keep the property and refinance it, what would the return be on your equity? This is the same question that we ask when someone comes to me and they say, “Hey, David, I’ve got a house worth 1.1 million in the Bay Area and I owe 500,000 on it.”

David Greene:
This is a person with 600,000 or so in equity in their property and they’re saying, “Well, it cash flows 500 bucks a month. It’s not a bad deal. I can rent it out and I can make 500 bucks a month.” Well, what I do is I run some numbers here, okay? I’m going to do that for you right now. If you have a property making $500 a month times 12 months in a year, that $6,000 a year you’re making in your return. If you divide that by the 600,000 that we have in theoretical equity, you’re getting a 1% return on that equity.

David Greene:
That means if you invested that 600,000 somewhere else and you only got $6,000 a year, you’d be getting a 1% return on investment, which is bad. In this case, even though it would cash flow $500 a month, I’m going to advise that person, you should sell that property. Buy more with the 600,000 that you’ll get a higher return on than what you’re currently getting. Basically your equity is lazy and it’s doing nothing for you. Now, some properties make your investment into that property.

David Greene:
And make no bones about it, your equity is an investment. Don’t just look at the capital you put into it, also look at the capital that’s already in it from the form of equity from what either you made it worth more on the rehab, or it’s grown from appreciation. And ask yourself, how hard is that money working? Now, if someone’s in California, you’re more than welcome to mention this when you email me or contact me and I’ll run you through this. But if you’re in a different area, look up what return on income versus return on equity is.

David Greene:
Let’s sum all of this up. The first question you should be asking yourself, Nicholas, do I want to own the property? What’s the location? Is it a headache? Is it going to cause me a lot of problems? Is it in a flood zone? Is there anything about it that I don’t like? If you do like the property, the next question would be, how much of a return would I get on this property versus if I invest that $100,000 somewhere else?

David Greene:
Assuming that the appreciation is largely equal, because you’re staying in the same market, the decision becomes pretty easy. You invest in the place where you’re going to get a higher return and more cash flow on that same money. Now, the only caveat to this would be, like I said earlier, if it’s super hard to find a deal, so you sell it and you have a hundred grand, but you can’t buy anything else, maybe it makes more sense to keep it. Or if deals are everywhere, but you got no money.

David Greene:
Even if the return would be good, maybe you can make that a hundred grand work more somewhere else. So you sell it even though the return on equity was solid. There’s a lot of things that factor into play. But I love that you asked this question because it helped me break down how my mind processes these options. I’m doing the same thing just at a bit of a bigger scale. I’m selling 30 something properties right now, and I’m going to 1031 those into different properties that are going to be in different markets where they’re going to appreciate more.

David Greene:
And I’m going to have less headache. I looked at my portfolio and I said, man, these 30 properties in this area, it’s constantly emails from the property management company saying, “This person’s not paying. COVID restrictions have affected us here. This just broke. This is going on.” It’s nonstop something all the time. When I asked the question, do I want to keep it? The answer was no, I do not want to keep it. I want to sell it. I looked at how much equity I had in the portfolio and I realized the same thing I just did with you.

David Greene:
I’m making like a 2% return on my equity. The misleading piece is I’m making like a 70% return on my initial investment. When you only look at ROI, it looks like I’m crushing it from all the rent increases that I’ve had. But the portfolio has grown so much in equity from the BRRRR-ing that I did, as well as natural appreciation that my money’s not working very hard. I’m going to sell it, and I’m going to put it into properties where it will have to work harder, get me a better return.

David Greene:
I’ll have a higher upside and less headache. I hope that you can do the same. All right, next question comes from Michael O’Brien in Canada, otherwise known as Canadia. “David, I love your show and the content has helped me get to this point. However, in discussing additional properties with my mortgage broker, he is suggesting I am close to my limit of residential property loans with my debt ratio. He said that in order to get additional properties, I will have to look at commercial mortgages with higher rates.

David Greene:
Is there a way around this? Thank you. I five properties and seven doors.” Okay, Michael, I’m going to break this one down for you pretty simply. First off, when he’s talking about debt ratio or debt to income ratio, what we’re talking about is as mortgage brokers, we look at, okay, you make this much money and you have this much debt that shows up on your credit. It doesn’t matter how much actual debt you have. It matters how much is documented.

David Greene:
We come up with a ratio that says at the end of the day, this is how much Michael has left of the money that he brings home.” We come up with a percentage. We add whatever your mortgage is going to be to that, and we make sure it stays underneath whatever number it needs to be, 40%, 45%. They kind of bounce around for different products. Then we say, “Based off of your debt, you can buy a house that costs this much at this interest rate.”

David Greene:
Now, the problem becomes when you keep buying real estate, if you’re not making money on taxes, or you’re not claiming the money, or you had a bad year on that real estate, the debt from the property stays there, but the income does not continue to increase. Your debt to income ratio starts to become too weak to get approved for additional properties.

David Greene:
Debt to income ratio, I want you guys to all understand this, is a metric that determines your ability to repay the money that the bank is letting you borrow or the lender is letting you borrow. What you can look at are debt service coverage ratio loans, which is something that my brokers does a lot of, where we look at the income the property to repay the debt, not the income from you.

David Greene:
If you’re going to buy a short-term rental and it’s going to generate $6,000 a month of income, we take that income and we weigh that against how much it’s going to cost to own the property, which might be three or $4,000 a month. We qualify you that way. If that’s what he’s talking about with commercial loans, that might be your only option. Typically, commercial loans are like 5/1 adjustable rate mortgages. It kind of sucks because as interest rates go up, your payment goes up.

David Greene:
Our products are 30 year fixed rate. They’re just like what you’re used to seeing, but the rate will be a little bit higher. I think in general, people make too big a deal out of this. Those rates that you get on conventional mortgages are incredibly low. They’re awesome. They’re not normal. No one’s lending money at that rate. Once you get to more properties, you should have more experience and you should be able to find better deals.

David Greene:
You should be able to make it work with an interest rate that’s maybe half a point, one point, one and a half points, whatever it is, higher. Before I went to commercial, which is an adjustable rate mortgage, I would look at the DSCR loans, which are 30 year fixed rate. I would ask your mortgage broker if they have access to those. If not, I would look for a mortgage broker that does. All right, we have time for one more question. This comes from Desmond in Omaha, Nebraska.

Desmond :
Hi, David. My name is Desmond, and I just wanted to start by saying thank you for fielding questions like this. I really love the format of the show and listening to other investors and what they’re struggling with and your insight into their situation. Really appreciate that. Kind of jumping into my question, I’m located in the Midwest. 24 years old and my background is in chemical engineering, which is currently my primary source of income.

Desmond :
I’m just getting started in real estate investing, so I don’t currently have any investment properties in my portfolio, but I’m interested primarily in buy and hold single family rentals where I ideally obtain properties using a BRRRR strategy. To give a little bit more context on my situation, I graduated college debt free in 2020. That was largely due to academic and athletic scholarships I had and working throughout college.

Desmond :
All of that allowed me to live well below my means after graduation and save a large majority of my paycheck when I started working. In 2021, I bought a single family home that I live in, proposed to my now fiance, and started saving for wedding and honeymoon related expenses.

Desmond :
I’ve known for a long time that I wanted to get involved in real estate investing and have been listening to this podcast and reading books about real estate, but I had to use the money I was saving on other important life things like buying my primary residence, getting an engagement ring, paying for part of the upcoming wedding and honeymoon and those related expenses. That kind of leads me to my question. In 12 months, I think I’ll have saved $40,000.

Desmond :
I estimate I’ll need for a down payment on my first single family rental and to cover the cost of the rehab. And then anything over that $40,000, I’ll tap the equity on my home and use a HELOC to finance. Now that I’m finally so close to being able to start my journey into real estate investing, I’m starting to have major FOMO where I see prices going up and other investors swooping in on deals in my area.

Desmond :
It makes me wonder if I should try to get creative in financing so I can start investing sooner or stick to the plan I have in place and save up now so I can start in 12 months. What’s your advice on this? Do you think I should try to get in sooner, or are there some other practical things I can do in the 12 months I’ll be saving? I’ve already started networking with other investors in my area, and I’m beginning to build relationships with real estate agents and lenders. Thanks in advance for your insight on my situation.

David Greene:
All right. Thank you, Desmond. This is a great question. I think a lot of people are in this same boat. I think you’re wise to notice that prices are going up, as well as interest rates. We don’t know what’s going to happen, but all indications are that the Fed is going to continue rising rates and that prices are probably going to continue to go up. Could they go down because rates are going up? Sure. No one knows. My best bet is that they will just go up slower than what they were going up because of rates going higher.

David Greene:
People like me are still going to buy them. Your FOMO might actually be somewhat healthy. You need to get involved. Rather than trying to save another 40K, what if you just found a way buy a house with less than 40K? My advice to you would be you house hack. You need to go buy a primary residence and put a smaller percentage down on that property, so you don’t have to save up all the money. You don’t have to go buy an investment property, put 20, 25% down.

David Greene:
If you still don’t have enough to do that, ask about different loans where there’s down payment assistance available. And if there isn’t any of that available, I would ask a family member if you could borrow some money from them and then pay it back. Now, you should have no problem paying that money back because your own housing expenses are lower since your house hacking instead of paying the rent.

