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This topic comes up so frequently on the BiggerPockets forums that I thought it could use its own article just to get a succinct train of thought from one very experienced person.

So what’s my experience? I was a general contractor (GC) in an extremely wealthy Southern California town for decades, as well as holding several other licenses in trades such as swimming pool construction, plumbing, concrete, and interior design.

Where the Contractor Fits in Picking Materials and Finishes

It is a common occurrence for a customer to want to pick out design finishes. Of course, they want to choose the electrical fixtures, such as area lighting, pendants, and plumbing fixtures, as well as faucets, toilets, shower heads, and the like. 

They will choose these with my blessing because I really do not want to be involved in such a personal choice. I will, of course, offer my opinion based on my experience with certain types of fixtures or even the quality and endurance of certain brands and models.

The same applies to cabinets and countertops. The customer should absolutely choose these because the myriad of colors, wood species, and materials make it an important and difficult decision for anyone, and the GC does not want this responsibility. 

Once again, I would offer my opinion on things like wood species, i.e., which is harder and more durable, as well as counters, stone, and tile materials—which will hold up better, take sealer better, last longer, hold a shine better, etc. I would even urge them to avoid certain species of stone that last well for a few years and then start to deteriorate (some types of granite have this issue). It is precisely my decades of experience that the customer is looking for and buying when they choose me over a newer/younger contractor.

But the customer’s involvement in the process must stop right there. Occasionally, a certain type of customer will want to order products themselves, usually because they think they are going to save money. Sometimes, they’ll say those dreaded words: “I want to get points on my credit card.” This is a shortsighted attitude—trading control of the project for a few measly dollars or miles. This is where a good, experienced GC will put their foot down and just say no. 

A lot of people new to the construction business, either investors or just homeowners, cannot understand why it makes any difference who pays for the materials. Let’s discuss that now.

Why the Contractor Should Be in Control of Materials

It is a basic fact that the GC is and should/must be the “king” of the job site. It is not about ego or some personality issue; it is simply about this: Having ultimate control of a project is imperative for the project to go smoothly and end up finishing on time and on budget. 

The GC must oversee the schedule, subcontractors, his crew, the building inspectors and city building and planning departments, OSHA, federal and state laws, job site security, neighbors, and materials so that everything moves seamlessly through the remodel (or new build) process. 

Any and every aspect that moves into someone else’s arena is another accident waiting to happen. In other words, every facet of the project that the contractor loses control of is another thing, amongst the hundreds of moving parts, that can and will fall into Mr. Murphy’s wheelhouse.

What Can Happen When the Contractor Is Not in Control of Materials 

I can provide an example from my own past. A customer had ordered some finish material, furniture, and fixtures from Italy. 

We got to the point in the process where these items were needed, and needed now, to allow my crew and subs to keep moving ahead as planned. That was when I was informed: “Oh, I forgot to tell you. These are being shipped from Italy. They were supposed to be here a week ago, but they just told me that they’ll be two weeks late.” They were actually a month late and caused the project to be partially shut down because in construction, you have to install Part A before Part B, and so on. 

This Is Not About Marking Up Prices

Every contractor I know has stories about what happens when the customer tries to get involved with materials. They always seem to think they can find them cheaper and save the markup. 

But this “markup” is greatly misunderstood by the public. It usually does not really exist. Any good, long-time general contractor will have their favorite vendors, and they’re usually not the big-box stores.

From windows and doors to electrical and plumbing, a GC has probably bought hundreds of thousands of dollars worth of products from these vendors. That gets them volume pricing that a regular consumer just cannot touch. They will then add a percentage to this special pricing to compensate them for this variable, which I’ll discuss next.

The Customer/Investor Never Thinks of This

So, let’s say an investor (for example) insists on choosing and paying for their own products for a remodel, and the young contractor foolishly decides it’s not worth arguing about. Besides, they really need the job. The investor calls Home Depot and orders materials or sends the contractor with their list and has the materials paid for on their credit card (and they get their precious points). 

Okay, great. Why is that any kind of issue? Well, let’s examine this: Who does the following very necessary tasks?

• Load the materials onto carts in the store.
• Load them into their trucks.
• Unload them at the job site.
• Put them in a safe place in an already or soon-to-be partially demoed house.
• Provide security for the duration of the project.
• Take back the wrong products, like those that are the wrong color/size/brand/don’t fit.
• Deal with warranty service for those products that break or fail while still covered.

We all know that the customer will not do this—they will expect the contractor to do all of the above. And they will be outraged if the contractor expects to be paid for performing all of these important, necessary, and critical tasks.

Examples of When the Customer Can Be Involved in the Material Process 

Now that I’ve spent all this time destroying the concept of customers being involved in the material process, I must get into a circumstance where they can and maybe even should be involved.

In most large cities, there are supply houses attached to plumbing and electrical warehouses that have huge areas set up with many samples of their wares, such as dozens of sinks, tubs of all sorts, the latest and greatest in modern toilets, etc. There are other establishments (like Pirch, for example, in SoCal) that have two- to three-story facilities with kitchen areas set up, bathroom areas, outdoor living areas, and more so that you can take a customer there and walk the whole store where they can get a great overview of all the products available to them in today’s market. They will assign a rep to you and the customer to facilitate the process, babysit the customer as they select and purchase products, and even serve you lunch.

Yes, I said the contractor should select and purchase products. So why am I saying it is okay in these cases? 

Because the GC is still in control. The company rep essentially works for the GC because the GC will send them many customers every year. The rep will make sure that the customer chooses materials that the GC will approve and want to install. The GC will not necessarily receive a monetary kickback (although it can happen), but they are compensated in other ways.

Final Thoughts 

So, we can see that it is critical for the general contractor to have full control of the construction project, especially the management of materials and supplies. Some of these are automatic, like the wire the electricians use or the pipe the plumbers use. But even though a well-meaning customer might want to buy the materials, they should realize that this is a huge mistake. 

Pick out the materials? Yes, of course, within reason. But leave the rest to your contractor. Let them pick them up and pay for them. 

If you insist on getting some credit card points, perhaps you can work out a deal where the GC buys the materials, and you make a credit card payment to them for a single invoice that reflects the materials specifically. But you, as the customer, will be doing yourself a huge favor by staying out of the whole materials and vendor part of the game.

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Ashley:
This is Real Estate Rookie, episode 346. My name is Ashley Kehr, and I’m here with my co-host, Tony J. Robinson.

Tony:
Welcome to The Real Estate Rookie Podcast where every week, twice a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today, we have the one and only Andrew Cushman. If you guys are at all familiar with the BiggerPockets ecosystem, he’s had, I don’t know, 50 episodes on The Real Estate Podcast, but it’s his first time here on the Rookie Show. Andrew is an expert in the multifamily space. So we bring him on, and you’re going to hear his journey of getting started as a new multifamily investor, what a real estate syndication is, and why he made the transition from flipping houses to real estate syndication. You’re going to learn about how to build your buy box, your multifamily. We’re going to talk about is now a good time to even get started in multifamily, and you’ll be surprised, I think, by what Andrew’s answer is.

Ashley:
We recently had AJ Osborne on episode 340, and he talks about why now is a great time to get into self storage. So I’m very curious as to what Andrew has to say to us as to why now is a great time to get into multifamily.

Tony:
Now, before we keep going, I just want to give a quick shout-out to someone in the rookie audience by the username of Kdemsky79, and Kdemsky left a five-star review on Apple Podcasts and said, “I love this podcast because it gives me the inspiration to pursue my real estate investing dreams. There’s a good spread of expert guests,” like today’s episode, “and rookies telling their story.” So if you are a part of the rookie audience and you have not yet left us an honest rating and review, please do because the more reviews we get, the more folks we can inspire, and inspiring folks helps them take action and hopefully get their first deal which is what we’re all about here at The Rookie Podcast.

Ashley:
Andrew, welcome to the show. Let’s jump right into it. Andrew, I want to know, is right now a great time for a rookie investor to get into multifamily?

Andrew:
Contrary to what the news headlines would have you believe, yes, it is. One big thing to keep in mind is if you’re looking to get into this all this negative crazy stuff that you’re hearing about interest rates going up, and people can’t make the mortgage payments, and syndicators are collapsing, all this stuff is happening, and it’s true, but it only affects deals that were bought in the past. If you are new, if you’re looking to get into new deals, all this actually benefits you because prices have come down 20% to 30%, and it’s a myth that interest rates make apartments not work. What happens is when interest rates go up, the cost of debt goes up, and therefore, the price has to come down in order to be able to have the property generate enough income to pay for the debt. So if you’re going into a new deal, all that means is you just buy it at the right price, you go get a loan, doesn’t matter if it’s 6%, 7%, 8% as long as you bought the property for the right price, and if it cashflows and works today, you’re good to go.
So all of the turmoil that you’re hearing, if you’re looking to get into the business, this is the chance you’ve been waiting for for the last 10 years because the refrain for the last 10 years is, “Oh, it’s so hard to get a deal. It’s too hard. There’s so much competition. Everyone is overbidding,” and that was all true. That is all going away, and now is definitely the time to get in because, again, competition is way down, pricing is down 20% to 30%, seller motivation is up. Right? It used to be you had to put hard money which means before you even do any due diligence, you can’t get your deposit back, so there’s a huge risk there. That is going away.
Also, keep in mind it is impossible to perfectly time the market. We will only know when the bottom is when we’re looking back going, “Oh dang, that was it. I wish I bought more.” So if you take advantage of the disruption now and pick up the right properties that you can hold long-term, nobody has ever regretted buying a nice multifamily property 20 years ago. You cannot find that person. So if you be that person who starts buying now, then you’re setting yourself up for success down the road. Again, now is the chance you’ve been waiting for for the last decade.

Tony:
Andrew, you said that some of the properties that aren’t performing well or that are struggling, those properties that were purchased in the past, what were some of those mistakes that you think those buyers made that set them up to struggle given this current economic climate, and what can we learn from that as new investors?

Andrew:
I’d say there’s two main mistakes that buyers of all kinds made from mom-and-pop to syndicators to big institutions. One of them is that people got a little too aggressive with their assumptions, and this addresses a broader topic of when you’re looking at deals of making assumptions that have a high probability of coming true. So a given example is I saw deals get sent to me where the person or the group buying it was assuming 7% rent growth for the next five years. That’s unlikely to happen, or property taxes only going up 2% a year for the next five years. Again, not likely to happen, especially if you’re in places like Texas where it’s like it’s a whole game to see how high they can jack up your property taxes. So the number one mistake that has led to current distress was overly optimistic, overly aggressive assumptions in underwriting.
The second big one, and this is one where it’s a mix of some people were being irresponsible, some people just got caught off guard, and also, just the fact that nobody saw a 500 basis point interest rate increase coming. So what happened is something like 70% or 80% of commercial real estate including apartments in 2021 and 2022 was purchased with floating rate loans. Most single-family houses, you buy a mortgage, you buy the property, you get a mortgage, the rate is fixed for 30 years, you’re good to go. In the commercial world, the debt works quite different, and it’s often due in 3 years, 5 years, 7 years, or 10 years. There’s some exceptions, but much shorter timeline, and a lot of the mass… majority of the properties in the last couple of years were bought with loans that were due in two, three or five years. So, again, that means they’re due this year or next year, in 2025. On top of that, the interest rate moves as the market moves.
So someone bought an apartment complex, they might have been paying a 3% interest rate, and today, they’re paying 8%, which means they can’t make the mortgage payment anymore, which means the lenders might foreclose, or the values come down 30%, and they can’t refinance into another loan. So, now, they have this huge balloon payment that’s due in three months. They can’t refinance, the property is not worth enough to sell, they can’t make the mortgage payment, and all of a sudden, you’ve got sellers that have to sell and have motivation. That is something we have not seen in a decade, and that’s part of what’s leading to both the distress and the opportunity.

