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Rob:
This is the BiggerPockets Podcast show 598.

David:
You got to be dedicated. This is not a market where deals fall into your lap, or people come to you and beg you to buy a property and you make up your mind if you want to do it. A lot of competition for these assets right now, they’re going up in value very quickly. Rents are going up just as fast. The stakes are higher than they have ever been. And so now is the time to continue taking action.
What’s going on, everyone? This is David Green, your host of the BiggerPockets Real Estate Podcast, here with a very special episode for you. Today is all about The BRRRR Method. Does it work in today’s market? Is the BRRRR extinct? Did the BRRRR ever work? Has anyone ever even done a BRRRR or is this more of a concept than a real thing? All of those questions will be answered here today. I am joined by my amazing co-host, Rob Abasolo. Rob, how’s it going?

Rob:
Hello? How’s it going, man? Typically, I try to come in here with some profound quotes, a couple of sound bites, pontificate, have a little bit of banter. But we had so much good stuff in this episode that I think we can probably get straight into the nitty gritty of what it takes to execute a successful BRRRR.

David:
Yeah, to be completely honest with you guys, this is less of a podcast and more of a bit of like a masterclass. So this is probably what you would expect if you paid money to take a course on how to do a BRRRR, or you wanted to have somebody who is doing a deal, that you paid to show you what they’re doing, where you’re getting this all today for free. So in today’s podcast, we’re going to talk about what The BRRRR Method is. If you’ve heard about it, clarify how that works.
We’re going to run you through a hypothetical BRRRR where we give you the numbers and the details, show you where you would find them, and then show you how you can use BiggerPockets calculators to do the heavy lifting for you, and let you know if you should move forward with this BRRRR or not. We’re then going to show you how, if you’d like, you can sign up to use all of those resources all the time. And then we’re going to get into a deal I am doing right now. The property is in contract, I share some pictures. We share some videos. We give you the insight into how I’m doing the deal. And then I share all the numbers myself of this deal to show you not only that BRRRR is possible in today’s market, but to go even deeper and show you how you could make it work for yourself.
Before we get into all of this content, I’m going to share with you today’s quick tip. And it is, if you’ve ever thought about going pro on BiggerPockets, now’s your chance to do so. If you sign up using the code REPOD21, you will get a discount on the membership. You’ll get a free copy of my BRRRR book, one of the best selling books in real estate and on BiggerPockets. And Rob himself actually said some very nice things about it. But more importantly, you will get access to the calculators where you can run these deals yourself, just like I do, just like Rob does, so that you can start to taking action today. Now, if you’re already a pro member or you don’t want to sign up, that’s cool. You’re going to love today’s show because it is so nitty gritty, behind the scenes, brass tacks, insert analogy here for the realist.

Rob:
Even if you decide not to sign up for the pro membership today, you can still go in and actually use all of these calculators up to five times for free.

David:
Yeah. And I highly recommend that you do that. One of the big things that scares people from investing in real estate is math. They weren’t good at math before. They’re afraid of math, or they don’t know what numbers they need to be getting. Well, the BiggerPockets calculators will walk you through all the questions you should be asking, what the data that you need to be inputting is, as well as how to find it. It makes it not scary. So I never liked math when I was in high school. I didn’t like it when I was in college, I was not a math guy. I was more of a logic, reason type of a person. Well, I don’t mind math with real estate, I actually like it a lot of the time. So go check it out. Play with the calculators. They got a BRRRR calculator, a rental estimator calculator, a rehab budget calculator, all kinds of cool calculators for you to play with. And that being said, we are going to get into it. I hope you enjoy the show.

Rob:
Oh, one little thing here. Stick around into the very end for a very good story on quite the pickle that David found himself in on his own property. You got to stick around to the end though.

David:
Oh, and last thing, let us know what you think in the comments. If you are not watching this on YouTube, this is a show where you should be. Please follow us on YouTube because you’re going to see all the pictures that we’re sharing. And then let us know in the comments what you thought about today’s show. All right, let’s get into it.
All right, everyone, you are in for a treat today. Rob and I are going be going into The BRRRR Method. Questions have been asked. Does this still work? Can I still BRRRR? Is BRRRR dead? What does BRRRR mean? And today we are going to answer a lot of those questions, as well as give you some examples of a deal that I’m working on right now using The BRRRR Method. Rob, you’re kind of new around here. I like you. You’re doing a really good job. But I’m curious, what was your impression of The BRRRR Method when you first kind of got into the BiggerPockets world?

Rob:
Well, give me one second because I think I can show you how important this method is. Right behind me, at all times, I keep the BRRRR bible always on the set of the raw built studio.

David:
Also known as the BRRRRible.

Rob:
The BRRRRible. That’s right. I like that. Yeah, man. So I’ve really only done flips. I’m looking to get more into what you and I call the BRRRRster, which is obviously the same principles and everything like that. Except instead of refinancing it into a long term rental, we’ll refinance it into a short term rental. But all in all, all the same concepts apply here.