David Greene:
If you’re in a position where you say, “No, I already own a house. I don’t want another one,” well, can you sell that house and use the money to buy the property you want? Can you rent out the house that you are living in now and then go house hack to get your housing expenses lower? What sacrifice are you willing to make to make this happen? You’re going to sacrifice something. My advice is you should always sacrifice comfort. Don’t sacrifice your future. Don’t sacrifice wealth building.

David Greene:
Sacrifice the fact that you don’t need at 24 years old to have a nice big house that you could be living in right now and try to get your fiance on board with how you guys are going to spend a couple years living beneath your means and being less comfortable so you can have a way better future later. In other words, there’s a way to move your money around. You have some equity in the house you have right now. You have a housing expense that you don’t need to have that you can reduce by house hacking.

David Greene:
You can lower your down payment by buying a primary residence instead of an investment property. Get your foot in the door. Then as those properties go up in value, you can access that to buy the next rental property and you can get some momentum going. Find a way to get this initial momentum that you need started by making some sacrifices. If you got through school with no student debt on athletic scholarships and working, I don’t think you’re going to have a problem with this.

David Greene:
Also, awesome that you’re a chemical engineer. My lending partner, Christian Bachelder, is also a chemical engineer, and you guys have a very unique way of looking at the world. All right, thanks again for taking the time to send me your questions. We have had a great response from our audience, and I encourage you all to ask more questions. You can do this by going to biggerpockets.com/david and submitting your video or your written question for me to answer.

David Greene:
Look, we can’t make this show if you don’t give me content to go by. I can’t help you or the rest of the community if I don’t know what questions you guys have. Real estate feels scary. It feels overwhelming. It feels challenging, but it doesn’t have to. It’s actually one of the most simple ways to build wealth there is. Let me help you do that. Let us at BiggerPockets help you do that as well. Please give us subscribe on the channel. Share this with other people that you know. Let me know in the comments what you thought.

David Greene:
And if you want to ask me a question directly, you can always find me on social media. I’m @davidgreene24 pretty much everywhere. You can also send me a message through the BiggerPockets platform. Thanks, everybody. I will see you on the next episode. Stay focused and keep grinding.

CNBC’s Diana Olick joins ‘Squawk Box’ to break down the latest batch of weekly mortgage application data.

Ashley Kehr:
This is Real Estate Rookie episode 178. My name is Ashley Kehr, and I’m here with my co-host Tony Robinson.

Tony Robinson:
And welcome to the Real Estate Rookie Podcast. And if this is your first time joining us, we are the podcast that’s focused on those investors at the beginning part of their journey. So if you haven’t done a deal, you’re still starting, this is a podcast for you because you’re bringing you the inspiration and the information you need to get started. So Ashley Kehr what’s going on, what’s new?

Ashley Kehr:
Well, once again, I feel like I’ve been saying this for like 20 episodes. I’m recording from my couch, [inaudible 00:00:39]. But I also have my little youngest here. So if you see a hand or a leg or something fly into the side of the camera if you’re watching on YouTube. He is my producer today. So we had him on another episode where I think he made it maybe halfway through before he asked if he could leave. So let’s see how long he lasts today.

Tony Robinson:
Are we going to see the famous Ashley death stare?

Ashley Kehr:
Oh my gosh, I forgot about this. Yeah, this was probably almost a year ago. I was on vacation with my kids and we were in a hotel room, just one room and I had to record. And the three kids, I put the TV on for them on mute and they were too, sit on the bed. And all of a sudden one starts jumping from bed to bed and I had to give the death stare, and I had to message to Tony and say, just so you know I’m not glaring at you. My kids are behind the camera. And that was the same day that as soon as we ended recording, one of them said, “Mom, we lost a hermit crab.” Because we had bought hermit crabs on vacation and one had got lost while we were out there. Luckily we found it and put it back in his cage.

Tony Robinson:
That’s a fond memory.

Ashley Kehr:
Always lots of things happening behind the scenes.

Tony Robinson:
Fond memory. Well, yeah, no, that’s cool. I’m glad you’re covering well, Ash. What’s new with me. I mentioned this last time we recorded, but we’re actually in the process of putting together a fund for short-term rentals. Actually two funds I’m working on. One’s going to be focused on new development and we’re pretty close to that one actually launching. And then the second one’s going to be more so focused on acquiring existing single family residences and converting those into short term rentals.
So just as we think about our growth plans, I realize that’s probably the best way for us to kind of continue to scale. And there’s some other benefits that come along with running a fund. So yeah, you guys that are listening, if you want to learn more, it’s still super early, but just follow me on Instagram, @TonyJRobinson and I’ll be sure to post some information about that there when we get to that point.

Ashley Kehr:
Yeah. That’s a great opportunity for anybody to get into. So congratulations Tony on starting that.

Tony Robinson:
Yeah. Thanks Ash. I appreciate it. Well, we got some good questions today. The Rookie reply. That’s what we do when we get these Saturday episodes. So if you guys want your questions featured, you guys can get active in the BiggerPockets forums, the Real Estate Rookie Facebook group, or you can slide into the DMs for me and Ashley. So today’s question actually comes from my DMs. Let me see if I can pull this person’s name, hold on. Because I want to be able to give them a proper shout out. Hold on you [crosstalk 00:03:24]

Ashley Kehr:
In the meantime. If you guys love the Real Estate Rookie podcast, we would appreciate it if you would go to Apple Podcast and leave us a five star review and tell us why the podcast has helped you, motivated or influenced you to become a real estate investor, we love reading through those. And don’t forget to subscribe to our YouTube channel. And that’s the end of our commercial break. Back to Tony.

Tony Robinson:
All right. So I found her name. So today’s question comes from Jessica and hopefully I get this last name, right [Veristegway 00:03:58]. So Jessica Veristegway. Hopefully I’m saying that right, Jessica. But Jessica’s question is, I’ve been watching the content, you and Sarah, my wife, I have been posting on YouTube and you guys are in inspiration. I’m looking into following in your footsteps, but I had a question about debt. You seem to be doing really well with all those properties, but how much debt have you accumulated? I’ve watched the videos with your revenue and it’s impressive, but carrying a lot of debt scares me. Any advice? So Jessica, I think my first question would be why does debt scare you?
And the way that I look at it is that debt is one of the big advantages of investing in real estate in comparison to other potential asset classes. Most people can’t go out and get a loan to say, hey, I want to buy 10,000 shares of Tesla. Most banks, aren’t going to lend you money to go out and buy Tesla stock. Or if you say, hey, I’ve got this really cool idea for this hot and new startup, you can’t necessarily walk into the local credit union and then they’re going to give you a loan of half a million dollars for your new hot startup idea. Real estate is one of the few asset classes where if the numbers make sense, you are able to leverage debt in a smart way to buy a property that you otherwise wouldn’t have been able to.
So I’ve always looked at debt as a tool. Especially good debt right now. I’m not talking about racking up credit card debt, but when we talk about the debt that I’m using to purchase these properties, it’s debt that gives me a good return. So that’s my first thought. I don’t know, Ash, what are your thoughts on that piece?

Ashley Kehr:
Yeah, I agree that debt is definitely a tool and I have struggled with the same thing. So I paid off all of my personal debt using the Dave Ramsey method. And so I think that for me, it’s that other people is paying that debt. So my rental properties, other people are paying those mortgage payments for me. That’s not something that’s coming out of my income and that I’m not responsible for. So I like to keep my payments very minimal. I mean, I can’t even tell you the last time I actually had a car payment. I’ve paid off our farm equipment. All of those payments that were put on myself personally, I got rid of those. So I like to not have that personal debt. But as far as rental properties, like Tony said, it’s such a huge advantage to be able to go out and get a mortgage on these properties.
And then look at what’s the worst case scenario if you actually can’t pay the mortgage. You get foreclosed on. The bank takes the property back and you’re back to where you started. You’re back to where you started. And plus in New York, at least it takes forever for a foreclosure to go through. So you have some time to kind of figure out a plan B. So think do more research on exactly what debt is and how it works. What are the exit strategies? If you do get into trouble with having lots of debt, I definitely don’t think over leverage yourself. So maybe you set a minimum requirement, like, okay, every property I’m never going to leverage myself 75% or 80% more of what the property’s value is. So set those limitations for yourself so that if you do have to do a quick sale to get out of some debt on the property, that you have some wiggle room, oh there’s the first foot for anyone who’s watching on YouTube. You have some wiggle room to sell that property, even if you break even on it.

Tony Robinson:
Yeah. And if you think about like the big players in real estate, they all… sorry, I’m laughing right now because I’m seeing that foot creeping into the video.

Ashley Kehr:
He’s smiling, smirking over here, he knows exactly what he’s doing.

Tony Robinson:
But if you think about the big players in real estate, they’re all using debt as well. Like Sam Zell, who’s a multi-billion dollar guy. I can’t remember his name, but the guy that owns the Irvine company, right? Like all these people that have amassed these huge fortunes in real estate, they’re all doing it with debt as well. So, Jessica, I understand that there’s a certain fear associated with taking on debt. But I think if you’re underwriting the properties, you’re analyzing them conservatively and you’re able to get a good return on that investment, then there’s no reason not to move forward.

Ashley Kehr:
Yeah. I agree. Okay. I think we answered that one. Anything else to add?

Tony Robinson:
Nah, I don’t think so. I think that’s everything Jessica. Sorry, if I butcher your last name, just shoot me a DM afterwards and give me the phonetic spelling. So maybe that’s like just rule of thumb, if you guys are going to DM us and you’ve got maybe a harder to pronounce last name, give us the phonetic spelling that when we get in front of the rookie audience, we’re not butchering what your name is.