Tony:
Yeah, Andrew, too, and super incredible points, and I couldn’t agree more. Just on that first point about being overly optimistic, and Ash, I want to get your thoughts on this too, but I think for a lot of new investors, it is tricky to walk that line of how aggressive or optimistic should I be when I’m analyzing a deal because when the market is hot like how it was in 2021, 2022, if you were too conservative with your numbers, you would miss out on every single deal. If you weren’t conservative enough, you could end up in a situation where you buy a deal that doesn’t necessarily pencil out. So, Ash, I want to ask you first. As you were looking at properties 2021, 2022, how were you striking that balance of not being too conservative that you were missing out on everything, but also not being too lax where you would potentially buy a bad deal?

Ashley:
Yeah. I’m definitely very conservative when I run my numbers. I definitely don’t say like, “Oh, maybe I can get cheaper dumpster service for the apartment complex,” or anything like that. I am very good at being diligent about sticking to my numbers and also over-inflating my expenses a little bit. So what I did to pivot through this change in the market is I found where I could add additional revenue to properties. So one of the things was like, “Okay. We’re buying land. Can we sell any of the timber that’s associated with it? What other multiple income streams can we generate? Can we charge people to park their RVs in this huge parking lot?” Things like that.
So that was where I had to learn I have to think outside of the box is somebody is looking at this property, and they’re saying, “Okay. I can rent this house out for that amount. I can rent the barn out for this amount. What other ways can I generate revenue off of this property where I can now create the income that will make this deal work for me?” or maybe another investor coming in and saying, “I can’t pay this price because it doesn’t make sense,” or, “I can’t use this type of lending where I could.” So that’s where I had to pivot and change is to finding different ways to generate revenue off of properties.

Andrew:
Yeah. Ash, I really like some of those creative things that you mentioned, and that’s… In multifamily, the money is really made in operations, and some of the things you just mentioned, those are perfect examples of what makes someone a really good operator versus just an okay operator. In the last 10 years, you could get away with being an okay operator. Now, you’re going to have to do the things that you were just talking about.
Tony, you nailed what has been the dilemma for the last five, six years is you wanted to be conservative and realistic so that you hit your numbers, you bought a good deal, you were able to pay your investors, all of those things. But if you overdid it, you just never get a deal. If you find the easy, concise answer to that, please let me know because we’ve analyzing literally thousands of deals. I’m not quite sure the answer, but this is what I boil it down to. A phrase that one of my old original mentors told me is he said, “It is better to regret the deal you didn’t do than to regret the deal you did do.” So when it’s tough to decide, that’s what I lean on.

Ashley:
That is great, Andrew, and I think that’s great advice to any new investor looking forward as to what they’re looking at to buy right now and as to if… “Okay. can I fudge the numbers a little bit?” “No, you can’t to make this deal work.”

Andrew:
No. You’ll probably regret it later.

Ashley:
Yes. Okay. Well, Andrew, this is all great information and just a starting point of what we’re going to talk about in today’s episode going forward, but first, let’s take a short break. So we just heard from Andrew about how past problems that buyers are having are now surfacing in multifamily. Let’s get into some consideration is if you want to start multifamily investing, what you should be doing today. So, Andrew, let’s start from the beginning. Do you have an example of a deal that you could go through with us where maybe everything did not work out okay and you had some lessons learned?

Andrew:
Yeah. I mean, since we’re on The Rookie Podcast, I’ll start with the first one. I wasn’t a rookie to real estate. I’d been flipping for four years, but I was a rookie to multifamily, and my first… and I did have a mentor and a coach that I had hired. We’re actually still friends and business partners to this day. So I wasn’t just going and completely winging it. However, people said, “Well, how did you get that first deal?” Well, it was really a combination of enthusiasm and being a little too naive.
Our first deal… Now, this is back in 2011 when you could literally just go on LoopNet and pull up a huge list of properties and say, “I want to go look at these 10.” I’ll come out in three weeks, and they’ll still be there. Not the case for the last 10 years, but that’s what it was then, and that’s how I found the deal. Literally, just looked on the map at a market that I thought would be good, didn’t have all the good screening procedures that we have in place now, started talking to a broker that had a ton of listings in that market. He saw a sucker coming from a mile away and said, “I’m going to talk to this guy,” and I ended up buying a mostly vacant, like 75% vacant, 92-unit 1960s and 1970s construction property out in Macon, Georgia on the complete opposite side of the country from me, and that was our first deal.
I had to raise a total of $1.2 million to get that done. It was not financeable. It had to be all cash. I completely underestimated how hard it would be to raise that money in that environment, and we are getting back to that environment today where everyone is scared of real estate like they were in 2011. I had to extend the contract period twice by adding more money to the deposit, non-refundable, just days before I had to close, got just enough money raised to close, and then took six months after closing to have to finish raising it. Fortunately, our documents allowed us to do that. That is probably the biggest reason why I started turning… my hair really started turning gray about that time because it was major stress.

Tony:
Andrew, at least you got some hair. You could join the Shady Head Club with me.

Andrew:
But see, you got a strong presence on the lower side of your head. I have even more gray there, so I’m just like, “Not going to work.” Some of the mistakes that we made, number one… Well, actually, I’m going to start with some of the things we did right. You said, “Well, why did you do that on the other side of the country?” Well, for one, my philosophy is live where you love to live and invest where the returns are the best. I live in southern California. You could not pay me enough to be a landlord here and have to deal with the garbage the legislature makes you go through, so we said, “All right. We want to be in the Southeast United States where the economics are good, the demographics are good, it’s business-friendly, it’s landlord-friendly, all of these things.”
Why did we go straight to 92 units, which I don’t recommend most people actually do, is because, well, we said, “Well, we want a property that’s big enough to hire and support its own full-time staff that works for us because I’m going to have to asset manage this thing from the other side of the country.” I’m not going to be flying out to fix a water heater because, number one, I don’t know how to do it anyway, and then two… So I want people who were there all day, they live there, that’s their job to run it. So that’s why we went big, and we’re really glad we did that.
Some of the mistakes were dramatically underestimated the cost of the renovations in addition to… Those old neglected properties are like a rotten onion. You peel off a layer, and the layer underneath is even worse. We had multiple episodes of vandalism where people would rip out the copper pipes, not even turn off the water. They must have gotten soaked. Yeah. If I was going to vandalize, I’d at least make sure I’m not getting wet so if the cops see me on the street, it’s not obvious if it was me. So not only did they rip out the copper, they flood the unit, so there goes $50,000.
It was a rough neighborhood. When we walked into the head of the police, the police chief, and we said, “Hey, here’s what we want to do. We want to partner with you guys to clean this up,” he looked at us and said, “Good luck.” That’s not the response I was going for. Now, we did get it cleaned up. We did get the crime reduced. When we bought it, it was collecting $8,000 a month on 92 units. We quintupled that basically five times over, and we did sell it for a good profit. However, lots of mistakes, lots of lessons learned. Don’t go buy a giant, neglected, highly distressed property in a bad area for your first deal.

Tony:
So, Andrew, just one thing I want to question before we get into the nitty-gritty of this detail or of this deal is you said you were flipping for four years prior to that. What was the motivation for transitioning from flipping to multifamily?

Andrew:
It is multifaceted. One flipping is a great way to get started in real estate, to generate chunks of money and build up some cash. But unless you’re one of these people who is going to build a seven-figure flipping business and have other people run it, it’s just another intense job, and you’re only as good as your last flip. You sell a house, you put some money in the bank, you got nothing left to show for it. I mean, again, it’s good. It’s a good business. It can be great money. But if you’re looking for something residual, it doesn’t typically provide that.
The second is we… My wife and I are business partners. When I say we, I’m typically referring to her and I. We had great 2009, 2010, 2011, great years because everyone, again, was scared of real estate. Prices were coming down. We had almost no competition. But then, everyone else started to figure out the opportunity, and no one had equity anymore, and so we said, “All right. Flipping is great, but it’s just another intense job. What would produce more residual, more long-lasting wealth?” We said, “Okay. We just had a huge recession which probably means we’re going to have a long expansion coming after that. Expansion means job creation, household formation, and everybody either got foreclosed on and can’t buy a house for the next seven years, or they know somebody who gets foreclosed on and they’re scared to buy a house for the next seven years. So that means, put all those things together, there’s probably going to be a whole lot of rental demand. So let’s go learn how to do apartments.” So that is how and why we transitioned to apartments in 2011.

Ashley:
You talked about that you raised money for this deal. So did you do a syndication? Was this private money you took on? Can you explain the funding of this deal?

Andrew:
Yeah. So the funding was… We did a syndication which, like you mentioned, is basically you put a deal together, you put a pro forma and a package together and say, “Hey, we’re buying this apartment complex. Here’s the business plan. Here’s what we think the returns are going to be. We need $1 million dollars to do this. Everyone can invest $25,000, or $100,000, or whatever you have.” So that’s how we funded it. As I mentioned, we ran short because I underestimated how hard it was to raise $1.2 million back then.
My very first check was my mom, and then the checks after that were the people who were giving us the money to flip the houses. We had some private lenders that funded those, and then the final $200,000, we didn’t want to retrade or go back to the seller and try to change the pricing, so what we did, we said, “Hey, look. The honest truth is this property has got a lot more work to be done than we anticipated, which is 100% true. We’re not going to ask you for a price reduction. However, we want you to help us out by carrying a note and loaning us the remaining balance of the funds.” I think we ended up settling on $200,000 or $300,000. That’s actually how we finished it off is we got the seller to carry some for us, and then we paid him off when we stabilized it and refinanced it a couple of years down the road.

Tony:
Andrew, one of the things you said which stood out to me was that you took these relationships that you have with your private moneylenders in your flipping business, and they were some of your early investors in this deal. In the Real Estate Partnerships book, Ash and I talk about the benefit of starting smaller with your investors, and then testing the waters there to move up to something bigger. So, in a flip, I mean, what? You’re probably holding money maybe six months to a year when you’ve got a flip that you’re working on. Maybe even shorter timeframe than that. So if for whatever reason that partnership doesn’t work out, it’s a six-month partnership, right? But since you’ve built that relationship with people, now it’s easier to go into a more expensive asset where the time horizon was, whatever, three to five years to get that thing stabilized.