David:
Yeah. So in today’s show, we are going to go over a hypothetical deal to show you exactly how the BRRRR would work. We’re going to do what we can to explain how the BRRRR works in today’s market. What strategies you want to use, kind of how you want to execute this. We’re going to show you how BiggerPockets has resources that can do all the heavy lifting for you, because if you’re like me and you like to get everything done quickly, it’s very helpful. And then we’re going to, near the end of the show, break out a deal that I’m actually working on right now, it’s set to close in about a week. I’ve been getting my rehab estimate. I’ve been running my numbers. I’ve been making some content about what the house is going to look like. I’ve gone back and forth because this is a bit of a more complicated rehab, because it’s going to end up as like a BRRRRster, like we talked about. So it’s either going to be a short term rental, or it’s going to be like 30 day plus corporate housing type stuff.
I’m going to kind of test out both sides and see where I get more demand. But you get a behind the scenes look at exactly what happens when I and Rob look at a property, see what we’re going to do with it. Because as we’ve said before, in today’s market, you don’t really find great deals, you make great deals, the vision that we have, and then what it should look like in the end. So I don’t know that we’ve ever done a show where we went into this much depth about an individual property. I guess we did one that was about the property you and I are buying in Scottsdale, but there’s not a ton of rehab on that one. That’s going to be more how we’re going to market it, maybe how we’re going to furnish it, a little touch up here and there.

Rob:
A few little things to spruce it up. Nothing crazy.

David:
Yes. That is more strategizing how we are going to generate revenue with this property. Whereas this one we’re going to talk about today is going to be pretty straightforward with the revenue, but it’s going to be a lot more intensive on the creativity. So I’m ready to get into this thing. How about you, Rob?

Rob:
Yeah, man. I’m ready to experience a masterclass from Sir BRRRR himself. So I mean, this is an exciting day for me.

David:
There it is. So I’m going to ask you, young Padawan, what is your understanding of The BRRRR Method? Pop quiz. Let’s see what you know.

Rob:
Well, obviously first you must buy. The B in BRRRR is you must buy, you must acquire. You must go and obtain a property that you feel, obviously, has an added value component that you can bring to the table. Next, you must rehab. That is the first R in the BRRRR analogy or in the BRRRR acronym. This is where you go, you fix it up, you get it ready. You add the value. You turn it from a diamond in the rough to just a sparkling diamond. You then go out and you rent it. Again, this could be short term rental, midterm rental, longterm rental. The more traditional approach here would be turning it into a 12 month rental.
And then you will take those rents and that lease agreement to a bank, and you’ll get it financed and refinanced. Sorry. Specifically refinanced. Sorry. I know we’re working in the acronym here. You get it refinanced to hopefully pull out most, if not all of your money out. Although leaving a little bit of money in every so often is not a loss, because you still have equity in the house and everything like that. And then the final and perhaps the most important for building your wealth. The final R, repeat. Where you go and you do this over and over and over again after you’ve read the BRRRR Bible.

David:
So here’s the best part about The BRRRR Method. If you can memorize what it stands for, you know how to do it. That’s what I love about it. Well, what am I supposed to do next? Well, what letter comes next? It kind of walks you right through it. And basically what I would like people to understand about The BRRRR Method is it’s a way of maximizing your capital. It’s a cool way of talking about real estate. I think it’s a good blueprint to use because it forces you to excel at each level of what an investor has to do. You want to buy a property right. You want to know how to rehab it. You want to be able to analyze it, so know what it rents for and maximize the income it makes. You want to be able to use equity. Or sorry. You want to be able to use leverage to increase your ROI as much as possible, which is the refinance. And then you want systems in place to make your job easier, which is repeat.
So in the BRRRR book I talk about, to become a black belt investor. You have to do something a lot. Just like to become a black belt at martial arts, you got to practice the same movements over and over and over. Well, real estate investing and life is no different. So The BRRRR Method, one, will kind of force you to invest in real estate the right way. But what it’s really doing is getting you more of your capital out of the deal and into your bank where you control it, where the market crashing can’t take it away from you, where it’s not useful to you. You can’t use it if you need money in reserves or you need to fix something up.
Basically, capital is how you make money with real estate. You spend money and you buy something that’s worth more than what you paid for it. You needed capital to do that. So if you can’t get capital in the bank, it’s very difficult to add value to real estate and to run a sustainable business. But when people lose real estate, it’s usually because they didn’t have enough capital to sustain it. And so, this is a way that will help you scale faster, scale more safely and invest better. It’s very hard for me. I’ve yet to hear a criticism of BRRRR that actually makes sense to me. When you’re doing it the way that we’re teaching it, it just forces you to invest in real estate the right way.

Rob:
Well, I’m a sucker for a good acronym here. And you mentioned something a little bit earlier. You said, oh the market crashing or this and that. So obviously, we’re in a pretty competitive market right now. Interest rates are obviously going way up right now. There’s a lot of people bidding on the same thing, overbidding. And it can be seemingly a bit of a discouraging market to a lot of people that are trying to break in. I’m kind of curious, just in your opinion, is a BRRRR still applicable in today’s real estate market?

David:
Here’s why I think it is receiving criticism as just being harder to do. The way we have typically described BRRRR would focus on adding value through the rehab. So we are usually looking for a fixer upper property. That’s really where it works the easiest. And because there are less fixer upper properties right now, it becomes more challenging to pull this off. So when I was first doing this, 5, 6, 7 years ago, nobody wanted the trash houses. They were just sitting there for a long time. People wanted a house that was move in ready, or that didn’t require a lot of work. So it’s pretty easy to go out there and find something that either you could add some square footage to, you could upgrade it. Just maybe you got rid of the trash that some hoarder had left in there, and bam, you’ve added some value and you’re on your way to executing a BRRRR.
Where in today’s market, even the worst houses tend to be selling relatively quickly. There’s not enough inventory. So it’s harder to earn money through the rehab. That doesn’t mean you can’t, as you guys are going to see on the deal that we’re going to show you at the end. This is a big value add. It’s a house that needs some work, quite a bit of work. And it’s going to be both cosmetic and functional, as in we’re adding some square footage to the property.
But the good thing about today’s market is that because there’s so much demand for these properties, they’re harder to get, you end up able to add equity simply just by owning it. So a lot of people that are using The BRRRR Method are watching their properties appreciate during a period of time before they refinance and after they buy it. It’s actually like this wind at your back that makes it a lot easier to get your value to go up. So while you lost something on, it’s harder to find the deals to do. You gained something on, when you do find it, it tends to be easier to add value than it ever was before.