Ashley Kehr:
Honestly, it doesn’t matter to me because if I don’t know how to say it, I just make Tony say it. Well you guys thank you so much for joining us for this week’s Rookie Reply. Remington. Do you want to say goodbye?

Remington:
Bye.

Ashley Kehr:
Thank you guys so much for watching on YouTube. Make sure you subscribe to our YouTube channel and comment below with what you think leveraging debt has to do with you personally. Are you against it? Are you for it? Do you feel comfortable with it? And what are your tips for overcoming that fear of taking on debt? I’m Ashley @wealthfromrentals. He’s Tony @TonyJRobinson. And we’ll be back on Wednesday with a guest.

Did you play musical chairs as a kid? 

I played in Sunday School, and I don’t think I ever won. It was painful, but I’m okay with it now. 

For the uninformed, the game started with a circle of outward-facing chairs. Kids march around outside the ring to queue up the music while the teacher grins slyly, her hidden hand poised on the record player’s arm (c. 1970) to stop the music at any time. When the music stops, all the kids sit down in the closest chair. 

But there was one problem. There’s always one less chair than kid, which meant someone had to get ejected from the game. With one less player, the next round also started with one less chair. It would repeat until there was a final winner—typically the aggressive, pushy bully I never liked.

The lesson of musical chairs is that there are multiple paths to losing. We typically talk about the multiple paths to victory, but it’s about losing in this case.

You may see where I’m going with this and ask, “Why is Paul being so negative? He seemed like a nice guy on the videos.” 

Why so serious?

This post is another warning about the craziness in today’s real estate market. We are seeing an unprecedented runup in asset prices and the associated risk that comes with it. There are many ways to lose in this market and fewer ways to win than I have seen since pre-2008. 

I will let you know why I think the risk is so high. Then I’ll tell you a few stories supporting my point. Then I’ll wrap up with a thought about how to win in this market or any market. And no, it’s not by sitting on the sidelines. 

Why is the real estate world so risky right now?

It’s quite simple. When paying an extraordinarily high price for an asset and adding the associated transaction fees and friction costs, you count on a future where revenues must be increased far above current levels to generate solid investor returns. But paying top dollar means buying an asset with the tiniest margin of safety, therefore, the highest chance of failure. 

This sounds to me like the best time to sell an asset. Not to buy one. (And we’re about to see that’s what many of the pros are doing.) The best time to buy is when blood is running in the streets. And that’s certainly not now. 

I recommend that everyone read Howard Marks’s classic Mastering the Market Cycle: Getting the Odds on Your Side. Buffett reads every word Marks writes, so perhaps we can learn something as well.

Marks, manager of the extraordinarily successful Oaktree Capital, was being interviewed by a reporter when blood was running in the streets in the autumn of 2008. He explained why he was buying half a billion in troubled assets per week. The confused reporter said, “Wait, you mean selling, right?” Marks said, “No! I’m buying. If not now, when?” 

We are currently at the extreme opposite of this moment where Marks seeded billions in profits for himself and his investors. I think Howard would say, “No! I’m selling real estate. If not now, when?” 

I have no idea if there’s one chair or three chairs left in our musical chairs game. But I think it’s prudent to act as if there could be one and the music could stop at any time. 

This doesn’t mean I’m not buying. My firm is investing in real estate right now. But the way we are doing it is quite different than the mad rush I’m witnessing. 

Three examples of a market going mad

Example #1: Storing up risk

An unnamed friend (we’ll call him Aaron) recently told me about a deal he lost. This guy is a self-storage pro. He’s been on the BiggerPockets Podcast twice in the past four years, and he has an excellent track record of creating fantastic cash flow and wealth for his investors. 

Aaron was bidding on a large self-storage portfolio. He stretched to get to a bid of about $70 million. This was as high as his prudent underwriting allowed. He lost the deal to another syndicator. A syndicator who was much newer to the business and hadn’t experienced years of ups and downs like Aaron has seen. A syndicator who is a fantastic promoter with a great investor following. 

But Aaron didn’t lose this bid by a million or two. Or even five. The winning bidder reportedly paid well over $20 million above Aaron’s high bid.  

Think about it. This buyer is paying over 30% more than a pro thinks could work. In addition, he’s probably saddling his investors with debt at approximately the full level of the property value (per my friend’s $70m valuation). On top of that, he’s paying all of the associated fees, commissions, and more. 

“More” in acquisition fees and other syndicator profit centers. These fees are likely at least $5 million, from what I’ve been told. These fees and costs are piled onto an already precarious situation that must go very, very well to rescue unsuspecting investors from ruin. 

I hope inflation allows the operator to raise rates exponentially for the investors’ sake. It may, and my fears may be proven wrong. Maybe that’s what the syndicator is counting on. But that sounds like speculation to me. Not a game I want to play anymore. 

Example #2: Can you really outmaneuver the godfather of multifamily?

Another one of my friends is perhaps the most experienced multifamily syndicator I know. A real pro. In his fourth decade as a real estate investor, he has done hundreds of millions of multifamily deals and over a billion dollars in other transactions. We’ll call him Johnny. 

Johnny told me about his worst multifamily deal since the Great Recession. It was rough. His experienced team could not raise rents by a single dollar in nearly three years of focused management. The prospects for investor profits were grim. 

But never fear. Johnny was approached by another syndicator who corralled his lender and likely clueless investors to buy this asset for $10 million more than Johnny had paid. 

Again, when adding acquisition fees, property management fees, lender fees, and closing costs, this buyer saddled his investors with a massive burden. 

I must ask: If Johnny’s experienced team could not make a profit on this deal, how is this new, likely less-experienced team going to raise rents and income? Especially when starting in a hole well over $10 million deep? 

By the way, Johnny is in the Howard Marks reversal stage, selling almost all of his properties. He believes that with interest rates rising and cap rates likely following suit, it is the best time in history to take chips off the table. If this is how the pro of pros is thinking, shouldn’t we take notice? 

I asked Johnny for permission to use his story. He informed me that this situation happened again recently. He said he sold another property that barely covered the mortgage at around 2% interest. The buyer got a bridge loan at around 5% interest and paid him about 50% more than he paid. How does that work? 

Johnny said: “To be clear, I didn’t sell because I don’t believe in the market. I had a few struggling properties, and I got offers that created a great opportunity for me to sell. 

And for properties that are performing great, when prices run up this fast, selling is smart because it maximizes the internal rate of return (IRR). Holding would reduce the IRR and return on equity, especially in a rising interest rate environment. I will say that with inflated pricing, it is really hard to find properties to replace these assets right now.” 

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Example #3: Vegas-style real estate investing

I recently heard about this third example from a residential subdivision developer friend at church. He recently developed a 36-lot subdivision near the beach in South Carolina. He was preparing to build 2,200 square foot homes with an all-in cost around the $360k range. A 1,600 square foot 2021 house across the road sold for about $450k last summer, so he planned a respectable 20% potential margin of about $90k per home or more. 

But last fall, he learned that the same $450k home had been resold a few months later for about $660k. He learned recently that it was pending for another resale in the range of $825k. 

For you old-timers investing in real estate over a decade ago: does this sound familiar? 

“History never repeats itself; at best it sometimes rhymes.” – Mark Twain

Yes, I agree that inflation may float everyone’s risky craft to the golden shores. But do you really want to count on inflation to ensure your deal goes right? To assure your investors make a profit or even recover their principal? 

I don’t. Fortunately, there’s a more reliable way to make a profit. 

Value investing – Real estate style

About a century ago, Columbia professor and fund manager Benjamin Graham developed a methodology that was later called value investing. His best student, Warren Buffett, took the practice to a new level, creating hundreds of billions in wealth for him and his investors. 

The bottom line here is that Graham and Buffett and those who follow in their steps spend their efforts searching for hidden intrinsic value in the assets they invest in. They seek out and acquire assets that have latent value invisible to the casual seeker. 

And they hold these assets to create a growing margin of safety. This margin of safety is a byproduct of increasing profits in good times, and more importantly, it allows investors to weather bad times safely. 

It allows investors to obey Buffett’s first two rules of investing: 

“The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.” – Warren Buffett

My company has built our investing thesis around these principles. We partner with commercial real estate operators who seek out off-market deals with hidden intrinsic value that can be harvested over years to come. We enjoy an ever-widening margin of safety between net operating income and debt service. 

These operators further lower the risk by refinancing out lazy equity to give back to investors or reinvest in other deals along the way. We purposefully diversify across different asset classes, operators, geographies, strategies, and properties.  

Yes, we miss some screaming deals, like the third example (East Coast houses) above. I have watched many smart and lucky amateurs make more profit than me by flipping deals in months or a few years. 

But I don’t have to rely on hope as a business strategy. I don’t have to:

I also don’t have to play musical chairs with my funds and the capital entrusted to me by investors. 

I sleep better at night, and I don’t have to be mad at the pushy guy who always got the last chair. (I wonder whatever happened to that punk, anyway?)

Mindy:
Welcome to the BiggerPockets Money Podcast, show number 296 Finance Friday Edition, where we talked to Chris about the sometimes harsh realities of running your own business.

Chris:
Well, when I was putting together my little summary for you guys today, this is the first time I’ve sat down and looked at my business financials in a while, because I’ve been working 60 or 70 hours a week without doing the financials, and I was coming to the same conclusion that obviously what I’m doing is not working the way I’m running it right now.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and joining me today is my smart cookie cohost, Scott Trench.