Andrew:
That’s another good point. If someone is listening to this saying, “Okay. This is all great, but I don’t have any track record. I want to buy a 10-unit, but I have no track record multifamily,” start with the people who know your track record in whatever you are currently doing. Whether you’ve been flipping for five years and you have private investors, or you’ve been doing notes or maybe even working as a pharmacist for the last 10 years, and all your coworkers know you as someone who’s honest, and trustworthy, and hardworking, that is… Lean on any kind of track record you have in your network there.
Every single one of us in multifamily or anything started at zero at some point with no track record, and so don’t let that be a hurdle. Figure out what else do you have that counts as track record and say, “Yeah. Maybe I’ve never…” Again, this only applies if you’re raising money. If you have your own cash, this goes away. But if you’re looking to bring in other people, leverage the other characteristics and strengths you have, the other things that you’ve done to say, “Yeah, this is something new, but here’s why I should be successful at it because of all this other things that I’ve done.”

Tony:
Even if you have your own cash, think about all the big companies, even they’ve got cash. They’re still going out there and raising capital from other people because it allows you to do even bigger deals. Right? I’d love to, Andrew, break down the numbers on that first syndication because I think for a lot of investors, when they hear you got 92 units, that’s… “What is that? $1.2 million raise?” The pie gets split up quite a few ways when you do a syndication. Especially the first go around, the syndicators are typically a little bit more generous to the limited partners to make sure that they can get a good return. So if you can, first, break down the structure for us, Andrew, on what that deal looked like, and if you’re open, what was the actual profits that you generated from that deal?

Andrew:
Yeah. So when we closed on it, technically, I was supposed to get a $50,000 acquisition fee. I don’t think I actually took that until a year or two later. The split of profits from operations and sale was, back then, 70% to investors, 30% to sponsor. Today, it’s much more common for that to be 80% to investors and 20% to sponsor. When we sold it, we… What did we sell it? We bought it for $699,000 or something right around there, and we ended up selling it for $1.92 about five years later. I don’t remember what the internal rate of return and all that stuff was. I mean, it was good, but I truly do not remember what that was.
So, again, it was a lot of mistakes and lessons learned, but that was the buy, the sell, the splits. Like I said, we did refinance about two years in, and we refinanced, we paid off the seller, and then we returned… I don’t remember. Again, I don’t remember the percentage, but we returned the majority of the original capital to investors. So if someone had put in $100,000 at the beginning, when we refinanced a couple of years later, they might’ve gotten $70,000 back or something like that. But then, they still retained their ownership percentage. They don’t get diluted.
That’s still pretty much the structure that we use today where maybe we got a Fannie Mae bank loan or Fannie Mae’s government agency kind of, but it’s a primary mortgage, and then we syndicate the equity. We put in some ourselves. Profits are generally split 80-20, and we typically operate for about five years. Then, if there’s a refinance in the middle, then we’ll typically use that to give some of the original capital back so that there’s less risk. Right? If you put in $100,000 and you get $40,000 or $50,000 back, but your ownership percentage stays the same, now your risk level is down because absolute worst case scenario, you can only lose what’s still invested. So does that… Hopefully. I do want to differentiate because how things were done and structured 12 years ago is a little different than now, but that’s how it was done.

Ashley:
Andrew, I can’t even get past the 92 units for $699,000.

Andrew:
Yeah. Isn’t that crazy? Less than $10,000 a unit. I spend more in renovations these days on a unit than I paid to buy those things.

Ashley:
Yeah. Crazy. So what would your recommendation be? So that’s how you got your start in multifamily, funding and putting together a deal that way. What would be your recommendation today as a rookie investor as to how they can fund a smaller multifamily deal?

Andrew:
Recommendations in terms of the overall process, or just how to get started, or just how to fund it?

Ashley:
How do you think they should start? Say they have no money.

Andrew:
No money. Okay.

Ashley:
How should they go and fund a deal? Should they be looking for bankable products because it’s great to get a bank loan right now, or should they be doing a syndication, or try and get seller financing? Whatever advice you have as to this is a great way to try to find a way to fund buying your first multifamily.

Andrew:
So the good news is when it comes to multifamily commercial property, so five units and bigger, the debt is not necessarily based on your credit score and your personal cashflow. It’s based on the cashflow that the property produces. Yes, they’re going to look at your credit score. So if they pull your credit, and you’re a 321, they’re going to say, “Eh, maybe we don’t want to fully trust this person,” but you don’t have to have stellar credit. It’s not like getting a mortgage today where if you’re below 750, they don’t want to give you a mortgage anymore. You don’t have to have perfect credit. So that is the good news.
Also, the good news is the money for the down payment, for the renovations, for the transit, all of that does not have to come from you. Now, these days, we invest in every deal we do, but for a lot of the deals, we didn’t because we didn’t have the cash. So if you’re getting started and you’re saying, “Hey…” Let’s say you live in Dallas, and you find a great 10-unit that’s a couple of miles from home, you’re like, “Oh man, I really want to acquire this property, but I don’t have the money.” The ways to overcome that are, number one, you can do joint ventures, which means just you and a couple of people who have the money become equal partners in an LLC, and then you purchase the money, and you all have decision-making capabilities. This is what keeps it from being a syndication. You don’t have to worry about SEC rules as long as you are all… Again, it’s a JV. You all have management responsibilities, so you are putting in basically the sweat equity, you’re finding the deal, maybe you’re going to run the deal, and then you bring these people in, they provide the cash. That’s one way to do it, joint venture.
Another is to, again, syndicate. This is where you are finding the deal. You’re going to operate the deal. You put together a pro forma, and you say, “Okay. I need…” Let’s see, 10 units in Dallas. Maybe you’re going to go raise a million dollars. I mean, $1.5 million, and say you’re going to go out to people that you already know and have a relationship with and say, “Hey, here’s what I’m doing. Here’s an opportunity for you to earn some passive income and some wealth creation. Do you want to invest in this opportunity?” You’re not asking for money. You’re providing a service and an opportunity, and it’s important to make sure you frame it that way.

Ashley:
That is so key right there, that phrase you just said.

Andrew:
Yeah. Yeah. I mean, not only do you need to internalize that, but you need to project that when you’re talking to investors. It’s a 100% true, but it’s just ingrained in our nature like, “Oh, I don’t want to ask for money.” Well, you’re not. You’re literally providing a service and an opportunity, especially if you’re doing it the right way. So syndication is one, partners is one. You could get private debt. If you do that for a large… Let’s use some smaller numbers here. Let’s just say you need a total of $500,000, and you’ve got $100,000. Maybe you can get some private debt for $400,000 as long as you’ve disclosed that to the lender. Some will allow it, some won’t. Then, the one thing to keep in mind is unlike single-family, multifamily has much higher transaction costs. You have much larger deposits. You have very expensive attorneys involved going through loan documents and purchasing sale contracts. The appraisals are more expensive. I mean, there’s a whole host of other things involved that can add up to be $50,000, $100,000, $200,000 depending on the size of the transaction.
Now, if you don’t have that cash, that is where you definitely will need to find a partner. So going back to that very first deal in 2011 where we were raising $1.2 million, and again, it was all syndicated, I had to front $125,000 just to get it to closing. Now, that is a cost of the deal, and that is… As the sponsor, if you’re syndicating, that is refundable to you out of the raise because, again, it’s a cost of the deal, but you have to have that money upfront just to get to closing, to make the deposit, to pay the attorneys, all of those things. So if you don’t have that, then your first step is to find somebody who does and who wants to do this with you. Again, if you’re going to go buy a 5 or a 10-unit in your backyard, that amount is going to be smaller. It scales up.

Ashley:
What would you say would approximately be the dollar amount where it’s worth it to do a syndication?

Andrew:
That is a really good question. So your first one in terms of dollars is not going to be worth it, but you have to look at it differently in that if you are looking to syndicate apartments or really, any other asset, and build a large portfolio, and build a business out of it, making money yourself on your first deal or two is goal number four. Goal number one is to learn. You can learn a lot through podcasts, and coaches, and mentors, and books, but there’s a certain point at which you just got to do it and learning through guided experience. So, number one, you’re looking for experience. Number two, you’re looking to build that track record so that you can say, “Hey, I have actually done these type of deals before,” because you can get started without a track record, but it does get easier the bigger track record you have.
Then, the more you can go to the lenders and say, “I have experience. I have other loans. I’m in this market,” those things build on each other. So when you’re doing your first deal and if you’re looking to get into syndication, your goals are track record, adding investors to your list, building relationships with brokers, all of those things. Then, profiting from it, that’s hopefully a nice benefit of doing all those things. You got to really look longer-term, and realize and understand that the first few years typically of building a syndication business is not all that lucrative. It only gets… Well, I shouldn’t say only. It typically gets lucrative years down the road when you’ve built it the right way.

Tony:
So, Andrew, one of the things you said earlier that really stood out to me was that you live where you love to live, but you invest where it makes the most sense. You lived in Southern California, very expensive market, decided to invest in Georgia, a much more affordable place to invest, but how did you decide on what your buy box was as you moved into that market, and for rookie investors to today, what would your recommendation be for that first commercial deal on how to build that buy box?

Andrew:
My buy box back then was basically anything that someone would sell to me.

Ashley:
Is that your advice for rookie investors today?

Andrew:
That is my advice to absolutely not do, and candidly, that is one of the reasons that most investors start off in lower end properties is because they seem affordable, the seller is willing to give and sell it to you because no one else wants to buy it. What I like to say is those properties are cheaper and more available for a good reason. The grass is greener over the septic tank. Just don’t step there. Stay away. So our buy box now or someone who’s getting started, number one, just decide a number of things. Are you a cashflow investor, or are you looking for appreciation or a little bit of both? I would recommend, especially in the beginning and especially if you can’t take a big financial hit if something goes wrong, make sure you’ve got at least some good cashflow to sustain the property. So you can decide if you’re a cashflow or appreciation. Are you going to self-manage or use third-party?
Just in general terms, you want to look for properties that are in areas where… Now, this could be a city on the other side of the country, or this could be just picking the right neighborhood in your backyard, but the key things to success, getting started in multifamily, is buy in an area where you have population growth, job growth. Those two are the biggest. Beyond that, you want good median incomes or high median incomes. When we say high median income, that means high relative to the rent you are charging. $60,000 median income is pretty good in secondary markets in Georgia. That is the poverty level in Southern California, so you have to… Basically, what you’re looking for is can the average or median person easily afford the rent that you’re going to charge? You want to buy in areas with low crime, and especially in the beginning, I highly recommend buying properties that are not in flood zones.

Tony:
Yeah. I had a very bad experience with a single-family home in a flood zone. Yeah, worst deal I think I’ve done so far, but anyway, I want to talk a little bit because you said population growth, job growth, but low crime. As a new investor, where should I go to get this information? What are some tried and true data sources to identify, “Hey, what’s the median household income? Is the population getting bigger or smaller, et cetera?”