Rob:
Okay. So I guess with that in mind, you’ve done this a few times. I don’t know. You’re no spring chicken as it pertains to The BRRRR Method. So kind of curious, my wife always says I use that phrase wrong. And I’m almost positive I used it wrong just now again.

David:
Spring chicken?

Rob:
Spring chicken. Well, she’s always like, well, spring chicken means it’s like a physical. [inaudible 00:12:51] a spring chicken in regards to a physical activity. But you could argue that a BRRRR is a very physical activity. So sidebar here.

David:
I love that you’re arguing with your wife in your head in the middle of the podcast right now. This is awesome.

Rob:
We’ve had this conversation more than you know. So as a no spring chicken in the BRRRR field, kind of curious here, what are some key elements to understand to perform a successful BRRRR? Is there anything that really stands out to you when you’re examining a deal or anything that you’re looking for specifically that is a very big indicator of, A, getting equity in the house simply by holding it, but, B, just being able to successfully execute?

David:
Well, there’s basically three ways that I see that you get equity. The first one is holding, if the market appreciates. We never know if it’s going to appreciate, but it has been. That’s one way you get equity. The other is by buying the equity, meaning you got it at less than what it’s worth. So you got a really good deal. And then the third way is by creating value through the rehab. So you can make a property worth more by fixing it up. But what you’re really doing, when we talk about this, is you’re trying to increase the after repair value. That’s all that the goal is. And I do just mentioned three different ways that you can do it.
And in this property I’m buying, I’m actually using a combination of all three. And we’re going to talk about how I got it at less than what it appraised for, how I’m adding value through a rehab, and how appreciation is also just shooting up. In fact, the house that I’m buying, man. There’s a house, it’s at the very top of like a street that goes up a hill. So it kind of ends in a cul-de-sac. And then from there, there’s a private drive going up to this property. Well, one of the houses before you get to the top sold for almost, actually probably more than what I paid for this one. It was listed for close to what I paid for this one, but I’m sure it would’ve sold for more than that, because it sold very quickly. And it’s about half as big.
So as I’m waiting, I got it at less than it appraised for. That one sale made it worth more than even what my appraisal was, right off the bat. So I’m seeing all three ways that are adding value to the property. Now, once you’ve done that, the BRRRR kind of takes care of itself. At that point, you’re just trying to manage a rehab, and you’re trying to keep your holding costs low as you get to the finish line when you can refinance it.

Rob:
So I’m kind of curious here, because you have done this a few times. And I know that you’re a really big fan of adding an extra room if there’s a way to slice a house this way, right? Is there ever a moment in a BRRRR, in your career, where it has made sense to add square footage to haul on additions to the house or anything like that?

David:
All the time? Yeah, that was actually one of my go-to ways when I was investing in Northern Florida five years ago. I would look for a sunroom that could easily be added into part of the house. So if I just ran electrical and plumbing, and if the kitchen was really close to it, I had all the infrastructure right there that I needed to put in. I would look for garages that were attached to the house, especially if they also had another detached garage, and I would convert the garage into part of the home.
A lot of houses have mud rooms, utility rooms, like different names for a structure that’s there, but it’s not included in the actual square footage of the house per the tax records. Maybe they did an addition and they didn’t have it added, or maybe it didn’t comply for whatever reason. And so, because we didn’t have to build it from scratch, we would just go in there, find existing space and then convert that into the home. And if you could take a house that’s 1,100 or 1,200 square feet and make it 1,500 or 1,600 square feet, you’re adding significant value just by making it bigger.

Rob:
So really, it makes a lot more sense to convert than to just newly construct square footage.

David:
Whenever you can. If they’ve already done some of the work, you want to hijack onto that and develop it rather and assume you have to build from the ground up. Now this is a side note, but this is one of the reasons that when people ask me the question of, “Should I build an ADU on my property?” The answer’s not always a quick yes. Because many times, you have to finance that ADU 100% with your own money, whether it’s cash in the bank or a refinance from something else. The point is, you can’t go to the bank and say, “Can you pay for 80% of my ADU, and I’ll take a loan on that money?”

Rob:
Yeah, that was me. I paid cash for mine.

David:
So let’s say you got to spend 100, 120 grand to build this ADU from the ground up. Would that have been better used as a down payment on a completely new property? And many cases, it can make more sense to do that. So that’s one of the, I guess I’m using this to highlight that ADUs are inefficient when you have to build them completely from the ground up. Now, if you’ve got prime real estate, it can make sense to do that. I’m not saying don’t do it. I hope you’re not hearing me. But you got to look at it a lot more close. The stuff that I was buying in Northern Florida was not really expensive real estate. It wouldn’t have made sense to spend $80,000 to build a new structure to make my existing home bigger when I could have spent $80,000 and bought a completely different property already constructed.

Rob:
Yeah actually, the reason I did it was because I was in LA. So it is like prime real estate out there. Land is at a shortage. And well, I was trying to do the supercharged house hack, if you will, where I was renting out a little studio under my house. And I was like, well, hey, if I do a little tiny house in my backyard, not only will I cover my mortgage, but I’ll make more. So it did make sense in that instance. But I definitely feel you what you’re saying, where, yes, I had to pay a private loan that was like 7.54% interest. I ran out of money halfway through. This was my first really, really big project. Honestly, very thankful that I did it, just from the learnings of it. But yeah, I totally see your points there.