Scott:
What a fully baked introduction as always Mindy.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

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

Mindy:
Scott, today, we are going to speak with Chris, a man who lives up in Canada, but all the information still applies to anybody, no matter what area of the world you’re in. He lives up in Canada. He would like to be financially independent within the next 10 years, but he’s got some interesting curve balls being thrown at him right now. Most of them stem from the fact that he owns his own business.

Scott:
Yeah, we’ll get into this, but Chris is upside down. His business is not bringing in enough income to support his lifestyle, and he’s got several employees and some real problems there, and I think this was a particularly interesting Finance Friday, a situation we have not come across before, and I think we had some tough, unfortunate advice that I think we hope we’re wrong on, but think probably might need maybe to be implemented by Chris.

Mindy:
Strongly considered. We’ll get to that in just a moment. I do want to stress that this is advice specific to Chris, but not really specific to Chris because he’s running his own business, and I think there’s a lot of business owners, who will listen to this show today and say, “Ooh, I feel seen.” We gave Chris several options. We didn’t just give him one option. This is what you have to do, and that’s the only path to success. There are a lot of things to consider, and I hope that if you’re listening and this is making you feel seen, you think of the different options that we’ve given Chris and see if those can apply to your situation as well.

Scott:
Absolutely. Well, should we bring them in?

Mindy:
No. We have to tell about the contents of this podcast. We have to talk about our attorney saying the contents of this podcast are informational nature and neither Scott or I nor BiggerPockets is engaged in the provision of legal tax or any other advice you should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and vice financial implications of any financial decision you contemplate.
Chris and his wife are looking to hit FI within the next 10 years, but they have incredibly variable income, anywhere from $1,000 a month to $7,000 a month. His most burning question is, how do I plan for expenses when money is so unpredictable. Chris, welcome to the BiggerPockets Money Podcast.

Chris:
Thank you very much Mindy. I’m happy to be here.

Mindy:
I am excited to talk to you. You have a lot of interesting aspects to your financial situation, so let’s jump right into it. What is your income and where’s it going? I already answered that question. Your income is whatever and where does it go?

Chris:
Precisely, whatever. That’s a very good way of putting it, actually. I’m running my own business, so it is very variable and it has been a ride for the last six months. Plus my wife is currently on medical leave, so all told I’ve got two rental properties bringing in about $850 a month. My wife’s employment insurance is bringing in about $2,000 a month. Canada has this baby bonus basically, that’s bringing in about $300 a month, and then my business, generally most months it’s mildly profitable, but it averages out to maybe $1,000 to $3,000 dollars a month. All told, I’ve got income at around 5,700 bucks a month, Canadian. You can translate that to American, if you really want to.

Mindy:
We’ll just go with a dollar for dollar and call it, because it’s the same. The math still works. Canadian math is the same as American math.

Scott:
What does your business look like six months to a year from now?

Chris:
Ideally, I really need to stabilize. I just hired on a new employee about two weeks ago, my first employee came on just longer than six months ago, so right now I’m looking to stabilize and bring it up to a steady. I’m bringing in $5,000 to $7,000 a month after expenses, and then I can look to grow again, so that would be the six month ish plan.

Scott:
What would you expect annual revenue for your business to be?

Chris:
Revenue? I’m really aiming for somewhere in the $190,000 to $210,000 range sometime in the next year. That pretty much sums it up. It is obviously very variable.

Scott:
Your annual revenue is $200,000, what is an employee cost?

Chris:
Sorry. I’m hoping my annual revenue is going to be $200,000 in the next six months. Right now, I’m bringing in somewhere in the range of $120,000 annual. I’ve got a couple of bigger projects lined up, so hopefully they bring me up to 200 grand and my employees are costing me roughly 50K a year each, roughly.

Scott:
In base salary or base bonus?

Chris:
That includes everything, taxes, everything.

Scott:
Okay, great. We’ll come back to the business in a little bit here for sure. We’re bringing in $5,700 a month, where on average very variable, where is that money going?

Chris:
About half of it goes towards my housing. That includes mortgage, insurance, everything, $3,200 a month, utilities as well. My three year old costs us about $1,500 a month, of that 1,250 is going towards childcare, household, and food. We’re just under a thousand dollars a month with food taking $600 of that. My wife and I spend about $375 each a month, so $750 for us, and that’s haircuts, through alcohol, through a new microphone for my computer, for a BiggerPockets interview.
We’ve got travel, was $350 a month last year, which was all combined into one big trip. I am Canadian, so we have universal health care, but I do pay for some private health insurance for dental, vision, any PharmaCare stuff. Giving includes gifts and charities at about $300 a month, all told. My cars, $750 a month. The vast majority of that is payment towards a $30,000 car loan and then restaurant 150 bucks a month. If you add all that up, it runs into about $8,250 a month, so that’s -2,600, is the difference if you might have noticed.

Scott:
Yeah. We can definitely see that. How much cash do you… Oh, go ahead, Mindy.

Mindy:
I was going to say right here, I can see a couple of things to discuss, but Scott’s got a better point. Let’s finish up the numbers first and then let’s go back and talk about these

Scott:
Where are your assets and how much cash do you have?

Chris:
Cash, I used to have a lot more cash. We’ve been living off of my savings for a while, so I’m down to somewhere in the $10,000 in cash, and then assets, if you add my cars together, they’re worth about $35,000, but my wife’s car being the vast majority of that, and then my business has about five grand in it, something like that, a bunch of outstanding invoices. Are we getting into equity now? Do you want to get into equity now as well?

Scott:
Yeah. Let’s do all your net worth. We have $15,000 in cash-

Chris:
Roughly, and then I’ve got two rental properties with total equity of about $210,000 and my primary residence with almost $370,000 in it in equity, so just shy of 600K net worth.

Scott:
Okay. You obviously can see that you’re cash flow negative right now and have $15,000 in cash, I’m sure that is somewhat stressful for you?

Chris:
Yes. It’s starting to come to a head. For a while, it was okay, now, it’s starting to feel very, very stressful.

Scott:
Do you have a plan of action or a set course there to resolve the situation or what is your thought process there?

Chris:
Temporarily, obviously there’s things we can cut out of that budget that we might need to for a little bit, and there’s a few different ways we’re going to approach that. Restaurant spending and personal spending both have to come down temporarily, hopefully temporarily, I suppose, and the childcare spending, we just filed our taxes two or three weeks ago, and theoretically we will now qualify for a subsidy for childcare spending, because our income was kept very low last year in 2021.
I’m hoping to bring that down by almost a thousand dollars a month, and then obviously some of these variable expenses or expenses we can control more has to come down as well, and of course at the same time, I’m focusing on actually invoicing my customers as opposing to leaving the invoices on the side as something I’ll get to eventually.

Mindy:
Okay. Okay. Let’s talk about paying yourself first, and your company needs to get paid first. I don’t know how a job works, do you do the work and then you bill for the entire thing at the end, or do you bill hourly, every week or can you set it up in a different way so there’s a different stream of income?

Chris:
There’s two different streams of income for the business, the energy audit that I do. Typically, residential and those are organized through a service organization. I build them directly for that and that I typically do monthly, relatively straightforward, and it’s about half of the revenue, I’m getting right now. The other half is engineering projects where typically there are only $1,000 to $3,000 in size, and I have been generally billing after work complete. The issue that I’ve had with that, is work tends to stretch on, and even if I’m charging extra for the extra work, I’m not sending out the invoices. I’m actually owed around $35,000 right now, in my business that hasn’t come in.

Mindy:
Okay. With the energy audit, this sounds like it is set up through like a government agency?

Chris:
They’re a nonprofit, but it is a government run program, which is why it’s quite so busy right now. We have a program in Canada where houses can get up to $5,000 back to do green things basically, and they require the energy audit to begin with.

Mindy:
Are you doing this personally or is this being done by an employee?

Chris:
To follow the rules, which of course I do, I have to go in and actually do the pictures and do the actual energy audit. My employee does the background math and work, and then I sign off on it before it goes into the organization.

Mindy:
Okay. Let’s see, I’m trying to think if you’re doing these jobs weekly, you should be billing them weekly, and is there any difference in a job or is it just, it pays a hundred dollars, so here’s a bill for a hundred dollars or is it, how does that bill work?

Chris:
There’s minor differences, but for the most part, it’s $300 per house, roughly. My contract with that company says I’m supposed to build a monthly.

Mindy:
Oh, okay.

Scott:
Stepping away from invoicing the customer and the timing of cash collections, which I don’t think is your fundamental problem. It could be a problem, but it may accelerate the payments to some degree, but let’s just do some simple math. You say your business is going to do $120,000 annually right now, and it could do up to $210,000 with its current situation, right?

Chris:
Roughly, yeah.

Scott:
You just hired your second employee and both employees cost $50,000?

Chris:
Yes. Although, I did forget to mention that one of those employees is subsidized for the next six month at 80%. That 50K becomes 10K for six months, if that makes sense.

Scott:
Say that one more time.

Chris:
One of my employees comes with a young engineer’s grant basically to the business, so he costs me 50,000 and then somebody pays me back 40,000 of that salary cost. What you said was correct, except I forgot to mentioned that I am getting a subsidy for one of those employees.

Scott:
Okay. So we have $60,000 in expenses on $120,000 in current run rate revenue?

Chris:
Yes.