Andrew:
Yeah. I’ve got a couple of good sources for you. Number one, we did a… I guess it’s the OG BiggerPockets Podcast, episode 571. We went through the whole screening process that we use and how to do that, how to identify the neighborhoods that I just talked about. So go check that out, and then there was a follow-up episode shortly after that where we dove into some underwriting stuff. So check those two out. However, if you are open to investing, just, again, live where you want to live, invest where the returns are good, go to the Harvard Joint Center for Housing Studies. They have an awesome map on that website of every county in the United States, and it’s color-coded which makes it super simple for guys like me who just like it easy and visual. Basically, you want to invest in the counties that are dark blue because that is where you have the greatest population growth and greatest migration. So if you’re like, “Ugh, Andrew, I have no idea where I want to start. It’s a big country,” go get that map and start with the blue counties.
Some other really good places to get data is we subscribe to Esri, E-S-R-I. I think it’s only $100 or hundred-something a year. It’s not terribly expensive, but they have a tremendous amount of the demographic data that I’m talking about. Again, population, income, all that kind of stuff. That is what we use for every deal we’re looking at to this day. If you just google “FEMA flood maps,” F-E-M-A, that’s the government website that shows you the maps of what’s in a flood zone and what is not. You also want to go to the Bureau of Labor and Statistics, bls.gov. That is a wealth of information for job growth, population growth, income. Basically, all the government statistics, and then there’s another one. It’s called Rich Blocks, Poor Blocks. It’s exactly what it sounds. Just those four words all jammed together dot-com. It will show you median income for different neighborhoods.
That’s a key point is you’ll see a lot of broker pro formas and offering them rents where it’s like, “Three mile radius. Median income, $90,000.” Right? Well, if you’ve ever been to a city like LA or Dallas, sometimes if you just cross the street, it can be a completely different world, and so you do not want to just take a big average area and say, “Oh, the median income is good.” You really want to drill down to the neighborhood that your property is in. In terms of crime, there’s about a billion different websites out there like Crime Mapper and a whole bunch. Just google crime statistics in whatever city you’re in, and you’ll probably find about 16 different resources for that.

Ashley:
That was great, Andrew. There was a couple there that I hadn’t heard of, and I always love to watch Tony vigorously google things and look things up, but there’s two that I would add is brightinvestor.com, that’s a newer software, and then also NeighborhoodScout too is one that I have used. Yeah.

Andrew:
NeighborhoodScout is good. Also, let’s say you’ve already identified some markets. Let’s say you’re like, “Okay. I’m trying to decide between Boise, and Dallas, and Atlanta.” Go to the big brokerage sites like… Berkadia is really good, but Berkadia, Marcus and Millichap, Cushman and Wakefield, CBRE, all of these, and sign up to be on, basically, their distribution list. Those guys put out reports sometimes monthly, at least quarterly of all these different markets. They are brokers, so they’re a little optimistic at times, but they do typically provide all the sources for the material they’re referencing, and so they’ll list out all the announcements of new jobs, and new plants being built, and all that kind of stuff. So that’s another really good free resource is to go get yourself added to the list of the various brokerages that have offices in whatever markets you want to invest in.

Ashley:
That’s a great tip right there. That was a really great informational deep dive into different resources where you can find different stats and data to actually verify the market that you’re in. Anyone can go on the BiggerPockets Forums. They can go on Instagram, anywhere, and they can see, “You know what? Andrew, he’s really successful in Houston, Texas right now. You know what? I want to do what he’s doing. I’m going to go to Houston because he’s doing it.” Yes, maybe some investor is successful in a market, but that doesn’t mean that their strategy, or their why, or what their reason is for investing, or their end goal is going to align with yours. So just because somebody is investing in one market or location, it doesn’t mean that it is a good fit for what you want to do, so make sure that you are always going and you are verifying, verifying, verifying.
So we could have Andrew right now just tell us, “Okay. Right now, what’s the best market to invest in?” and Dave Meyer does this all the time where he’ll pick a random market, and he will just go through on BiggerPockets and say, “This is the good of this market, this is the bad of this market, this is who should invest there, and whatnot.” But that doesn’t mean that it’s going to be a perfect match for what you’re doing. So you always want to go, and you want to pull this information on your own. Getting a market tip, hot tip from somebody is a great starting point, but make sure you’re not just taking somebody’s word for it, and you’re actually going and verifying that data from a lot of these resources.

Tony:
Let’s talk a little bit, Andrew, about building out your team. So say that you’ve chosen your market, you’ve got an idea of what your buy box is, but as you actually go through the steps of purchasing, setting up, managing, et cetera, I’m assuming you’re not doing all this stuff yourself. Right? So who are the team members that you need to build out? How does it differ from traditional single-family investing, and then what steps are you taking to find those people?

Andrew:
So, first off, go get David Greene’s book Long-Distance Real Estate Investing even if you’re doing it in your backyard, and that will make sense in a moment. The big difference is when you’re going from single-family to multifamily, there’s some additional team members that you need that you may not necessarily need in single-family. So, a team in multifamily. That will often involve property managers. Do you self-manage? Do you use third-party? That’s a personal business decision that depends a lot on what your goals are. My recommendation would be if you are just getting started and don’t have any property management experience at all, either partner with somebody who does or hire a third-party, but pretend they’re not there. What I mean by that is you have to have the right third-party company to let you do this, but approach it as they’re co-managing with you, and you’re there to help them and to make, whoever is working on your property, their job as easy as possible so that you can see the systems that they have, so that you can see how they address problems as they come up, and learn on the job.
Again, what I don’t recommend doing is just… Unless you enjoy it, and you live right close by, and you want to be heavily involved, don’t go by 10 units and try to manage it by yourself with no mentors and no experience. Also, don’t buy your 10-unit and hand it off to a third property manager and say, “Hey, send me the report in a month,” because that won’t work out either. So do something in the middle. So you’re going to want to have property management as… Again, whether that’s going to be you hire an assistant to help you do it or you get somebody third-party.
You’re also going to need contractors. I guess that’s probably similar to single-family. However, if you’re buying 10 units, you’re going to need someone who probably has a little more bandwidth than the contractor that can handle one or two houses at a time. So make sure your contractor has the size and the ability to handle bigger jobs. You’re going to need attorneys. Again, if you’re syndicating, that’s a whole separate attorney. You have, basically, a syndication attorney.

Tony:
They’re not cheap.

Andrew:
No. Typically, they’re flat fee, and that flat fee can anywhere from $10,000 to $30,000 for syndication, and that gets back to the question like, “Ooh, at what point is syndication worth it?” If you’re just doing 10 units, it might not be worth it for the profit, unless you’re using that as a stepping stone. That’s exactly the perfect example of why because there’s… Boom, 15 grand gone just to get the syndication paperwork done. You’re also going to need an attorney to help negotiate and review loan documents and the purchase and sale agreement.
I know every state is a little different in single-family, but in California, when you buy a single-family, it’s just title and escrow. We don’t involve attorneys, and I know other states, I believe mostly on the East Coast, you got to sit down and have attorneys to handle everything, if I’m correct. In multifamily, whether you’re required to or not, actually, one of the biggest mistakes I see some people make is be their own attorney. Do not do that in the multifamily world. You will end up with some nasty clauses in your loan docs that you’re not going to find out until way down the road, and you are going to wish you had spent the money on the attorney. So you want to have a good attorney.
You want to have good lenders, and I have actually found it most beneficial to have a really good loan broker, somebody who can take the needs of your property and your finances out and match it to the best loan for your business plan and what you’re trying to do. You’re going to need a really good insurance broker for the same reason. Insurance. I’m sure most people listening have probably heard that has become a nightmare lately. I’ve got actually friends who their portfolio, their annual insurance premium last year was $1 million. This year, it’s $2.3 million. So, literally, their expenses went up 130% just on insurance.

Ashley:
Let me guess. Was this in Texas?

Andrew:
No. It was actually spread-

Ashley:
In Florida?

Andrew:
Yeah. Well, partially in Florida and partially several other states, but yeah, you’re actually right. Florida and Texas are the two and California are the three main culprits driving the insurance problem. Again, not to scare anybody, the silver lining on that is the free market works. What’s happening is insurance premiums are so high now that more carriers are coming back into the business because they can make so much money off premiums that most of the experts that I talk to now are saying that prices should level up and possibly even start coming down next year. Right? So you don’t need to underwrite 60% increases every year for the next five years, so don’t… Be careful with it, but don’t let that stop you.
A good insurance broker. I’m just trying to think. I’m sure I’ve missed a couple, but those are the key ones, and then the next question is typically, “Okay. That’s great, Andrew. How do I find all of these people?” Referrals, referrals, referrals. Go on BiggerPockets Forums and say, “Hey, I’m trying to buy 10 units in Dallas. Who else is invested in this area? Can you please connect me with your favorite lender, contractor, syndication attorney, et cetera?”
Also, if you’re buying a property, I’m going to assume you’re probably talking to a broker or agent of some kind. Ask that agent. Say, “Hey, if you were buying this, who would you want to hire to manage it for you?” That’s how I found our property management company that we’ve partnered with for 12 years now. I literally asked the brokers, “Who would you hire to manage this thing?” The same couple names kept coming up over and over again. Do that for lenders. Do that for… “Hey, if you were buying this, what contractors would you use?” Then, when you talk to the lender, say, “Hey, do you have a favorite attorney that you like to work with?” Just do that whole circle of referrals. That is the fastest and most effective way to build a high-performing, high-quality team of the third-party people that you need to do this business.

Ashley:
Another person that is a great resource, and I just recently put this together in the last year, is the code enforcement officer of that town or city. Especially if it’s a smaller town, they have more… There’s only one code enforcement officer, but anytime they go and do inspections of multifamily, so they’re seeing what operators take care of the building, what property management is taking care of it, what tenants are happy, which ones are dissatisfied, and they’ve actually become a wealth of knowledge for me as somebody who’s picking out as to how well is this property management company.

Andrew:
Yeah. I really like that tip. That’s a good one, especially for the under 50-unit properties. The only thing I would add is if I was asking the code inspector, I would say, “Hey, I’m considering buying something,” and I definitely wouldn’t be like, “Hey, I’m buying this property at this address,” because then they’re like, “Oh, cool. Let me go look at it.”

Ashley:
Okay. So before we wrap up here, Andrew, I want to know one last question. Based on today’s current market conditions, is there anything that you are doing to pivot today that maybe you didn’t do last year or the year before?