David:
Yeah. I would say areas like Los Angeles, Miami, where I am in Northern California, The Bay Area, real estate’s very expensive. So adding an ADU can give you the return you want. Los Angeles, yes. Louisiana, no. If you can look at real estate that’s going to cost $70,000 to $90,000. You spending $50,000 to $60,000 to build additional square footage to that property isn’t going to make sense. There’s also situations where the property is 3,000 square feet. And adding another 500 square feet isn’t going to make a huge difference unless it’s prime real estate. So these are things you have to keep in mind. And I’m bringing this up because a lot of people hear this information and they say, “ADU, yes or no?” And they just want to simplify it to that degree. Where, as real estate investors, it’s a little more art than science a lot of the time.

Rob:
Especially on something like that. I mean, because there are definitely some instances where an ADU. And either way, building an ADU, did you think that concept alone, does that even fall under the BRRRR strategy?

David:
It would if the ADU’s adding value to the property. But that’s tricky. Because the way that you determine if it added value to the property is based on the appraisal of your refinance. And if there’s not many ADUs around for appraisers to use as reliable comparables, they’re not going to give you the value that you want. And because ADUs are a relatively new thing. I mean, they’ve been around for a while, but not en masse. It’s only a new thing that we’re starting to see them popping up because of the housing shortage. There’s a very good chance that you spend $100,000 to build an ADU and the appraiser gives you $10,000 or $20,000 of extra value in your property. And that would be a terrible investment.

Rob:
Oh man, I also can relate to that. Because I bought a house. Well, I was in escrow on a house in Destin. I was going to close. And then the appraisal came in and they valued the back house, which I think was an ADU officially. They value that at like 25% or 30% of the actual value of the home. And so I had to walk away. The appraisal came in $300,000 less. And then when I built my tiny house in LA, my ADU, I had to get an appraisal to come out to do a cash out refi. I was one of the first people to ever do an ADU in that regard, especially in my neighborhood. There were no comps. So I think the appraiser, it kind of threw him for a loop. I was able to get most of it back, thankfully. But you know, little bit of fighting there, I think.

David:
Oh, I’m sure you probably had to fight quite a bit. The average investor who’s new at this wouldn’t have known what to do. And that’s an example of why, whenever possible, we don’t want to build from the ground up. We want to take existing structure that isn’t being used efficiently and change it. So I’m a big proponent of garage convergence. If I buy a property, which I’ve done several times, and it’s got a big lot, there’s plenty of parking. I’d rather take a detached garage and turn that into an ADU, than build something from the ground up. And then instead of building from the ground up, I’ll just build like a new, I don’t know what you would call it, like a non-covered garage.

Rob:
Oh, like a carport?

David:
A carport. There you go.

Rob:
Yeah. Those are very popular in Joshua Tree, the carports. And then even in my neighborhood here, almost every single house. I’ve never really seen it before, the way it is in this neighborhood of where I’m at. But like every single house has a garage apartment. And so it shows you that a lot of the houses here were either fix and flips or some form of BRRRR because they came in and they fixed it. They flipped it. And then instead of just rehabbing the garage, they converted it into like a garage apartment.

David:
Very, very common to see in areas where the land itself is more higher value, because they’re going to do exactly what we’re talking about here. So for those that maybe want to know more about what a BRRRR would look like, or are confused about how to know if they should do it. You are in for a treat. We are actually going to walk you through a hypothetical BRRRR, and show you how BiggerPockets resources can do all the math for you and help you figure out if this is a deal that you should buy or not. So Rob, any questions before we jump into the BiggerPockets calculators here and we show somebody how to analyze a BRRRR deal.

Rob:
No. I’m excited. I’m excited to see my sensei at work. So before we jump into the calculator here, do you mind just walking me through this property? Maybe give me some of the nuts and bolts of the actual process or what you were planning on rehabbing here?

David:
Yeah. So a property like this is what will catch my eye. So as we can see from the main picture on the left, the front of the house, it’s not in terrible shape. The roof looks like it’s solid. There’s no reason to think it’s falling apart. You can’t see that this is actually a duplex and it has a downstairs from this angle. But I like that, because that means that other people that are looking at pictures on the MLS or whatever, they’re not going to see it either.
When we get into the actual interior photos here, we’re seeing that there’s not mold. There’s not anything like fire damage or smoke damage, water damage that would really scare me. But it’s also not updated. So your casual buyer’s going to skip right over this. So swipe it left. If this is housing dating apps, they don’t want anything to do with this. But there’s some good bones here. This is the one that other people are going to be passing up. I can tell from the street scene that it’s a good neighborhood, that the cars all look like they’re in pretty good condition. There’s not garbage or graffiti all over the streets. It actually looks like a nice area as well, which is very important.

Rob:
Yeah. I know. My test on that kind of stuff is, I mean, this is Google Maps, granted. But even better, every single yard that you can see here is pretty much mode, right? It’s all manicured. So curb appeal kind of checks the test there.

David:
And I’m seeing green. The grasses are green.

Rob:
That’s right. Hey, this isn’t a seeing green man. This is just a regular show.