Scott:
Okay. That’s your fundamental problem right there. $60,000 in revenue with your business is not enough to sustain your lifestyle. You do not yet have a viable business. Let’s do the math on your end state, six months to a year from now. You think best case scenario, you’re going to get to $210,000 per year in revenue, right?

Chris:
Best case might be strong. I think that’s my expected case, looking at the projects I’m quoting on right now.

Scott:
Okay. You’re anticipating case is, let’s call $200,000 in revenue in a year from now, and you’re going to have two employees, each being paid $50,000. The grant will be over with at that point?

Chris:
Yeah, it will be.

Scott:
Okay. You’re going to net $100,000 in revenue or in gross margin, we’ll call it, at this point. You will have other expenses you’ll have to pay for your business besides the employees. What are some of those expenses that you’ll have?

Chris:
It’s actually a relatively low overhead business, but yes, there are expenses. It’s roughly $3,000 a year in insurance, another, let’s just call it 3000 again, in terms of engineering licenses and keeping up to date with all of that stuff, and then the only other one I really pay for regularly is paying myself a mileage allowance for my car.

Scott:
What about your engineers, will they have mileage allowance?

Chris:
No, they work from home and aren’t going anywhere.

Scott:
Do they have equipment that you pay for?

Chris:
Nope, I’m limited. Our contract has them paying. I pay for paper if they print, that’s about it, and then there’s a couple of software licenses as well, so it’s another thousand dollars or so on top of that. All told, expenses are running in and about $10,000 to $12,000 a year, except from employees. I had some setup costs obviously, but those are all done at this point.

Scott:
Okay. We have 200,000 in income, earn revenue, we have a hundred thousand dollars in employee expense, and we have $12,000 in other incidentals, as a conservative estimate for your business, right?

Chris:
Yeah.

Scott:
That brings you to $88,000 per year in income that you will then pay taxes on, the net of which is what you can use to fund your lifestyle, your lifestyle costs 8,250?

Chris:
Sure.

Scott:
8,250 times 12 is 99,000.

Chris:
Yeah.

Scott:
That’s the basic problem that I’m struggling with from your business perspective here. Something has to change, in order for that to work out. Either the expenses have to get… And by the way, that’s a year from now, from that. Something has to change in order to do this. Where do you think the biggest leverage is?

Chris:
I just want to throw in there that, I do have the two rental properties, which are cash flowing a little bit, pretty safely, as well as my wife is going to go back to work as soon as she is able to, and hopefully until then the employment insurance keeps coming in. There is a little bit of a buffer there. My wife was making about 45,000 to 50,000 a year before we started taking this medical leave.

Scott:
Got it. Okay. So we have another 45,000 to 50,000 in income there. What are your goals?

Chris:
Six months ago, I would’ve said stabilize my income and buy a couple more rental properties. Right now, what I really want to do is stabilize my business income at a much higher level. I want to grow the business and actually make it… I don’t want to make $88,000 a year, that wasn’t why I got into it. I could make $88,000 a year as an engineer at a job tomorrow if I really wanted to, so that is my focus right now, is growing that business income up and making sure my bottom line makes sense for all the work I’m putting in, which is a lot.

Scott:
Great. That’s what I figured your goal would be. I wanted to make sure though that was the right case here. Let’s go through the workload again. What do you need the two employees to do?

Chris:
I need them to do a lot of the technical stuff, where I am just double checking and providing my stamp. I don’t know how it works elsewhere, but Ontario, the stamp is the engineer seal, without the stamp, things can’t get built or past building code. Generally, how it works in engineering firms is the junior engineers will do a lot of the background, basic math, the basic drawings, that kind of thing, put it all together, and then the senior engineer will come in and review and stamp and provide to the customer and as well-

Scott:
How long does the work that the engineers are doing take you to do?

Chris:
That’s very variable. I’m charging roughly $160 an hour for my time and I’m charging $60 an hour for the junior engineer’s time, if that helps with that. That’s probably fair in terms of how long it takes them to do something that I would do as well, right now.

Scott:
Here are some thoughts that are occurring to me. I do not believe you can afford a full-time employee right now. I think you can definitely not afford two and full-time employees. I think that based on the high level things that I’m observing, I’m going to go drilling into this. You can tell me if I’m wrong with this, but my instincts say that a reduction in force or a layoff is in your business’s future for this, because it’s going to come down to you depleting your cash reserves, or you continuing to pay your employees, with what is currently going on in this business, and that is not good news, and I’m not going to pretend that is good news or anything. That’s what I see with my CEO hat on, in looking at your business as an outsider from this.
When you say, my time is built out at 160, and my team is time is built out at $60 an hour, that’s viable, if you’re paying your team $25 an hour, roughly with $50,000 a year. But you are not actually getting that arbitrage because your income is so variable at this point. You’re not filling up. I can tell immediately that you’re not filling up these engineers time with billable hours and that 30 plus hours a week range, that you can actually charge off to customers downstream.
If you could fill that pipeline with 30 to 40 plus hours per week of time for your engineers to actually doing that work, you might have a viable arbitrage business model there, but the simple unit economics don’t appear to be working out. How much time are these engineers billing in your business?

Chris:
Right now, I have one, as I said, just started. He is basically just doing training right now, and I did accept that there was going to be obviously almost zero build hours out of him for a while.

Scott:
But your guy who is billing hours, how many hours is the guy who is billing hours getting?

Chris:
She was billing about 25 hours a week, roughly. A lot of that, I was putting towards the background math for the energy audit, as I also trained her up. She is a new engineer, so I was also training her up to do the drawings and the heat load calculations and the math, basically.

Scott:
She’s billing 25 hours a week, at $60 an hour to your clients, you should be bringing in 6,000 a month in revenue from employee alone. Is that happening?

Chris:
That would be the goal. Like I said, right now, she was doing a lot of the background math for the audits, so I was paying out about 80 bucks for her to do an audit and I was getting paid 300 bucks to get that audit finished, and obviously I spent an hour and a half on it as well.

Scott:
Okay. You got a services business here, so that means that the economics here are billable hours times rate times arbitrage.

Chris:
Sure.

Scott:
You’ve got pretty easy math there and maybe this is a good first step, build a KPI dashboard that you’re looking at on a weekly basis. How many hours am I billing out per week at my rate, which is, you said 320?

Chris:
160.

Scott:
Okay. My rates 160, what is my target goal for billable hours and how do I get that number up? That is your number one job as the CEO of your small business. That’s your highest revenue driver. If you’re not billing 25, 30, 40 hours a week, something’s wrong with that. Why do you have employees if they’re not putting you on the clock, billing that time all the time, right? If you’re doing, let’s just do that real quick. If you can do 25 hours a week, you’re going to do $16,000 a month, and now you’re now you’re bumping against $200,000 in annual income, alone, just from you. Is it possible to get you to 25 hours a week in billable time?

Chris:
Just for me?

Scott:
Yes.

Chris:
The work is there, yes. I spend a lot of time in the background right now as well, doing the sales, the accounting, all the other stuff, but 25 hours is roughly what I’m doing at the moment. It’s just not all of it is… Sorry. It would be 25 hours. This is complicated, because I fix price jobs generally, which is something else I have to stop doing. I need to start doing time and materials because things go over through no fault of my own, but I’m working more than 25 hours a week for customers, I’m just not billing for all of those hours, if that makes sense.

Scott:
I got no trouble believing you’re working more than 25 hours a week. Don’t worry about that. No one’s worried about that. The question is, are you billing that to customers there? I would like come off the call today, I would go back for the last three months, and I’d say, “How much billable time am I putting in?” And then putting a daily and weekly dashboard and saying, “How many hours am I billing at my rate and what is my blended rate?” If you’re doing contract projects and they take you six hours and you’re billing them at like 300 bucks, you’re doing 50 dollar an hour work, with that.
You need to be honest with that and say, “My number one business goal is to get my time built out as close to 40 hours a week as possible, not to get my employees time built out at $60 an hour.” That’s way worse arbitrage. Your revenue’s coming from your time with this, and then that would inform your employee strategy. You may not even want an engineer, if you come to that conclusion. You may say, “No, an executive assistant is what I really need, because they will be booking me and keeping track of my billable hours, hounding the customers for payment, invoicing them, doing all of the other stuff that is taking my time away from billable hours.” Unit of value in your business right now is you and your time.

Chris:
Unfortunately. Yes.

Scott:
That’s fine. That’s how you get started. After you get booked fully out, okay, now I’m going to bring on the next person and build their time out at a hundred bucks an hour and pay them in the $50 an hour range, the hundred grand range. Now, you’ve got even better arbitrage than I think with these other engineers. It sounds like there’s work there, is for the $160 an hour team. But that’s how you build a scalable enterprise here with services based business, I think.

Chris:
Yeah, I can’t disagree. I think that is my goal. Right now, I’ve been spending a lot of time training and bringing my new engineers up so that I can get them doing some of the more background work and actually build them out, and every hour I spend is tracked.

Scott:
It’s too expensive to do that. You can’t do that with your business model. You can tell that by looking at the very simple high level math here. Your time’s worth $160 an hour, their times worth $60 an hour. You’re arbitrage at best, $30 an hour time. If you work a 40 hour week, for billable hours, that’s $25,000 per month in income. That’s 300 grand annualized. Every hour that you’re not working training your employee, they’re going to arbitrage you $30 an hour, maybe which you-

Chris:
At some point, not today.