Andrew:
In some ways, yes. In some ways, no. I mean, we’ve always had very strict criteria of what we do buy and what we don’t buy. We’ve always had pretty conservative leverage. We’ve typically never gone above 75%, but some of the things that we have adjusted are instead of 75% leverage, now we might be 55% or 65%. So if it’s a million-dollar property, you would be looking at getting a $600,000 loan, which is 60% instead of two years ago, maybe you would’ve gone for $800,000. So taking lower leverage.
Also, we are looking at trying to purchase some properties all cash and getting no loan at all, and the reason for that is yes, it is harder to do because you got to raise that equity, and it’s a bigger commitment in a lot of different ways. However, what has changed in the market now is these days, from a seller’s perspective, the most important thing is how certain they can be that you as a buyer will close. If you can eliminate the risk of your loan blowing up, then that increases surety of close, and so that’s going to increase the chance that, number one, you’re getting it at a better deal from that seller. Two, what that does, it means you don’t have any debt service to worry about. Your interest rate is not going to fluctuate. You don’t have to worry about paying the mortgage, and then two, you can patiently wait until the market shifts, and it’s a really good time to refinance, and you do it then. You’re not forced to do anything.
So we’re looking at buying… again, looking at deals all cash. Also, if you’re looking at buying a property today, it was really popular the last few years to look at a two to three-year timeline. Don’t do that. That business model is on the shelf for now. It would be very risky to say that you have to exit two to three years from now because who knows where we’re going to be. Have a longer timeframe. So, typically, for us, we’ve always looked at five years. Now, we’re looking more towards 6, 7, and even 10 years because our best guess is the next two years might be a little turbulent, and then that is going to set up the next big bull market upcycle, and we want to sell well into that upcycle. So that’s a few things as we’re looking at lower debt, sometimes no debt, looking at longer hold times, but the fundamentals have not changed.

Tony:
Andrew, one last question before we let you go here, and it ties into that last point. You said that you’re looking at potentially holding properties for up to 10 years. That’s a decade. When I think about our rookie audience, I wonder if they might have challenges getting an investor to commit to a deal for up to 10 years. So if you were a rookie investor, how would you pitch a potential deal with a 10-year hold given that maybe you don’t have that super strong track record yet?

Andrew:
The investor that funded by far the biggest amount of my flips was a guy in his 70s. When I brought him that very first apartment syndication that was on a five-year timeframe, he looked at and said, “Yeah, Andrew, this looks great,” but he goes, “I’ll probably be dead by then. I’m not invested in that.” So you’re right on. It is definitely tougher to get people to invest for those longer timelines. There’s not a silver bullet to it. What I would say is… or how I would address that if I was getting started is I would build the pro forma and the projection maybe on five years. I do think five years is fine.
One of the beautiful things about real estate is time typically heals all wounds. The longer you can wait, generally speaking, the better it gets. That’s just how the US economy is set up. So what I would do is I would maybe focus on five years, but then set it up so that if for some reason in five years, it is either a bad time to sell or it’s very clear in five years that if you keep holding, you’ll make a whole lot more money, you have the option to do so. Right? That’s actually something that we’ve been very cognizant to do in our deals the last three years is maybe they were set up as five or six-year deals or even four-year, but we always made sure that the potential is there to hold longer if we either need to or want to.
I’ll give a perfect example. We have one in the Florida Panhandle that we bought in 2015. Our pro forma was to sell it in 2020. We still have it, so it’s going on eight years now, but that is because it makes so much money that all of the investors voted… We took a vote because doing something different than what we originally said, voted to keep. It was a unanimous vote, “No, let’s keep this thing,” even though it originally was five years. So that’s how you end up getting a 10-year hold with investors who would otherwise never agree to 10 years is you buy and say, “Look, our plan is five years.” But then, if you buy it right, and operate it right, and do such a good job with it, it’s not going to be hard to convince people to keep it even longer. Again, if your investor is like, “No, I really do want to get out,” there’s different ways to structure that without selling the property or hey, you know what? Sell the property. Put a check in the win column, and then move that money somewhere else.

Ashley:
Not even with syndications, but that example works with private money too. If you are amortizing it over 10 years, maybe you do the loan callable instead of… that it’s actually a balloon payment where they have to give so much notice. We’ve done them where they have to give eight months notice in writing if they’re going to call the loan or else it extends for a certain period of time.

Andrew:
That’s a perfect example actually. So I have a small property that is not syndicated, and we did that very thing. In order to not have to put quite as much cash into it, we got a number of investors to do private notes. It was a two-year term, and then we said, “Hey, at the end of two years, the notes just go month to month.” One of the investors said, “Yeah. I actually need my money now. Can you pay my note off?” All of the other ones, “Yeah, we’ll just let it keep going.” But if we had said, “Hey, can you give us a five-year note?” that would’ve been a lot harder, right? But now that they’re used to getting an ACH deposit in their account every month and there’s nothing better to do with the money, everyone is like, “Yeah, we’ll keep it.” So do a good job, and the problem goes away.

Ashley:
Well, Andrew, thank you so much for this mini masterclass on multifamily. Can you let everyone know where they can reach out to you and find out some more information about you?

Andrew:
Yes. BiggerPockets Forums, of course. Please connect with me on BiggerPockets, and I am not a social media guy. However, I’ve decided to slightly catch up with the rest of the world, and I am on LinkedIn now. So if you comment or respond, that actually is me posting and actually responding. So if you want to engage with different topics with me, then please do that on LinkedIn. Our website, just vpacq.com, short for Vantage Point Acquisitions. There’s a couple of different ways to connect with us there, and I look forward to hopefully talking with you. For those of you who are only listening to this on audio, go check out the YouTube because Ashley and Tony are the most color-coordinated hosts I have ever seen on a podcast. They look professional and perfectly match their backgrounds, both of them. Mine looks like business barf on the wall, and they’re perfectly coordinated, so.

Ashley:
Well, hopefully, they go, and they watch this YouTube one because no other episode will be like that. Andrew, thank you so much for joining us. You can also find out more information about Andrew and get even deeper into his multifamily deals. You can go to episode 571. It is a great starting point on The Real Estate Podcast, but Andrew is a celebrity there, and you will find more episodes and more information on multifamily. If you would like to learn more about myself, or Tony, or today’s guest, Andrew Cushman, please head to the description of this episode in YouTube or your favorite podcast platform to view the show notes.

Tony:
Well, Andrew, that was an awesome episode, man. Really, really appreciated that.

Ashley:
Yeah. Thank you so much.

Andrew:
It was fun talking to you guys, so.

Tony:
It’s always cool when we can break down the meteor, more intimidating rookie topics for folks and make it seem more attainable.

Andrew:
Hopefully. Hopefully, they’ll get some value out of that, so.

Tony:
Yeah. No. It was super good, man.

Ashley:
I’m Ashley, @wealthfromrentals, and he’s Tony, @tonijrobinson, on Instagram, and we will be back with another episode.

Rob:
Welcome to the BiggerPockets Podcast show 853. I was digging into the forums and found an abundance of posts as in hundreds of posts dating as far back as 2008 surrounding the topic of negative cash flow, as in when is it okay to lose money on an investment property? So today we’re going to unpack negative cash flow. I invited some great investors on the show today so that we can discuss some real examples and share why investors may choose this investment strategy. After this episode, we hope you’ll understand who this is for and when to stay away, as well as some of the rules one of our panelists used to vet negative cash flow deals. I’m joined today by Mindy Jensen of the BP Money Podcast. Hello, Mindy.

Mindy:
Hi, Rob. Thanks for having me. I’m super excited to talk to you today.

Rob:
Happy to have you. We’re also joined here by former Red Robin waiter of the year turned on the market podcast panelists, James Dainard.

James:
Hello, my friend.

Rob:
How you doing, bud?

Rob:
I hope you’re ready for this ’cause we think we’re going to get into it in today’s episode.

James:
Well, if we don’t perform, I’m going to have to go back to Red Robin and start singing birthday songs again.

Rob:
So we’ll try to avoid that. We’re also joined here by the beard formerly known as David Greene. Hello, Dave.

David:
Good evening, everyone.

Rob:
Is your head heavier now with the beard? Do you feel like there’s a weight at the bottom of it?

David:
You do feel the wind rustling it. I noticed that, and little kids love pointing out that you don’t have hair on top, but you do on bottom, which I think is hilarious. Like on the plane, when you’re going somewhere at a restaurant, they’ll be looking at you and they’ll be like, “How come your hair is down there and not up here?” It’s very funny.

Rob:
Well, awesome. Today we’ve got an amazing set of panelists on the BiggerPockets Real Estate podcast where every week we are bringing you stories, how tos and answers that you need to make smart real estate decisions now in the current market. So we appreciate you listening. So getting into it, as I mentioned at the top of the show, I found hundreds of posts on the BiggerPockets forums that all talked about negative cash flow, and I thought it was worth a conversation, especially with today’s market conditions. So first let’s define it so everyone is on the same page, and then we can get into some real-world examples of why investors may choose this investment strategy. We will then think about this strategy and when to stay away.

Mindy:
So negative cash flow, to me, means more money is going out of my pocket than I am making. That is taking into account my mortgage payment principle, interest, taxes and insurance. That is taking into account CapEx and property management and repairs and vacancy and all of the things that you have to take into account when you are looking at your numbers. You don’t just look at the mortgage and say, “Oh, my mortgage payment is $1,000 and rent is 1,100, therefore, I’m making money.” No, you’re not.

Rob:
Yeah. Dave, what do you feel about that? Does that all make sense with how you think of this type of thing too?

David:
Yes, and what I hope we can get into today is that cash flow is one way that you make money in real estate it is not the only way, and it’s very important for certain purposes, but it’s not for every purpose. So hopefully, our audience walks away with a much better understanding of the various ways you make money in real estate and how cash flow fits into that equation.

Rob:
Now James, do you think you could break down very quickly why this could be a feasible strategy for newbies and how they should be looking at this?

James:
As a new investor, it comes down whether you want to look at cash flow or negative cash flow properties is where you’re at in your investing career today and what kind of starting liquidity that you have. As you look at buying properties outside of the standard cash flow principles, it really comes down to what is the growth anticipation that people are trying to implement into getting the financial freedom? I always say it doesn’t always come down to dollars and cents, it’s what is your goals and whether you want to do this strategy or not. It doesn’t work for everybody. If you want to do that more steady growth, the BRRRR properties are great, but if you really want to step on this and get to financial freedom five times quicker, buying with negative cash flow can be a huge deal.

David:
Yeah, and we’re not saying that you should ever buy a bad deal, we’re saying that maybe redefine what deals are. For years, real estate investing has been preached from the perspective of look at the income, look at the expenses. If income is more than expenses and you’re getting a solid cash-on-cash return, you should buy the property. That’s led a lot of people to buying in bad locations, bad asset classes, not looking at where the economy was going in general. There’s a lot of people that chased after deals that looked like they would have great cash flow, maybe like buying a hotel when you don’t understand how hotels work or buying a short-term rental in an area where there’s not a lot of people vacationing ’cause it looked like it would cash flow, but they ended up losing their shirt on that deal.
Unless you’re James Dainard, it’s never a good idea to lose your shirt. So I like to focus on three things when I’m trying to analyze a deal, which are market fundamentals. What does the market itself look like? Is this a time to be buying real estate? What is the location for the property? Because the only thing about a deal that you can’t change, you could always change the floor plan of the deal, you can change the aesthetics of the deal. You can even change the purpose of how you’re using the deal, but you can’t just pick up the house and move it somewhere else, at least not for a reasonable price. Then look for the opportunity to buy equity, which is the phrase that I use in the book that I have coming out next, which is also commonly referred to as value add. How can you take that property and make it worth more?