David:
And we see here, in additional interior photos, it wasn’t-

David:
And we see here in additional interior photos, it wasn’t marketed well, so this is clearly a realtor who is probably getting a discounted commission and isn’t spending money on the photos. And in today’s, like I mentioned, real estate house dating apps, that’s how it works. There’s no list of properties that no one else has. Everybody’s looking at the same stuff. And so if your photos don’t look right, people are skipping them. These photos are dark. They look like they’re taken with an iPhone six. They show you what’s there, but it’s definitely not a flattering look, so a lot of my competition’s going to skip right over this. But what I’m seeing is outdated but good bones.
The bathroom looks like it’s in okay shape, it already has a shower. I don’t have to put a new shower in. It’s got a vanity. It’s just outdated and ugly. And then you can see the mudroom the kitchen are very outdated, looks like something out of That 70’s Show. So most buyers are going to be turned off when they see these pictures. You see that the two bedrooms there, the sun’s coming in from the drapes, giving it that golden look that I remember from being seven years old, and that’s what every single house looked like. This is not going to be catching attention on my competition, but I’m not seeing anything that scares me, and that’s … This house isn’t wearing makeup, but it doesn’t have any giant warts on it or something that you go, “I don’t think I can work with that.”

Rob:
Well, I mean, yeah. When I see this kind of stuff, especially whenever I’m shopping for short-term rentals or anything, or important comping out my competition, oh, man, I love seeing terrible photos. That is some of my favorite, favorite thing because I’m like, “Okay, great.” So many, 50% of people are going to walk away from this, not even click past the first three photos because they see these orange drapes right here. That creates just a great opportunity for people like us.

David:
Yeah. I’m drawn to this. This is what gets my attention. When I see really nice pictures, beautiful house, and everyone oohs and aahs, I click right past it. No money there, no opportunity there. When I see something like this, I get excited. It’s kind of funny, but this is what you want to be looking for.
All right, now this is where we get into the nitty gritty. As you can see from these pictures, now also, let me give you another tip. You won’t hear this anywhere else. When I’m looking at properties on the MLS, or if you’re using a portal like Zillow, or Realtor, one of those type of places, most people click on the initial picture and they click on the arrow to the right. N what happens is when I’m listing a house as a realtor, I put my best pictures first. I want the ooh and the aah stuff, the beautiful view, the amazing kitchen, or the master bathroom, I want you to see that. We put the worst pictures last. So I always click on the left arrow when I’m going to be looking at homes because that’s going to show me what the lots looks like and it’s going to show me stuff like this, the unfinished portions of the house that scare away the casual buyer, but someone like me is interested.
I get excited when I see exposed framing, rough in plumbing. Right? As you can see here, a lot of the expensive work has already been done in this basement, but it is not livable. Somebody could not live here, which turns off a lot of my competition, so I always click on the left button because I want to be seeing those ugly pictures first. So you can see the basement already has a bathroom. It’s ugly, but it’s got plumbing run to it, which is one of the most expensive things in a rehab. The bedroom just has this wood paneling wall that makes you look like you’re sort of in an underground bunker in World War II. But it’s already finished, you don’t have to do any work.
And then you can see that the mid basement has exposed framing, where somebody could just come in and put up some drywall right over the top, which it looks uglier than would actually be to finish this. And if you’re not experienced with rehabs, this would scare you. But somebody like me looks at this and says, “They’ve already done 90% of the work.” So it was these pictures that made me think this is the house that we should be going after. This is the one I want to use in the hypothetical BRRRR because it’s got everything you need, but it still looks ugly. Does that make sense, Rob?

Rob:
It’s got everything you need, but it still looks ugly. I’m going to frame that quote.

David:
And you’re going to put in on a T-shirt right next to my face. David Greene, bringing you everything you need, but still looking ugly since 1983.

Rob:
Yeah, I’ll get you that. I’m going to get those mass produced for BP Con.

David:
So we see here, this property, it has some potential. It’s got what we’re looking for. Now we need to figure out. Is it going to work if we rent it out by the number? So I’m going to show you just how Bigger Pockets can help you do that very thing easily, quickly, and without making mistakes. All right, everybody, so here are the deets. We’re going to be looking at a 1950s ranch up down duplex, so this is going to be a duplex with an upstairs and a downstairs. We’re looking at a purchase price of $220,000 because this place is in need of some repair, an estimated rehab of around $50,000, and ARV of $350,000. So in this case, one of the units of the duplex, the bottom one, is not finished. It actually has to be made into livable space, which is going to increase both the square footage and the value of the house, as well as the rents that it can bring in because in its current state, you’re only going to be able to rent out the top unit.
The rents would be about $1600 per unit, and we’re looking at property taxes of about $220 a month and homeowners insurance of $60 a month. So let’s say you have that information, which frankly shouldn’t be too hard to get if you listen to this podcast, you have a pulse, and you know how to use a computer. The question is: What do I do with these details to figure out if I should buy the house or not? So because Rob here has not done as many BRRRRs as me, we’re going to let him actually get a little bit of repetition in here. So Rob and I took a quick break and we entered in all of these details to the Bigger Pockets calculator. Now Bigger Pockets has several calculators you can find them at biggerpockets.com/calc. There’s a rental property calculator, a rehab estimator calculator, and this one, the BRRRR calculator. So Rob, will you show us just how easy it was to put this information in and what you inputted?