Scott:
At some point, and they’re not going to get up to that that full level. You’re spending $160 an hour time, to make $30 an hour, maybe downstream. I think your fundamental problem here and why you’re upside out on your cash flow situation is these employees are killing you. Bottom line, they may be good people, they may be doing all the right things, but the unit of value in your business is not their time, it’s your time.

Mindy:
I have a question. I don’t disagree with Scott, as much as I want to, because we’re talking about two people and their jobs. I would love to disagree with Scott and be like, “Hey, I’ve got a great solution,” but I don’t. I’m wondering about the energy audits. You’re getting $300 for these, but how much time does it take to do an audit?
I’m talking from the time you leave your office, you drive to wherever this property is located, take the pictures, and I’m a real estate agent. I’m out there looking at houses all day long. I’m not even looking at their energy stuff. It is really easy to spend an hour in a house, just looking around and taking pictures and talking to the people. But then you have to come back and the engineering work, which your employees may be doing, and write the report and submit the bill. I think these are taking a lot longer than two hours total, which is your time. I’m thinking it’s probably more like three or four hours, so now you’re down to $60 an hour making on these audits?

Chris:
Roughly, yes, and that has definitely been at the front of my mind, recently. I started doing the audits more as a filler than as something I wanted to do full-time and I’m booked out through the end of June for them, already right now, just because there’s been so much demand for them. I did start pulling back. At the beginning of June, I’ll be doing three a week instead of five a week, and I’m hoping to bring them back even further. But yes, the time, the dollar per hour rate for the is nowhere near as high as what I get when I’m engineering.

Scott:
You said it’s five hours?

Chris:
No, it’s less than five hours. I batch them together, so I’m doing two or three in a day, on the road and then it takes another day to get through those, so that’s 900 bucks over two days, roughly.

Scott:
900 bucks over two days. So 900 divided by 16, what is that?

Mindy:
I don’t know. Let’s get it calculated.

Scott:
$56 an hour.

Chris:
That’s about what I’ve worked it out to be hourly for those, for me.

Scott:
That’s why you have a lot of demand for that, your time is worth 160 bucks and people are getting you for $56 an hour. You’re going to have to make that all day. That’s okay, that’s a hundred grand a year from that, but that’s not okay if you have two employees, who cost a hundred grand a year. If you have two employees that cost that, you cannot be doing activities that are less than a hundred dollars an hour, in my opinion, and you have to be doing a lot of activities that are $100 to $150 an hour, in order to make up for that.
You can do fewer activities that are 500 or a thousand dollars an hour, with two employees with that. This will bankrupt you. It won’t bankrupt you right away, because you got a strong core financial position. You obviously made a lot of good decisions in the past, and are strong with money, overall, so you’re not in an emergency mode here, but-

Chris:
No, not yet. Although, we are heading that direction. As I’ve noticed when I’m tracking my… My net worth keeps going up because housing prices are so ridiculous and I own three of them, but my cash on hand and actual cash flow numbers have certainly not been trending that way.

Scott:
Well, okay. Let’s come up with some actions here that we can do here. I think we’ve zeroed on the problem and it’s an uncomfortable one, but do you agree that we’ve zeroed in the problem?

Chris:
I think so. Yes.

Scott:
Okay. First option and the one that I would recommend here would be helping explaining the situation to your employees and helping them find a new home with that. That may not be something you’re willing to consider there, but it’s a good market, I’m sure they’ll be able to find other work. If you give them, “Hey, in two months, I’m not going to be able to do this. I’m going to keep paying you till then, but here’s the deal. I got to fix this.” That’s option one. Option two, is to try to stick it out and perform a deep analysis and say how much $160 an hour work is there for me. How many billable hours can I get in per week in a realistic long-term scenario for me and do my current employees aid me in actually realizing that income?
I think that’s going to be difficult because I think that in order to maximize your time, you need to sell the client, which you’re not going to get paid for these deals, and you got to do that. Then the best case scenario is, that’s an hour pitch or something like that. Your executive assistant, books all of the meetings, takes care of all of the billing, collects all the revenue, drives your schedule, makes sure that those are the appointments.
I think best case scenario, you’re getting in 25 to 30 hours a week of billable time, and you’re working 50 hours a week in order to get that billable time. That’s not bad. That’ll get you to 200 plus thousand dollars in net revenue before you pay the executive assistant with that. But that’s what I think is the best case scenario here within a 6 month to 12 month period for your business. What do you think? How’s that logic working out?

Chris:
Well, when I was putting together my little summary for you guys today, this is the first time I’ve sat down and looked at my business financials in a while because I’ve been working 60 or 70 hours a week without doing the financials, and I was coming to the same conclusion that obviously, what I’m doing is not working the way I’m running it right now.
I do think there is enough work on the table, like enough engineering projects that, once at least one of these guys is up and running, I’m able to hand it to them, continue getting the sale on the next project and doing the stamping. I feel there is enough business there at least for one employee, but I do definitely agree an executive assistant is probably very much worth the time because I spend way too much time and I do track every hour while I’m working as doing.

Scott:
An executive assistant is only worth the time, if you can arbitrage your time for that amount, and you don’t have your two employees. I’m not saying go get an executive assistance.

Chris:
No, no. I’m not thinking I should also hire an executive assistant.

Scott:
Great. Now, here’s one thing to think about with regards to your aren’t employees. There is an arbitrage opportunity here for you. You are getting business that they can perform for the most part, and you just put your stamp on the approval. I don’t know if that’s the right motion for stamp. You probably have a digital stamp.

Chris:
Yeah. Close enough.

Scott:
This is where I would consider using contractors instead of an employee, and you say, “Hey guys, this is not… But what I can do is, I can help you find a good home that will have similar compensation overall with peers of my network, and I will contract you for this work for a higher dollar per hour rate.” Right now you’re paying them $25 an hour, pay them $45. Try the contract method so that when you actually get the work, you can build it out to them and pay them $45 an hour. That’s an enormous raise for them, for the work that they’re actually doing, that’s adding value and they can do it on a side project or afternoon, evenings and weekends if they so choose.
I’m sure a lot of people would jump at the opportunity to make those kinds of dollars, and you can build these out in a contract basis. It’ll cost you more per unit, but you don’t have the risk of paying somebody $50,000 per year on your variable income. You only pay when you make money, and then once you get to a certain scale, “Okay, now it’s time to bring back the full-time employee because I know I’ve got enough consistent work of this nature, that it will lower my overall costs and reach my profit affordability to bring in the employee.”

Chris:
Yeah. I do want to clarify that they are paid hourly right now. It’s not a salary and it is understood that if I don’t have things for them to do, they will not be getting-

Scott:
You’ve already mitigated that risk?

Chris:
I have. I’m not guaranteeing them 50 grand a year. I am paying them at about that rate, and right now, I have been having them work for about that amount of time. But like I said, a lot of it has been training, so not revenue generating.

Scott:
Okay. You will get to that level down, so the problem really is your billable hours are not… Instead of putting your billable hours out, you’re essentially generating work for these employees and arbitraging that, and that is not enough to cover your expenses.

Chris:
Yes. At the moment, that is pretty much exactly where I sit.

Mindy:
I think it comes back to this energy audit. That’s a lot of work and I would be… I know you’re tracking a lot of time or a lot of your expenses, but I would really be curious as to exactly how much time that audit takes you. Not just the typing up the math and all of that stuff, but driving there, taking the pictures, coming back and doing it, and even if you’re batching it, at what point… You said, you have to do it, they can’t go and take the pictures and do the audit themselves. At what point could they, and at what point would it be worth it for them to do that?
I really come back to this thinking, this doesn’t sound like these audits are really worth it. Do you have a contract that you have to fulfill obligations for? I don’t think it’s fair that you just say, “Oh, I’m not going to do any more of these at all. Do whatever through June and then stop taking audits.” You also said something about engineering work you’re billing at the end of the job, and you said you’re doing fixed price jobs instead of price and materials, and I’m not sure what materials you’re doing.

Chris:
That’s more of just a phrase. It’s basically just time. Occasionally, travel allowance if I have to drive to site, that kind of thing, but for the most part time.

Mindy:
Okay. Do you know how much time it takes to do a job? Like, you want me to do X, Y, Z job. That is probably going to be a 25 hour job, so at 25 hours it’ll cost this, and if you need to increase the scope, then I’m going to need to increase my price. I don’t know how to phrase that, but I think setting up expectations up front is going to be really important and structuring the contracts differently, so you get paid in a different way, like 30% upfront to start the work and 30% when you deliver your first report or halfway through or whatever, and then 40% upon completion. There’s incentive for you to complete the job, but there’s also, you’re not waiting until the end for this $35,000 that all of a sudden plops into your account.

Chris:
It’ll be a nice day when it happens, but-

Mindy:
I’m sitting over here in perfect world.

Scott:
That’s where an executive assistant, I think it could be very powerful for your business. That would be the first place I would be looking in your shoes for an employee if I’m starting over and appraising my business as an outsider and saying, great. You should have somebody research, put in place Mindy’s terms, and then they enforce that for you. Where it does not begin or get scheduled on your calendar to begin, until the first payment’s received.
You get going, finish the project through your completion, take a couple of sales calls for you to build up your pipeline and go from there. That’s what a healthy business in your industry would look like to some degree. This is not going to make you a billion dollars, but I think a clear cut path to $200,000, $300,000 in annualized income per year, maybe more if you’re willing to put in 50, 60 hour weeks to get that billable time up.