Rob:
So for investors who have their fundamentals in place, can a negative cash flow deal ever be the right move? If it is, what should you do to make sure it ends up paying off? To answer these questions, we will hold a cash flow court right after the break. Welcome back. All right. We are here to figure out the answer to a hot button question, should you ever do a cash flow negative deal? I can see all the TikToks and all the haters in the comments now saying, “I can’t believe they would ever talk about doing this,” but I do want to say that not all cash flow losses are created equal, right? So I want to hold a cash flow court for offenders of cash flow as we know it. Each offender will make the case for the cash flow negative deal. I will be the judge and the BP listeners will be the jury. Court is now in session. James Dainard can you please come up to the stand, my friend?

James:
Am I doing one of these?

Rob:
Yeah, cut to eight minutes later. We’re finishing the oath. Okay, so let’s talk about a deal that you have in mind here. Can you tell us what type of property was this that you’re going to bring to the court?

James:
Okay, so this is a duplex that I just purchased in Bellevue, Washington, which is a very… it’s probably one of the nicest areas in Washington. It’s a 1031 exchange deal where I sold a property, made a $250,000 gain on it and I 1031-ed it into a more expensive market at this point. One of the things I think that is going to drive a lot of people nuts is, I sold a property that I had $0 in, I had $250,000 in equity and I had a 4.25 rate. I was cash flowing it at over $1,500 a month, and I traded it for a property that I’m losing $800 a month on.

Rob:
Okay, that’s interesting. Yeah, that definitely gets some ears percolating here. Okay, so you were making about $18,000 a year a little bit more. Sounds like on this property, you sold it and then you were losing $800 a month. So what was your goal with this deal?

James:
The principle, so I’m a return on equity guy and cash flow aside and the principle of buying cash flow and getting into financial freedom, it’s a real thing. Buy assets, leverage them correctly, pay you income, it’s going to offset your income and be able to live off of your assets. That is a real thing. The one issue with that is you need a certain amount of capital to buy into property and a certain amount of gunpowder to get it to a certain amount of volume that will pay you real money. Because as you start in this game, and we all start there, when I was first buying properties, we started with very cheap properties that we could buy. We could do the BRRRR strategy, refinance, create the equity position, and then it would give us a couple of hundred dollars a month in cash flow, and that was great. We got assets that were paying for themselves, but where we saw the impact was the growth of the assets, not the 200 bucks a month.
So what we did is I had a property in Seattle, Washington, I paid 350,000 for it, which is really cheap. It was a massive value-add property and this is why I liked it. I put $175,000 into it, rebuilt the whole thing, got it stabilized, permanent financed it, BRRRR-ed it, got all my cash back out of it and the value increase went up to 775,000 when I did this. So after I kept it for a year and a day, I sold that property, and I made a $250,000 gain. The reason I sold that property is because I was getting good cash flow, but now the property had already had all the appreciation built into that deal and we are going into, as rates have normalized out and gotten more expensive, it’s going into slow steady growth.
So if I was making $1,500 a month on this property, which is going to be 18,000 for the year, but I have $250,000 in equity in that property, that’s a 7% return. I want to do better because my job as an investor is to get to financial freedom. 7% is not going to get me there in my opinion. So I 1031 exchanged it, and I bought a duplex for $1.125 million. I was able to use all of my proceeds, the 250,000 as my down payment and got a construction loan on this. Now when you look at the core math of this duplex, my new payment on that is going to be $7,800 a month and I can only rent it for 7,000. So that’s going to be an $800 loss every month. So I traded $1,500 for a -800. The reason I did this is a very versatile property with a huge equity play.
That property, once I renovate it is going to be worth $1.65 million as a multifamily. But the big kicker is I can condo it off and also sell them on separate units and the combined sale of those is going to be $900,000 a unit, which is 1.8 million. So when I’m done with my stabilization and I rent this thing out, I’m going to increase my equity position again by over $350,000 on this property. So the reason I’m okay buying negative cash flow is I’m going to be losing at least $800 a month on this property for the next two years. So that is going to be a loss of $18,000 on this deal for the next two years. But that equity gain that I have on it is a 1031 $250,000 in equity. I’m losing basically $20,000 in cash flow over a two-year period. Then I’m going to 1031 exchange this property again for a higher cash flowing property and my overall gunpowder is going to increase from $250,000 to $625,000. So I’m making an over 120% return on my investment over a two-year period.

Rob:
Okay, so let me make sure that I’m following this deal right. So you had a deal that was making 1500 bucks a month, but then you sold it because you had a $250,000 equity gain in that. You use that $250,000 1031-ed into another property that now gives you a $365,000 equity play. But in order to get that $365,000 equity play, you’re losing $800 a month. In total while you own and stabilize this asset, you will lose $20,000 in cash flow up front. But once you stabilize and sell this property and 1031 it into another property, that’s where the really big play is.

James:
Yeah, because the general principle is for cash flow, you’re living off of your savings. So if I want to make a 10% return and I have $250,000 there, that’s going to pay me roughly two to $2,500 a month on that.

Rob:
Correct.

James:
If I have 625,000, the cash flow goes to $6,000 or more, and I can do that all in a 12 to 24-month period. So the principle is is taking value add, increasing it, forcing the equity. Then once you maximize that deal and getting a steady growth, then you optimize that deal by selling it and then not just exchanging it for a turnkey property, exchanging it for another value-add property where you can force that equity up and double and triple your gunpowder, which is going to triple your cash flow and your purchasing power on that next deal.

Rob:
Makes total sense.

David:
Now, James, I think a lot of people are going to turn around and say, “Well, that only works if you keep the equity. What if the market drops? There’s no guarantee that’s going to happen.” What’s your rebuttal to the people who say that equity is a bit of a mirage, that it can disappear, but cash flow is reliable?

James:
Well, it goes in, equity goes up and down. That is very true, and there is a part of timing in this and you’re never going to time the market correctly, but what you can do is forecast what you think is going on in the market. What I do know is today is the rates are at all-time highs or the highest they’ve been in the last 20 years, and we are starting to see rate relief where rates are starting to come down. Also, I’m forecasting this deal over a two-year period, which I do believe rates will be lower in two years, which should increase the equity position in the gain.

Rob:
Okay. Okay. What would you say your rules are for vetting a deal?

James:
So my rules for these high equity growth deals is I always do them for 12 to 24 month terms. I don’t want to be in this negative cash flow for five to 10 years. That’s not the plan. The plan is to grow it quickly, so a 12 to 24- month deal, always exit at that longest to 24 months. I always have 12 months of reserves in my bank, so no matter what, I know I am covered. I factor for that because that’s where people get in trouble is when you’re burning the candle on both ends. So when you’re going for the strategy, there’s some sacrifice ’cause you got to put some money on the sideline, but remember, you’re hitting 130 to 200% growth on that. I’m always looking for at least an 80% to 100% cash-on-cash returns. So in this deal, I’m putting in 250 and I’m getting 360 back. That’s a win.
As long as I’m making around 200 to 250 in growth, I’m going to be doing that and the property has to be tradable. I don’t want to buy something that’s not going to appease to the masses. This deal, I can condo off. I can sell to the biggest demographic in this whole area. $900,000 in the city is in the affordable price point for this area. So I’m going to be marketing my units to the biggest masses of people that are going to be buying it. Then we always make sure before we buy these deals that we’ve qualified for our permanent financing because many times, we’re taking these down heavy value add with hard money, setting it up with the right leverage with the construction component.
We have to be able to refinance that into permanent financing or at least a portfolio loan because you’ve got to make sure that your money is there and ready to pull the trigger with. Lastly, when we’re looking at buying negative cash flow properties, you want to make sure that you can operate inside of your income, right? This is a monthly investment for me, and so I always like to make sure when I’m having a negative cash flow deal that it is not going to be any greater than 3% of my net income every month because that just means if I’m going into a slow times, I can spend less money at the grocery store, I can spend less money going out to dinners, and I can feed my investment that’s going to give me a long-term play. So you want to make sure that you’re not getting outside your skis on your income as well.

Rob:
So basically, if you’re making $10,000 a month, you don’t want it to be more than $300 a month of negative cash flow. Is that right?

James:
Correct. Everyone has their different threshold, but I might have numerous properties like this, so I don’t want to get too outside by skis.

Rob:
Totally, Totally. Okay, so Mindy, what say you to our cash flow offender?

Mindy:
First of all, James, thank you so much for bringing up money. My money heart loves the fact that you have a huge reserve. So this is not James’s first deal, everybody listening who is like, “Oh, maybe I could buy a negative cash flowing property.” James has done a batrillion deal, so this isn’t even remotely his first deal. He knows his market like the back of his hand. He’s kept up to date with zoning changes and real estate changes and updates and all the local stuff. He’s not buying all over the place or maybe he is, but this deal is in his backyard. He knows what’s going on in this spot and he has, my money heart sings, a huge reserve fund accessible to cover his expenses. I am also in the BiggerPockets forums all the time and I see people talking about buying negative cash flow properties who also are talking about buying their first deal and they don’t have any money.
They’re barely making ends meet, but they have to get into the real estate game, so they’re just going to jump into this one really crappy deal. It’s a negative cash flow deal because they haven’t done all of this research and they don’t know what’s going on. So they’re like, “Oh, well I’ll just get in. What’s the harm?” The harm is you can lose your butt, that’s the harm. So James has done research, he’s got reserves, and he knows his market. He said something else, he said it has to be tradable. You know what? Unique is a four-letter word in real estate. I bet you drive past this duplex and you’re either like, “Huh, there’s a property,” or you drive by and you’re like, “Oh, that’s nice.” But it’s not like, “Ooh, that’s the most interesting house I’ve ever seen.” Interesting is also a four-letter word in real estate.

Rob:
What is the four-letter word? Sorry.

David:
Meaning it’s a bad word.

Mindy:
Interesting, a four-letter word is a bad word.

Rob:
I was like, “Did I miss this? Have I not been paying attention?” That’s right. It went over my quaff. I’m sure there’s a percentage of people that didn’t know. I’m just asking for the people that didn’t know. I knew, but there are some people that didn’t. So one of the interesting things that you said, James, was your whole philosophy here is interesting because you’re clearly two steps ahead, right? You’re saying, “Oh, I’m going to lose money on this deal because I’m already planning the next one.” Right? There is a little bit of a delicate dance that you have to dance here whenever you know you’re going to lose money. David, I know this floats into some of your philosophies with portfolio architecture, right?