Rob:
Yeah. So this is obviously very, very quick here because kind of simple information to be entering. It’s very nice and easy to flow through here. So report title, you can name this anything. We’ll call this BP home test. All right, I probably could’ve thought of a catchier title than that. That’s all right. Property address, 123 Main Street, property city, Salt Lake City, property state, Utah. Zip code, and then for annual taxes here we put $2400. You can add a photo and add a property description. I probably would recommend doing that if you’re going to be doing a lot of these at a time. And then for purchase price, like you talked about, 220. We got our ARV in here that we entered in, $350,000.
You put your closing costs at $500, estimated repair costs at $50,000, and then really, it’s just a few drop downs here to just make sure that you’re tightening up some of these details, so you put in things like your down payment, your loan interest on the purchase loan details. Are you going to be wrapping in your loan fees, paying your loan fees? And then is the loan interest only? Does it include PMI, amortization over 30 years? And then how many months until you refinance it? And how long is it going to take you to actually rehab? So all very kind of straightforward information here. I think if you’ve done this a few times, again, this’ll probably take you five minutes.
And then it’ll ask you all of your refinance loan details, so what that loan amount’s going to be, interest, rate, and then really a lot of the same questions. Are you going to be wrapping your points into the loan, paying them out of pocket, interest only? Are you going to be amortizing it? That’s pretty much it.

David:
Now let me jump in. If someone doesn’t know what PMI is, or how to calculate their taxes, or what amortization means, there’s these little question mark bubbles that are right next to all those inputs that you could hover over, and Bigger Pockets will tell you this is what this means, and here’s where you can find this information. So it’s designed for people who don’t know what they’re doing, who haven’t done this before, and who are trying to learn. It kind of walks you through by, in a way, forcing you to get the information that you need to analyze the deal to teach you how to do it.

Rob:
Yeah, actually, that’s nifty. So right here it says, “Total gross monthly rent.” Obviously, we know what that is, but if you’re unsure, that little gray box that you’re talking about says, “How much rent will the property receive every month?” Enter a master number here, expand the section to break down the numbers into specific units. If unsure on rental price, consider using Craigslist, Zillow, Rent O Meter, rentometer I’m not really sure, I’ve never said that out loud.

David:
Well, have you ever called it a speed O meter? Or do you call it a speedometer?

Rob:
Well, a speed O meter is a whole different machine. Or as your landlord. So okay, well. Speed O meter, speedometer. Okay. Listen, I say rentometer, and then one time I said that on YouTube and I got a couple comments from people that’s like, “Did Rob seriously just call it rentometer?” And I was like, “I thought that was correct.”

David:
I got your back, man. Hit them with the speed O meter, speedometer test. It’ll shut down the haters.

Rob:
Okay, final thing on this. The way it spells it is rent, capital O, capital M, meter, so I think it’s understandable.

David:
So they’re purposely causing confusion. That’s why we use Bigger Pockets for this, because Bigger Pockets actually has a rental estimator tool that you can use, where you can put in your property address and it will tell you this is what it would rent for. So I use this all the time, we do it for our clients that want to come by with the David Green team. And they say, “Hey, we like this house. What do you think it’ll rent for?” I say, “Go right here. Here’s the link. Put it in and Bigger Pockets will give you what the estimate is.” And then we verify that once we’re actually in escrow with a property management company, or Craigslist, or some of these other things Bigger Pockets mentioned.

Rob:
Well, that’s nice. That’s one other thing I wanted to say because I was asking you before this. How do you personally, how do you do the rehabs? Or how do we know what the rehab’s going to come out to? And then I found out that there’s a rehab calculator, which is very nifty for those of you that don’t really know how to estimate things like roof, drywall, flooring, anything like that.

David:
As well as a very good book that Jay Scott wrote called Estimating Rehab Costs about exactly what its title is.

Rob:
So in 2022, do you just take that book and then double all the prices?

David:
It’s happening so fast that, that’s what the problem is. Right? It’s like when you talk to your grandparents. I used to be able to buy a scoop of ice for a nickel. And I’m over here like, “Why do we even have nickels anymore?” Just round it up.

Rob:
Hey, man, don’t you know that nickels are the new penny? All right, so kind of finishing up this calculator. It is going to ask you a few more little things like variable landlord expenses. This’ll be things like vacancy, repairs, and maintenance, cap X, management fees. And then future assumptions, if you want to really get into the nitty gritty of annual income growth, annual expenses growth, sales expenses, all that kind of stuff. So get to the very end here, there’s a little blue button here that says calculate results. And if it’s your first time using it, you’re going to get a fancy schmancy badge that says, “Congrats. You’ve just ran your first deal,” which we all saw off screen when we weren’t recording. And here it is. The final output I guess of this calculators is a very nicely organized and aesthetic and very clean set of data, I suppose would be the easiest way to describe it. It just kind of runs you through this entire investment as a whole.

David:
So there are several ways that you can use this final result. The first and most important is it will let you know if you should buy the deal or not, so we’re going to get into that in a second. The second is you can share it with somebody else and they can very easily read it. And because so many people use Bigger Pockets’ calculators to analyze deals, they’re already familiar with the format. It’s sort of the Microsoft Excel of analyzing rental properties. Everybody knows what an Excel spreadsheet looks like if they work in that world. Third, and often sort of dismissed value of this is that you can you can take it to other people who you want to borrow money from and show them this is how the deal is going to work out, and this is how I got my numbers. And because it’s clean and professional and clear, it’s different than writing it down on a greasy napkin and handing it to someone and saying, “Just trust me.”

Rob:
Hey, man, we can’t discredit the greasy napkin too much. I mean, a lot of good deals have been penned over a greasy pizza napkin.

David:
That’s how I got my start. Luckily, it’s not how I got my finish. This is how I got my finish. Now this is a sheet that cleans everything up for you very nicely, as we can see looking at this. The property will cashflow about $615 a month. That’s $3200 of monthly income, minus $2585 of monthly expenses. Now let’s talk about the capital that gets left in the deal. On the left hand column here, you see all of your expenses sort of summarized. We spent $220,000 on this property, which you could’ve paid cash for, but in this case, we talked about getting a loan for. So we have $5000 in closing costs, and then we spent $50,000 to fix it up. So if we add $220,000 to buy, $50,000 to fix it up, plus $500 in closing costs, and then another $5000 in closing costs after that to do the refinance, we end up with about $280,000 invested into this deal. And if it’s worth 350, and we get a loan for 80% of that you see, we get $280,000 back, which ends up being the same money that we put in the deal.