Mindy:
Another thing to think about is, is $160 an hour, a good rate for your level of experience and your level of engineering prowess? I’m clearly not an engineer, so I don’t know what I’m asking, but is that the going rate or are you billing yourself a little bit low?

Chris:
That is a little bit low against the current rate for an engineer of my experience. It’s all actually published if you’re paying the right fees, so that’s like a 25% or 30% discount. Part of that is that, I don’t have the overhead, and part of it is that I have the experience from my own old jobs, that kind of thing, but I don’t have the track record yet. My business started two years ago, but if you remember, two years ago was March 2020, so I didn’t do a whole lot for six months, and then after that-

Mindy:
I’m not laughing at you.

Chris:
No, it was great. I actually incorporated on March 16th and then Canada shut down as a whole on March 17th. Yes, it was a great start, but what I was trying to say there is, I was pricing low to begin with and it is on my… Like this summer, as things start to ramp up, construction projects are ramping up again to raise that rate for my own billable hours, and yes, I do want to start quoting, not as fixed price but as estimates based on the job and then tracking my hours, because I already track all my hours and that’s the way I should be doing it.

Scott:
Two years from now, you’re telling me you could be billing 200 or 225 an hour for these services and putting your income closer to $300,000 to $400,000 per year, right? Now, we’re talking. Now, we got a little dental practice here or something. I don’t know if that’s what dentists make, probably more, but-

Chris:
Probably more. But yes, it could be in that similar time range. I think a big part of it is, I don’t mind working 50 to 60 hours a week, and I’ve been obviously doing it. Part of the reason I was bringing it on employees maybe early, was to make sure that I can shove some of the work onto them and not work the 50, 60 hours of sitting there designing ducts, which I don’t know if you’ve ever designed duct work, but it’s not fun.

Scott:
I think that continuing to study the art of business and building a business, is going to be really important for you because you are… I’m just sensing you not optimize for unit economics here and say, what are the actual things that drive revenue and profit in my business and we’ve identified them here. The number one thing is your time. It’s a senior engineer’s time. Arbitraging, unless you could also start with a different thesis, which is I’m going to actually arbitrage junior engineer’s time for these projects and I’m going to need 40 of them in order to drive this level of profit with that. That would also be a viable business model with that, but I don’t think that’s what you’re necessarily going for here.
It sounds like the path to easy street financial freedom to a certain degree is get your time up to 35, 40 hours a week, move your rates toward the 225, say two years from now, I want to be billing out 30 to 40 hours a week, 25 to 40 hours a week, whatever you think is reasonable there, in billable hours at $225 an hour and say, “What do I need to do to back in there? Well, first I’ve got to start billing out my time right now at $160 an hour. That should be easy because I’m undercutting the market by 40% with all of these things.” In theory, the business should be there. “How do I get that business? Well, I’ve got to sell it, then I’ve got to schedule it, then I’ve got to book it.”
Some of those things are things only I can do, and some of those things are activities that someone much less skilled than I, can do. Which of those activities can be done there? Great. If I’m hiring an executive assistant and they’re idle much of the time, but it’s saving you from having to do 10, 20 hours a week of work, you’re making really good arbitrage on that executive assistant in that particular case. Maybe you can get a fractional. Someone fractional or can do that 10, 15 hours a time with that. That’s the path I see for that.
The third option here, so we had two options. First one was, continue to working your current business and consider layoffs for your current employees or finding them a new home. The second option is, part of that first one. An acting part one, but then also saying, “Okay, let’s consider hiring an executive assistant and mapping out my time so that I’m moving that business towards the maximum number of hours.” That’s really the same option there. The third option here though, is the next option is, just close the business and go get a job in this space. I don’t want dismiss that out of hand. What does a job, you could get at W2 job pay?

Chris:
It’s called a T4 in Canada. 80,000 to 120,000 would be the expectation. That depends, if I go on the technical side where it’s probably more on the 80 to 100 or the sales side, which is where I used to be, which would be 100 to 120, roughly.

Scott:
Either option would immediately result in a huge increase in income over your current state, and the second option would be more than the best case scenario for your business or the expected case for your business, one year from now without any major changes? I think you should look at those and coldly appraise that math and think through, “Okay, if I’m going to run a business for myself, I got to make much more than that,” because that’s 40 hours a week, 45 probably and you’re home and relaxing after that.
There has to be a premium above that if you’re going to work 50 to 60 hours or some advantage to your business which, I could guess right now is going to be a lot of work that is frustrating and hard. Perhaps rewarding too, with a lot of that, but that’s not giving you the income that you could be getting from-

Chris:
From a W2, T4. Yes.

Scott:
A T4.

Chris:
Exactly.

Scott:
Sorry about that. I didn’t know that was called a T4.

Chris:
We have our own tax free savings account as well. We tend to name… Like you guys have the Roth IRA, all these other ones that I hear about all the time on your show. We’ve got tax free savings account, which is exactly what it sounds like. We put money in and it grows tax free and we can take it out at any time. RSP, which is the one where we put in, that’s pre-tax dollars. Those are the two, that’s about it. There’s employee plans and stuff, but RSP is a registered retirement savings plan-

Scott:
Just a simpler way of life up there.

Chris:
Everything is just a little bit different, but I like our TFSA because I can put money in and take it out at any time tax-free.

Mindy:
I want that too. I want to take money out tax-free anytime, instead of at age 55.

Chris:
You’re not allowed to day trade in it. There’s some rules, but as long as it’s just general savings and investing, you can pull that money out of tax-free.

Mindy:
Wow, nice. Scott, I’ve got a couple of things. Before we shutter your business and I’m not… Again, I really want Scott to be wrong, but I don’t think that he is. Can you hire a salesperson to sell your time, so you’re billing at 160 instead of not, instead of pitching these jobs and your wife is currently on medical leave, does she have any capacity to help out with executive assistant ding in any way?

Chris:
We did try that and that actually is her general role in real life or before my leave was executive assistant thing. She’s just really not able to right now. We tried and it wasn’t going to work. As per hiring a salesperson, I do find it difficult. A lot of the sales I am getting is from people I know in the landlording community basically, and it’s starting to come in cold where my website is just generating.
I’m getting cold calls from people now, which is nice as opposed to going out to them. Obviously, there’s background work there, but that can maybe is more of an executive assistant than it is a salesperson I think, because there’s certainly enough work to keep me busy. The projects I have just lined up right now, could keep me alone going for two or three months probably.

Scott:
At $50 an hour?

Chris:
No, at my-

Scott:
At 160?

Mindy:
At 160?

Chris:
Yeah.

Mindy:
Okay. If they can keep you going for two or three months, what is preventing you from billing at 160 an hour for two or three months? I’m not trying to be mean, because there’s more to it than just sit down and bill at $160 an hour, that would be so easy.

Chris:
Well, after this conversation, I’ve noticed that it is all the time on spending training my employees and not billing and the energy audits, which I’m not contractually obligated to do. You had asked earlier if there was a contract, there is not. I could theoretically just say, “No, I’m not doing it anymore” at any time, but those obviously take up quite a few hours as well as training employees and getting them up to speed has been taking quite a few hours. That’s why I haven’t been billing it 160 bucks an hour straight.

Mindy:
Okay. With regards to the audits, where do your employees have to be in order to be able to do the audits? Do they need more schooling or do they just need more years of experience?

Chris:
They would need to pass an exam. But as soon as they pass the exam, they have no need of me, if that makes sense. There’s enough demand right now that they could go directly to a service organization and just start doing them on their own if they wanted to. Which I have pointed out to them, that it is a possibility in the future. One of them could probably pass the test today. The other one could pass the test in a month pretty easily, if they wanted to go that route.

Mindy:
Not everybody wants to do their own thing. What does it cost to take this test?

Chris:
Nominal amount, not enough to worry about.

Mindy:
I wonder if there’s any benefit to having the one who could pass it today, take the test and take over the audits?

Chris:
She is actually based about 400 miles away from me, roughly.

Mindy:
So no benefit whatsoever?

Chris:
No benefit to me. If we are talking about finding them other homes and she could pass that test tomorrow, she could start doing them for a service organization in her area, if she wanted to. I’m not sure she wants to. She hasn’t really expressed the interest, but it could be an option.

Scott:
Well, I think based on what I’m hearing, this is a great place to stay away from, from your business or conversely, if you just embrace those audits and you say, I’m not going to have any employees, I’m just going to do audits all day, that’s a 100K a year right there, if you can do them right there. That is a viable income stream, for sure. It’s not going to get you to the several hundred thousand dollars in income, but you could certainly make a living and fund all your expenses and maybe begin building wealth, especially when your wife goes back to work, with that as a full-time,

Chris:
I also don’t have to be scheduled this far in advanced for them. What I just thought about when you said that is, I could obviously say, “Okay. Nope, don’t book me anymore at the end of June, don’t fill my calendar anymore with those.” And then if I have downtime in the engineering work, there’s nothing stopping me from calling them and saying, “Hey, can I take two this week, can I be able to get two that week? Absolutely. They’ve got a cancellation list a mile long and they will, for at least six or eight months from now. That actually does make a lot of sense on that side.

Scott:
We talked a lot about the business today and I think for good reason, that’s the big item in your situation with this, that we have to figure out here, but is there anything else that you want to talk about besides the business?

Chris:
No, I know we need to cut back on our personal spending and we know where we can do that, as I think I mentioned early on there. It’s not easy. We have gotten used to living. I used to make $110,000 a year in the sales role and my wife was making $50,000 and we didn’t have a kid at that time. We started spending money and it’s hard to pull back, but it’s not impossible at all to pull back, and we know we have to for a bit here.