David:
Yeah, that’s exactly right. I talk about this in Pillars of Wealth because it’s becoming a necessary part of the conversation and investing when it never was before. Oh, look at Mindy, she’s got a copy there. That’s awesome. Real estate investing was so simple because nobody else was doing it. So if you could get the loan and you had the money, it was really as simple as just go out there and find something that cash flows, buy in a good area and you will make money. Now we’ve done such a good job of sharing the information, the masses are all hearing it that, unfortunately, everybody is fighting over these assets. Like Mindy just said, there is still more demand than supply.
So you have to start thinking in three dimensions instead of just two dimensions. The idea of portfolio architecture is to stop looking at every single property and only comparing it to itself. It needs to fit into a bigger puzzle. So if you have a property that’s got a lot of equity in it but it’s not cash flowing, you can offset that with another property that maybe cash flows a lot, but isn’t going to grow in equity; or you can keep a W-2 job, which allows money to keep coming in; or you can start a business and have money coming in; or you can save money on your own housing by house hacking, or by not taking expensive vacations.
You can make decisions in the rest of your life that free you up to go after these deals like what James is talking about without being bankrupted. Whenever someone says, “But what if it doesn’t cash flow? I’m going to lose it.” The next thing we should all say is, “Are you that bad with money that you couldn’t lose $800 a month or it would torpedo you?” $800 a month is a little bit of a bigger chunk, but for James, that’s not ’cause running several businesses. To Mindy’s point, the better you do with your personal finances, the more room that you have with the individual property you’re getting and the bigger swings that you can start to take. So I would just like to encourage everybody to stop only asking, “Does it cash flow or not?” And start asking, “How does it fit into my overall portfolio and can I make up for the lack of cash flow with something else?”

Rob:
Sure. James, you obviously have a very developed portfolio, you’re very skilled for this, but I think the question that everyone wants to know is, is this a deal that you would’ve done when you were starting out?

James:
No, I would not have. When we were restarting, and the reason I can say a hard no is because I did do these deals from 2005 to 2008. I overleveraged. I was paying negatives every month, and I was doing it to get equity so I could go buy more properties. That’s a bad recipe, and I learned that in 2008. So in 2008 to 2012, we used a similar concept, and we would go for high-equity positions, but we wanted to make sure they at least broke even with a buffer in there because as you start to build, our income has changed dramatically from 2008, ’09 and ’10. There’s no way negative $800 a month would’ve hit inside my 1 to 3% rule, and that’s also why I make that rule. We have to have a certain amount of income coming in, but I would still do the same principle of trading minimal cash flow for higher equity as long as it could break even or pay for itself because that equity growth is what moves the needle, not 100 or $200 a month.

Rob:
Great. Well, you’ve built a really great case here, James. We are going to take a quick recess for the jury to discuss. Mindy, will you please approach the bench and build your case?

Mindy:
Okay. This is a story of creative financing gone wrong meets great house on the market at the wrong time. So this is a property, it’s a single-family home. It has a killer location on the golf course with a horrible execution. I don’t know if you guys know, but I love a good ugly house built in the ’70s with the rock solid bones. But boy, the ’70s architecture, I don’t know what they were smoking, but it was not pretty. This house, you walk in and it’s one big room. It’s like a studio house but with three bedrooms slapped onto the side of the main room. There’s no hallway or anything, it’s just rooms out there. Instead of having solid doors on the bedrooms, they had sliding glass doors on every bedroom.

Rob:
Sliding glass doors, literally like an outside patio doors how you would get into the bedroom? Okay.

Mindy:
Three of them for the three bedrooms. Then inside the kitchen, my neighbor calls it a one-butt kitchen because it was so tiny that only one person could fit in there. So I changed the floor plan, I changed the interior, I changed the exterior. I turned it into a midterm rental so I’m not locked into a long-term lease because eventually, I’m going to move into this property. It’s a ranch house and once my children leave the nest, the house that we’re in doesn’t work for us anymore. Our current house is a split-level. This is in the same neighborhood that we live in, but as you get older, you don’t want to walk upstairs all the time. Our purchase price was 510,000. The next lowest priced property in this neighborhood on the golf course was $710,000. So there’s already a huge amount of opportunity, but first you have to take out those weird things like sliding glass doors into the bedrooms.

Rob:
Important. Important. So your goal was to rehab it a little bit and turn it into a midterm rental?

Mindy:
Rehab it a lot and turn it into a midterm rental for a few years. So my youngest daughter’s in eighth grade, so we have five more years with her at home and then we will move into it. We originally purchased it, creative financing. We took out a line of credit against our after-tax stock portfolio because it has a 1% interest rate. So our interest-only loan on this property was $425 a month, renting it for $3,500 a month, that’s some killer cash flow. I do okay, but 1% rates didn’t stick around very long. We could have taken out a 5% mortgage and in hindsight, maybe that would’ve been a good idea, but the mortgage payment was going to be 2,150, principal and interest. Taxes and insurance are always going to be the same, so it doesn’t matter, but the difference between $425 and 2,150 is a lot. Rates went up. I don’t know if you guys caught that very tiny news, but rates went up and now we are paying $3,000 a month interest only on this line of credit.
So we went from $5,000 a year to $35,000 a year paying for this property. We put $50,000 into it, new kitchen, new floors, new walls, new doors, decorating for the midterm rental, new appliances, new bathroom, new paint. We xeriscaped the outside so we didn’t have to take care of it. We didn’t have to have the tenants take care of it. We purchased it in June of 2022, and it went into service in April of 2023. As we were working on the property, there was no income coming in. The line of credit started to shrink. So the line of credit is you have this much money in your stock portfolio, they will lend you approximately half, except it’s not approximately half depending on what kind of stocks are in your portfolio. The line of credit started to shrink due to the volatility of the stock market at the end of last year, and as we were watching it fall, we decided we would open up a HELOC on our primary residence just as a backup. We didn’t take anything out.
A HELOC doesn’t cost you anything unless you take money out, unless you borrow it, a home equity line of credit. When we took out the portfolio loan, we had a line of credit of $1.5 million. We borrowed 500,000 giving us a buffer of $1 million, but tech crashed and our stock portfolio is tech heavy. So we went from a $1 million buffer all the way down to zero and into negative. So we ended up taking money out of the HELOC and putting it into our portfolio loan because when the buffer goes away, they start selling your stocks. They don’t ask you what stocks you want to sell, they sell what they feel like selling, and we didn’t want them to do that. So we put money into the HELOC, but that costs money too. So we are now back to a roughly $500,000 buffer, but it was a bit of a touch and go there for a while.
We did rent it out for $3,500 a month from April until just last weekend when our tenants moved out, and now we have it on the market. If anybody needs a place in Longmont, we now have it on the market for $3,900 a month, and it will cover the interest-only loans. Once interest rates go down, our payment will go back down and life will get a little easier, but we bought it because eventually we want to move in. When this house comes on the market again, if somebody else were to have bought it when we bought it and rehabbed it, they wouldn’t have rehabbed it the way we did. They wouldn’t have done many of the things that we did, and it might’ve been somebody who bought it and moved in and doesn’t put it back on the market for years. So we bought it because of timing, and we have a lot of reserves to pull from that we can cover any negative cash flow.

Rob:
So is the idea here, is it like a long-term equity play or are you just waiting it out until interest rates drop down and that’s when the cash flow goes back up?

Mindy:
The cash flow will go back up when the interest rates drop, and we are going to have it as a rental for about five years until we move into it when our kids move out of the house.

Rob:
Got it. So you’re just waiting it out until you can move in, basically.

James:
Yeah.

Rob:
Yeah. Okay. That makes sense. Is this a deal that you would’ve done starting out?

Mindy:
No, I would never have done this deal starting out because starting out, I didn’t have the line of credit to pull from.

Rob:
James, you’re looking like you want to jump in over there. What say you?

James:
Well, the reason I love this is ’cause I definitely don’t think this is for the brand-new investor, but this is all about planning your goals and where do you want to be and your real estate and your investments are going to shift you there. Mindy found a really good deal with some good equity position, but the big benefit of this deal is when she moves into it in five years, she’s already created this massive equity gain. When she sells her other property, she’s going to get the first $500,000 in equity tax-free. So when she moves into this property, she’s probably going to have a very similar $500,000 in tax-free equity in this property with the appreciation. So she may be taking a little bit of a loss for the next couple of years on this.
Rates will settle down. She’s going to break even. That’s a short-term pain. But when she moves in, if you are not paying taxes, even 30% on 500 grand, she’s instantly making more money by walking into a property that the equity has already been created. So she sells that in two years, she’s making that money tax-free so it all works out. The only thing I’d always watch out for, especially with newer investors, is stay away from floating debt. Floating debt makes it really hard to perform a deals because you don’t know what’s going to happen in the next 12 to 18 months. Unless you have a huge padding and huge buffer in there, I would stay away from floating debt.

Mindy:
I am so glad you brought that up, James, because yes, that is absolutely a great point. Do not just jump into floating debt. I have been investing since God was a boy, and I didn’t even realize that rates could go up that fast. Do you remember last June I had the opportunity to get a 5% loan? I’m like, “5%? Why would I ever pay that much? I have a 1% right here?”

Rob:
Any last comments before we close this court?

David:
Yes, I have a point I’d like to make about the floating debt. Thank you, Your Honor. My question for both James is Mindy, when you think about the avatar of investor that is most likely to say, “How can I use floating debt? How can I get a HELOC to try to buy a property? How can I borrow money? How do I use OPM to buy this property? How do I find someone to partner with?” All of these things that increase the likelihood that you’re going to lose money in real estate, when you think about the type of person that’s typically asking those questions, what’s their financial position usually like?”

Mindy:
They don’t have money.

David:
Yes, that’s exactly right. So the point of living a life that’s financially frugal and focusing on making money, the stuff I talk about in Pillars of Wealth, the stuff we’re talking about now, is to help you avoid that risk zone that you fall into. When you don’t have the money, you start stretching, you start exposing yourself, you’re overreaching to try to make things happen. When the market’s going up, up, up, up, up, you can get away with those moves more than when the market is like it is right now. Yeah, people have been listening to podcasts and hearing for seven, eight years now, “Oh, I just borrowed that person’s money,” or, “I just got a HELOC,” or, “I just got floating rate debt, at a very low rate,” and they were able to get in and out. Luckily it worked out for them, and I’m happy it did. But I’d rather see people not get into the point where they’re so desperate for money that they’re going to Vegas and they’re putting it all on black and crossing their fingers hoping that it works out.

Rob:
So we’ve heard the cases, we leave it to you at home to judge our offenders, but there is some good rules to vet deals like these and never do a bad deal. So thank you to all of my defendants/plaintiffs. At this point. I don’t know which one you are. I never finished law school, but I appreciate y’all coming onto the pod today.

Mindy:
Rob, thank you for having me. This is always fun to talk to you and James and David too.

Rob:
Nothing from you, James? You’re like, “Meh.”

James:
I want to challenge anybody that wants to make the challenge of cash flow versus equity gains. I think we have a great debate about this. We want the cash flow equity rumble. Let’s break down the math and see where it goes.

Rob:
Oh, okay. Is this somewhat of a challenge here? Are you trying to challenge people at home?

James:
I challenge any listener that wants to challenge equity growth versus cash flow to a cash flow rumble, cash flow cage match right here on BiggerPockets.