Rob:
Yeah. And then usually, it’ll calculate this cash on cash return metric here for you. In this particular instance, notate that cash on cash is actually infinite because you got all your money out of the deal.

David:
Yes. And that’s a home run. Now not every BRRRR deal is going to be exactly that. What if you left $10,000 in this deal, or $20,000 in this deal. That’s still a lot better than if you bought it traditionally, spending $44,000 of a down payment, plus $50,000 of a rehab. Now you’ve spent $94,000 of your capital plus your closing costs that are sunk into that, that means you can’t go buy more real estate with that same money. So the BRRRR method in this case helps you get your capital back that you put into the deal, so you can go get another one of these suckers and start building your portfolio.

Rob:
Yeah. So when you’re doing this, I mean, do you kind of expect to leave a little money in the deal? Or do you go in planning for, hey, perfect scenario, I get all my money back? You as someone who’s sort of perfected this, what’s your mindset here?

David:
That is such a good question. And it’s relevant because I’ve seen so many people do a great job, add a ton of equity to a property, get a property in a great area, and it cash flows, and they left maybe 8% of their money in the deal, and they’re hanging their head with their tail between their legs saying, “Oh, I’m a failure. I’ve screwed up my BRRRR.” And I’m like, “Your competition put 25% to 30% down and then sunk all their closing costs and got none of that back. And you ended up leaving 8% of your money in that deal, and you think you’re a failure.” Here’s the amazing thing. When you’re leaving 8% and it’s cash flowing, your ROI skyrockets. Those people are often getting a 65% ROI on their money because not much of it got left in that deal. So when I’m doing this, no, I do not expect to get all of the money back. I shoot for that sometimes.
There are other deals that I go into knowing I’m not going to get all my money back, but I like this deal so much, I would’ve bought it anyway. I’m just going to buy a better using the BRRRR method. So I’m glad you brought that up. It does not have to be perfect. As long as you left in less than you would have if you put the full down payment and the rehab, then you won. And in this case, that’s exactly how that looks. Now we’re shooting for the home run because you want to take your best shot. You’re hoping that it works out. But if you don’t get a home run, you get a triple or a double, man, that’s still a big win.

Rob:
Yeah. Especially if you’re … I mean, one thing I asked a buddy, who kind of was in a similar situation the other day. And he was kind of bummed out about not hitting his goals on this type of stuff. And I was like, “Who’s the best baseball player of all time?” And he was like, “I don’t know. I guess Ken Griffey Jr. I guess.” And I was like, “Okay. You know that when he stepped up to the plate, he hit a home run not that often.” I was like, “His career, his VIP, MVP status came from singles, doubles and triples.” So yeah, I totally agree.

David:
That’s a very, very good point.

Rob:
So David, when you’re looking to actually get into BRRRRs and get started in this journey, what are some financing options that one can execute to actually get into this niche of real estate?

David:
So that’s a really good question because part of using fixer uppers to build wealth is that you can’t or maybe shouldn’t all the time use traditional loans to buy. A lot of the time when I buy a property, it’s in such bad shape that it won’t qualify for conventional lending, so we have to find other options. And to help with this, I know no one better than my partner in the one brokerage, our broker, Christian Bachelder. So Christian and I have built the one brokerage, and it might be the fastest growing loan company in the country, and a lot of that is because he’s a bit of a computer that wears tennis shoes. And so I usually say, “Hey, Christian. This is what we need. We need a product that works this way.” And he goes and does whatever magic that Merlin does when King Arthur needs some help. And he comes back and says, “I got something for you.” So Christian, welcome to the show. If you don’t mind, can you share some of the more common options that people use on the front end when they’re buying a property they’re going to BRRRR? And then we’ll ask you about on the backend on the refinance.

Christian Bachelder:
Yeah, absolutely. First and foremost, thanks, guys, Rob and David, for having me. David and I have been through quite the journey on a couple of his deals personally as well. So yeah, I mean, there’s a number of options. Obviously, David mentioned conventional isn’t always the best route, and mainly it’s going to be the best rate and best terms, but typically you’re going to run into, when pursuing BRRRRs, you’re going to run into financing issues, maybe due to the quality of the house. Typically, a BRRRR is going to need some remodeling, some updating that conventional lenders may kind of take a second look at and decide it’s not a risk they’re willing to take on.
That’s where we can get into a lot of what I call kind of the shorter term financing, the hard money, the private money, mainly a lender who’s lending maybe on a three, six, at most maybe 12 month timeline. It’s going to be high rates. It’s going to be high closing costs. But the idea is that you’re not going to hold it for very long. Typically with experience, you can get even some of your renovation costs financed as well, which is a good alternative if you have a little bit lack of capital to start out. The problem is when you’re new or inexperienced, it can sometimes be more difficult to establish that relationship with a lender. Hard money and private money is very significantly relationship based. Once a lender lends to you once or twice, they like you, they want to lend to you again. And obviously, that’s where developing that relationship comes in very, very, very, handy, whether that’s with a broker or a lender.