Mindy:
One of the biggest expenses that I see just jumping out, is the childcare expense.

Chris:
Yes.

Mindy:
$1,250 a month. This is going to sound super insensitive, please email me mediabiggerpockets.com and tell me what a terrible person I am. But if your wife is on medical leave, $1,250 a month can go really far in other places.

Chris:
We tried this as well.

Mindy:
I was a stay at home mom, kids are a full time and a half job. It’s not like she’s just laying on the couch, eating bond bonds all day and watching TV, while your child goes to school. You’re typically on medical leave for a reason.

Chris:
And that’s what it comes down to. She is on medical leave for reason, and we did try. We had my son home for two weeks straight, without canceling daycare, because daycare spots are impossible to get in Ottawa, impossible. We spent two weeks with my son at home and it was not feasible, unfortunately.

Mindy:
I know someone’s listening and saying, “Why didn’t you ask about that?” Well, I did.

Chris:
That’s fair, and it is a fair question. We tried. There is cheaper daycares available, but once again, it would take months just to get into them, potentially. We love our current daycare, it’s not really where we want to cut. We have other opportunities to cut, so we’re going to start there and we don’t have any family that’s capable of taking care of a child either, so before anybody asks.

Mindy:
Childcare is a difficult, one to try and cut and like you said, getting a good childcare, it’s worth paying it just to test out. That was a really smart move. Just because she’s on medical leave now doesn’t mean that she’s going to continue forever when she goes back to work, you would need the childcare again. How old is your son?

Chris:
Three and a bit.

Mindy:
Okay. You’ve got a couple more years of that.

Chris:
Yes. He’s a January baby, so it will be as long as possible before he actually makes it into preschool, yes.

Mindy:
Yes. I had a November baby, same thing.

Scott:
Well, how about any other areas that we can talk about?

Chris:
I’m just looking over my income and debt statements here, but I don’t think so. Yeah, I don’t really think so. I’ve been spending a fair amount of time on my rental properties lately as well, because we had a sewage backup in one of them. Yes, that face exactly Mindy.

Mindy:
I’ve had a sewage backup.

Chris:
Yeah. Took insurance almost eight months to get through that, and we haven’t actually rented that apartment back yet. We’re hoping to get it on the market for early May. I spend a lot of time there, but the cash flow and the appreciation we’ve seen on that has been ridiculous. That $350 a month for rental one, once we get that running again, we’re probably looking at almost $800, $900 a month of cash flow there as well, and that’s after I put aside money for furnaces, roofs, all the other stuff. It’s nice. It’s a good property.

Scott:
That’s great.

Chris:
Other than that, I don’t really have anything else in any questions. I think this has been very useful. I’m going to have to sit down with my employees and see where they want to go. I would like to take advantage of the 80% grant for six months, because again, if I’m paying him 20 cents on the dollar, at the very least he’ll be able to run through the energy audit background stuff for me and some of the other stuff for a while.

Scott:
Yeah. That makes perfect sense.

Chris:
Yeah, and it is an internship, so theoretically there’s no obligation to keep going after that, but yes. Anyway, I’ll have to sit down with them and see where they to go and how we can approach this.

Scott:
Before you sit down, I would take out your spreadsheet and I would say, KPI one, Key Performance Indicator one, is my bill of hours. How many hours did I bill? What was my blended rate? How many did I bill at 56 effectively? How many did I bill at 160? And say, okay, that was this week. Next week, I’m going to move it up from $75 to $77 an hour. Then I’m going to move it up and I’m going to get 15 hours instead of 10 build. Then I’m going to go, and if you just put that on your scorecard as your number one thing, then you can put secondary one, is employee number one, billable hours. Yeah.
Rate charge to customer, rate paid to employee, spread with that. If you can come up with just a simple set of KPIs on half a page of a word document put in a spreadsheet, 15, 20 lines in a spreadsheet and just update them, populate them once a week, I think you will see magic happen over a few months in terms of your revenue output.

Chris:
The thing is, I have all the background information. I have how much money I’m billing, how much time I’m working on each job, how much time they’re working on each job or trading, it’s all there. I just need to put it together.

Scott:
Call your employees in together and show them. After you’ve done for a couple weeks, have your weekly KPI meeting and say, “Here’s where we’re at.” People understand capitalism with this, they need to produce more economics than they cost in order for it to be viable employment arrangement. And you can say, “Great, these are the goals of the business, and Hey, here’s a little reward, if we start hitting some of these bigger goals,” that’d be one way to begin salvaging things with the current folks, if you want to do that.

Chris:
Yeah. I’ll have to sit down and run through all of that. Lots of good ideas and options here about some not so great, but things that I might have to do anyway.

Scott:
You have three to six months before you run out of cash, not an emergency, but time is ticking to think-

Chris:
I started this process. I’m conservative when I estimate these things, I will say. I started this process with three to six months of cash and that was two years ago and I still have three to six months of cash but yes, you’re a hundred percent right. I have seen that. It’s been trending downwards anyway.

Scott:
Well, Chris, thank you for sharing this. This is a valuable perspective that I think a lot of people are struggling with, and we’re really grateful that you’ve come on to talk about this. I know there was some hard conversations are hard feedback that we had for you, but I think this is going to help a lot of people to hear what you’re going through, because I think that this is going to be much more common than we’ll hear from a lot of that. It’s tough as a business owner to come in and say, “I don’t really know how to get this thing to the profit level that I want to get it to from that.” I think takes a lot of courage and I think we’re really grateful for you to come on.

Chris:
I will say that when I originally applied, I was making 100K a year as an energy auditor and without any employees and it was going to be very straightforward, and then I started growing and it’s six months later. Things change, but I’m glad I came on anyway, I didn’t need to talk about it.

Mindy:
You know what, that’s a really good point. Life changes really quickly and I bet your plans six months ago were a little different than what’s going on right now. A lot of my plans six months ago are different than what is the reality of my life. That’s something to keep in mind. Your plans should be fluid because life is fluid.

Chris:
Yeah, absolutely.

Mindy:
Okay. Chris, thank you so much for your time today. Thank you for sharing your story. I really appreciate it.

Chris:
Thank you guys very much for having me. This was kind of fun, mostly fun.

Mindy:
It was interesting.

Chris:
Yes.

Mindy:
Okay. We’ll talk to you soon. Scott, that was Chris, the engineer from Canada, and I really, really, really wanted you to be wrong with your suggestions. I don’t think you are. I think that it’s a harsh reality for a lot business owners listening to this, just because you own a business does not mean that it will be instantly profitable. What a lot of business owners do, is hire too late. They’re swamped with work and they’re so swamped and they’re working 90, 150 hours a week, and then they hire somebody, and I think maybe in this instance, Chris hired a little too soon.

Scott:
First of all, I hope I’m wrong as well. I think that the real problem for entrepreneurs and first time CEOs and a lot of this is, it’s really hard to get the structure of your organization right, in the early days. What skillset and employees do I actually need and how does that work with where I want to get to a year, two years, three years from now? I think it’s really hard to be able to come up with that. An engineering firm needs engineers, that seems logical. Well, when we unpack it, maybe it’s more logical that the unit of value in Chris’s business is Chris’s time, and the employees that maximize the ability for him to bill ours are more valuable than many Chris’. Many Chris’ being more junior Chris’ that are able to do some of the work, the engineering work, but not all of the engineering work.
That I think is hard, and it’s a guessing game and hindsight’s 2020, maybe it’s easy for us to look at the situation now and be, “Oh, we could have done this.” It’s really hard to do that in the act of building a business. A year ago, his situation could have looked like, “Hey, I’m doing all these jobs that look like this, here’s what this employee will help me do and free up my time and all that stuff.” I think it’s just a challenge there. No blame game going anywhere in the discussion today. I just think a cold look at the reality of the situation to me suggests that, that business is not going to sustain two employees and Chris’ family.

Mindy:
I, like I said, I want you to be wrong, but I don’t think you are. Another option, another viable option is to go back and get a job to get over this hump while his wife is on medical leave. You don’t shutter the business necessarily, you put it on hold. Maybe you do one extracurricular job instead of a whole full-time jobs worth of curricular jobs, while you’re waiting for life to stabilize. But I think being fluid in life is the best way to live life. Make good plans, but be fluid with them.

Scott:
It makes you wonder, I don’t know, but I wonder aloud whether service professionals that offer their time and build them out, what the difference between a W2 and starting their own practice really is. You’d imagine there’s going to be a period where there’s going to be a lot less income and then a period where there could be a lot more income, but I bet you, the spread isn’t massive for most folks in the mid-career phase of that.
Perhaps the advantages of going into business for yourself need to be in the form of much higher income or scalable opportunity or lifestyle benefits in order for the switch from a W2, in a field like Chris’s or law or something like that, to owning your own practice with that or you need to be willing to put in the 70, 80 hours a week, 60, 70, 80 hours a week, for many years to get that off the ground to then have the cake and eat it too. The more income and the better lifestyle.

Mindy:
Yeah. I think you hit the nail right on the head there Scott. If you’re not making more money and you’re not a better income or a better lifestyle, if you reduce your income, but you’re also working 10 hours a week, that’s great if that’s what you want, but if you don’t have either, then it may be time to really seriously reassess.

Scott:
Yeah.

Mindy:
Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 296 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying, got to go buffalo.