Rob:
All right. This is great. Okay, so if you think you can go toe-to-toe and head-to-head against James Dainard in a cash flow cage match, please comment on the YouTube video down below. Reach out to us on social media and we will arrange it for an amazing episode on BiggerPockets. If you’d like to connect with any of the panelists from today, by the way, check out the show notes for this episode. We will leave links to all of our social media down below and be sure to tune in on Friday to hear Dave Meyer, David Greene and James Dainard break down the state of real estate investing, including strategies are working and what to watch out for. So you’re not going to want to miss that. Thank you to everyone for listening, and we will catch you on the next episode of BiggerPockets.

Mindy:
To apply to be on the cash flow cage match, go to biggerpockets.com/guest and put cash flow after your name in the application.

Meredith Whitney, Meredith Whitney Advisory Group CEO, joins ‘Squawk on the Street’ to discuss why Whitney believes sports betting has and can further impact the housing market.

It’s almost that time of year! As you make your list of resolutions for 2024—somewhere between “Peloton more” and “learn to make paella”—consider adding a few real estate-specific bullets to the list. 

Not sure what to include? No need to reinvent the wheel. We asked two investors with different strategies, target cities, and portfolio sizes what was on their resolution list for 2024. Let these inspire your own resolution-making!

The Investor

Claire Johnston is an investor and realtor in Minneapolis and currently owns three doors. One is a single-family; another is a duplex she is currently house hacking. Her real estate investments bring in about $4,000/month. 

The Resolutions

1. Build my real estate income to match my W-2 income.

2. Personally purchase a fourplex.

3. Start a real estate syndication.

Why and How?

BiggerPockets: Why these resolutions?

These goals support my overarching life goal of creating a business I enjoy working in every single day that supports me and my community. While my ultimate goal is financial freedom, I am less attached to this goal than I am to creating a meaningful and rewarding daily life for myself and those who work for/with me. Helping others, renovating historic homes, and providing safe homes for tenants are all parts of my business that I find incredibly rewarding.

BiggerPockets: How will you achieve them?

As a huge fan of New Year’s goals, I have found the secret to achieving them is making a plan at the beginning of the year outlining when you will work on them on a daily/weekly/monthly basis. A year is a long time, and it’s easy to lose sight of large goals through the ups and downs.

Creating a plan enables me to show up consistently. Even when it feels like I am accomplishing nothing or going backwards, I find that small efforts done consistently have a greater impact on helping me reach goals than when I make massive efforts but inconsistently.

I also find a self-imposed deadline incredibly motivating, and these deadlines help focus my work time. Every goal will have a few milestone deadlines that I will then track my progress against. 

For example, for my goal of starting a real estate syndication, my milestone deadlines could look like:

• Q1: Finish researching syndications and start taking action.
• Q2: Connect with a minimum of X accredited investors.
• Q3: Pitch X number of deals to investors.
• Q4: Get a property under contract.

BiggerPockets: How will you monitor your progress?

I like tracking key performance indicators (KPIs). Mine are focused on how much time and effort I am putting into a goal vs. an immediate outcome. Here are a few metrics I am using to track my progress:

Build my real estate income to match my W-2 income:

• How many hours per week am I educating myself on real estate-related items?
• How much time am I spending weekly on lead generation activities?

Personally purchase a fourplex in 2024:

• How many deals in the Minneapolis market am I analyzing monthly?
• How much am I saving monthly for a down payment/renovations?

Start a real estate syndication in 2024:

• How many hours am I spending weekly researching syndications?
• How many potential investors have I connected with monthly?

In reality, I have learned that life is complex, and you are not always in control of the outcome of your actions. Instead, for 2024, I am choosing to focus on the effort I put into my goals (see above KPIs!). If, at the end of the year, I can confidently say I put in the effort, I will be content with whatever outcome or progress they bring.

I’ve had years when I completely missed every goal on my list, only to wildly exceed my expectations the next year. Progress is not linear, and allowing myself to set big goals without the attachment to a specific outcome on a specific timeline has allowed me to be resilient in the face of unforeseen circumstances and maintain my commitment to achieving goals over the long term. 

The Investor

Sam Dolciné is an investor and podcast host (Black Real Estate Dialogue Podcast) who invests in the Dayton, Ohio, area. 

The Resolutions 

4. Get my bookkeeping organized. 

5. Get smarter about creative financing.

The Reasons Why and How

BiggerPockets: Why these resolutions?

Bookkeeping: It’s important to understand how your business is doing financially. You may find that you are overspending in certain areas or not spending enough in certain areas. For instance, a typical repair or maintenance item you may have could be done at a lower cost.

I’ll schedule time to review receipts, bank statements, and the accounting software. I may also hire a bookkeeper to do this on a monthly basis.

Creative financing: Off-market deals [from] distressed property owners (e.g., those who need to sell quickly due to a life circumstance) can be advantageous because you may be able to acquire them for less than market value. Creative financing, such as seller financing, can help avoid using the bank. I want to learn more about finding off-market deals and close on at least two using creative financing.

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

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

When you are renowned for your expertise, business becomes easier. Rather than going out and convincing people to work with you, they come and find you. Prospects complete your intake form, follow you on LinkedIn, make requests and are ready to pay. Your reputation precedes you and signing clients seems simple. If you’re good at what you do and you know your stuff, you might be closer to this scenario than you think.

Dillon Kivo helps clients establish their expertise to grow their personal brand and win new clients. As a Wall Street Journal bestselling author of The Authority Playbook and owner of PR company Authority Titans and news site Kivo Daily, his clients include Fortune 500 companies, high-level executives, household-name entrepreneurs and budding thought leaders working on making their mark.

Kivo shared his top ChatGPT prompts to become an authoritative thought leader, based on his five pillars of establishing your expertise. Copy, paste and edit the square brackets in ChatGPT, and keep the same chat window open so the context carries through.

Become known as a thought leader with these ChatGPT prompts

Access mastery

“Mastery is the most basic element of expertise and is only accomplished through dedication to a craft or business,” explained Kivo. To be considered an expert, you have to gain mastery, which he said is, “a highly misunderstood concept.” Contrary to popular belief, you don’t need years of experience and education to build mastery, because “many people spend years of their lives practicing the same subject only to be upstaged by someone much less experienced who happened to discover something that the expert who had been working in that niche for years had never considered.” Use this prompt to find the loopholes and hidden passages reserved for those who know where to look.

“I operate a business in [describe your business and niche]. To gain mastery and establish myself as an expert, I’m looking for potentially overlooked strategies that could propel me ahead in my field. These might include unique topics to write about, untapped client demographics, or innovative approaches within my niche. Based on my business description, can you suggest such strategies or areas where I could focus to develop a deeper expertise and stand out from others with more traditional experience? The aim is to identify less obvious but highly effective paths to becoming an authoritative thought leader in my industry.”

Practice consistency

Consistency will help turn your actions into repeatable results, especially when it comes to your personal brand. “Consistency is a mark of a true expert. Rather than getting lucky and creating the perfect product once, the expert knows how to consistently provide the necessary skill to create the perfect product over and over again, like an assembly line.” Are you doing this with your online presence? Could you honestly say that you are showing up consistently, with a consistent commitment to excellence? “This isn’t something you do with random sprints of energy,” said Kivo, “It’s a pattern you develop over time.” Social media helps you share your expertise on a regular basis, but your message has to match. Check your post consistency with ChatGPT.

“I’ve pasted my recent social media posts below. Could you assess their consistency in terms of language, style, tone, and topics? I am aiming to establish a strong personal brand, and it’s crucial that my content reflects a consistent identity across all platforms. Look for patterns or deviations in how I present my messages, the type of language I use, the overall tone, and the subjects I cover. This analysis will help me understand if I am successfully creating an assembly-line-like consistency in my branding efforts, or if there are areas where I need to improve to maintain a steady and reliable presence.”

Use social proof

In a sea of many companies or experts that all do the same thing, social proof will make you stand out. “The opinions of customers and clients will either drive sales in the future or stagnate the returns that your business experiences.” How often are you collecting reviews? Every compliment, every bit of positive feedback, every time a client says you changed their world, make sure it’s saved and used in your public communications. Kivo recommends you provide, “direct responses to customers on every channel through which they contact you,” and “directly engage your clients however you can.” Use this prompt to provoke email testimonials that you can share far and wide.

“I’m drafting an email to my client to request their feedback and stories about their experience with [describe the nature of your service/work]. This feedback is vital for showcasing the effectiveness of our services on my website and in public communications. Can you help me compose an email that encourages them to share their positive experience, either in response or on one of these platforms [add names of where you want the reviews]? It should convey appreciation for them or their business, highlight the importance of their feedback in helping others [mention specific ways their feedback helps], and assure them that sharing their experience is straightforward and impactful.”

Harness existing knowledge

If you’ve got this far, you have existing knowledge. But you might not be making the most of it. “Experts get their position by proving a deep knowledge and understanding of a niche.” Customers know exactly what to ask them for. Are you clear on what you know, and could you explain who you are and what you stand for in simple terms? Become well known in your field by being synonymous with your craft, which Kivo says is simply, “what people pay you for.” He added that, “many will pay for education, but when it comes to getting a task done, they pay for the educated.” Get crystal clear on what you’re actually selling with this prompt, and use it for meeting new people and explaining what you do on your website or social media bios.

“I work in [describe your industry or field] and create results for my clients like [describe the specific results or changes you bring about for clients]. Based on this, can you help me define the exact niche I own and what I stand for, in simple and effective terms? The goal is to articulate my unique value proposition and expertise clearly, making it evident why clients should choose my services. This definition should encapsulate my knowledge, experience, and the distinct benefits I offer, positioning me as a go-to expert in my field.”

Leverage new skills

“While there is a lot you can do to expand your skill set, the only skills that matter are those that differentiate you from your competition,” explained Kivo. If you learn what everyone else is learning, you’ll get the results everyone else is getting. But you want more than that. Being an authoritative thought leader means amassing new knowledge and skills, and sharing the results with your unique style. Can you teach someone how to do something brand new? Can you be at the cutting edge of your industry and pass on the insights? Position yourself as a thought leader by learning and teaching new material. Figure out what to learn and develop with this simple prompt.

“In my current role as a [describe your current role or position], I’m looking to expand my skill set in ways that set me apart from the competition in [mention your industry or field]. What are the emerging skills or knowledge areas in my industry that I should focus on learning to maintain a cutting-edge position and maximum relevance with my clients? The aim is to identify areas where I can gain new expertise that not only differentiate me but also allow me to share unique insights and teachings with others, thereby reinforcing my position as a thought leader.”

ChatGPT prompts to establish and grow your authority

Become an authority in your field and win the game of business. The more established you are, the more people will seek you out, the less effort it takes to win clients and create results. Access mastery and find new paths to explore, practice consistency and build trust in your public posts, and generate social proof by asking happy clients to share their words. Harness your existing knowledge and ensure it’s clear who you are in the minds of your audience, then figure out what to learn and apply to stay super relevant. Use these ChatGPT prompts to soar your influence to new heights.