David:
Yeah, that’s a really good point. So we’ll talk about that a little bit more just when a lot of people do the work of the brokers, they go shop and try to say, “What’s your rate? What’s your rate? What’s your rate? What’s your rate? What’s your rate?” And they try to find the lowest rate. And they typically end up with that Wal Mart strategy, finding the broker who, their value is in the fact that they are the cheapest. Right? It’s kind of like the flea market approach. It’s not Nike, it’s Bikey, but it looks like Nike, and it will make you think that you’ve got that. Versus someone like you, who knows my file intimately, probably more than you want to. It’s probably a broker’s nightmare.
But because you understand the strengths and weaknesses the different properties I have, the different ways I make income, you are able to go find a specific lender that will do something unusual, but in my best interest. And we’re going to talk about that later. So when it comes to buying the property, would you say that for the average person, if they don’t have the cash, probably taking a HELOC on either their primary, or an investment property, or a hard money loan, are going to be the two most efficient options?

Christian Bachelder:
Absolutely. If you have a portfolio to leverage, that’s always a benefit to utilize, whether that is via HELOC or a cash out refinance. Obviously, in markets that were … This is being recorded in April of 2022, obviously being in a market like we are in right now, with rising interest rates and the Fed doing what they’re doing to hedge inflation, I would advise a little more toward the cash out than a HELOC because HELOCs are adjustable in the significant amount of cases.

David:
Rates could go up.

Christian Bachelder:
Yeah. And that HELOC, you may have a 2000 monthly payment now that may go up to a 3000 monthly payment by the end of the year. And when you’re running your numbers, it’s sometimes hard to predict for that, whereas a cash out is fixed. If you can get a HELOC that is fixed, obviously that’s a different story. Typically, my experience, most are variable though. But absolutely, with that portfolio, people who don’t have a portfolio don’t have that option, but if you have it to leverage, absolutely a good call to … David and I talk a lot about that return on equity instead of the return on investment.
And if you got hundreds of thousands sitting in a portfolio, great job. You did a good job investing and taking advantage of appreciation. But at the end of the day, would you buy that same portfolio with hundreds of thousands of dollars down? Right? You’re still getting the same return on your equity as opposed to return on investment. And that’s where cashing out can help that velocity of money continue.

David:
And with the BRRRR when we talk about using HELOC, it’s because presumably you’re going to pay that HELOC back after you refinance, or at least the majority of it. So it takes some of the sting out. If you have to borrow 100 grand, and then you pay back 80 or 90 grand, you’re only left making interest payments that might be high on $10,000 or $20,000, which doesn’t hurt you nearly as much as if it was the full 100. But I do agree that an environment like this, the cash out refi is usually better because you lock in that lower rate. So there’s also options where you could borrow money from a friend, or you could borrow money from a partner and pay them interest on the money that is being borrowed. But that idea is once you’ve got a portfolio of properties yourself, you end up with more options, so it helps with the buying.
Now on the refinance at the end, that’s a little different. Right, Christian? At that point, you’re trying to get the better rate.

Christian Bachelder:
Absolutely. And that’s where you’re going to be leaning towards more of a 30 year fixed option, whereas the hard money or acquisition purchase is usually going to be a three or six month term. And obviously, that’s where our rental programs that you’ve discussed a lot on the podcast are a dead service product, where your personal income doesn’t count once you have maybe more than 10 properties, or don’t qualify conventionally. It could be a conventional loan. If you qualify, it could be your exit strategy loan.
Obviously, once that property is stabilized, you have a little more options on the forecast of what you can take advantage of. But you’re definitely going to be leaning more towards a long-term fixed rate stabilized rental loan.

Rob:
Can we just break down sort of what a hard money loan scenario would look like? What does a typical deal look like? Just because we’re talking concepts here, but I want people at home to sort of understand how this loan product could work. Do you think you could walk us through that, Christian?

Christian Bachelder:
Yeah, absolutely. And I know we’re going through David’s example shortly, but let’s just say a theoretical one. Say you’re buying a $400,000 house. You anticipate the exit value’s going to be worth 500, maybe you’re putting 30, 40 grand of repairs in. You’re going to hope to get 100 grand of increased value, maybe remodeling a kitchen, some bathrooms, or something. Typically, the idea is a hard money lender would go in as an equity position with you on a, let’s call it, you have to put 25% down. Right? So they’re going to be 75% loan to value. These rates, I mean, I’m sorry, these loan products are the most expensive in the industry, the highest rates, because like I said, they’re meant to be short-term. Right?
So this may cost two to three points to close in loan fees. That’s not including appraisals and everything else that comes along with it. And it’s going to be probably 8% to 12% interest maybe. Right? Typically, they are interest only to limit that monthly payment. And in some situations, especially if you show that you have experience with flipping or renovating, they would also be able to finance your renovation costs as well. So if you had, say you’re able to put 25% down on that 400,000 number, plus getting 100% …

Christian Bachelder:
… percent down on that 400,000 number plus getting a 100% of say your 40,000 remodeling budget. That’s actually a decent loan value. You’re getting more closer to that maybe 20, maybe 15% down ratio when you add in the renovation costs as well. With that though, there needs to be a solid understood, what we call ARV, after a repair value. Typically, the hard money lender would have their own in-house appraisal who is good at analyzing after repair values. And he’s the guy who would go in that say, “Hey, yeah. This property would be worth 500 or 550,000.” And they would only be lending in the event they know you can get to that exit strategy.

Rob:
What’s a common ratio on the ARV? Is it typically like they’ll loan, 70%, 65%, 80%? What’s that?

Christian Bachelder:
Yeah. A really good question. That’s where you get in if you have a really big renovation budget. What if you have a 100 to $300,000 renovation budget. Yes, and that’s going to vary by lender. Typically, they’re going to go up. They’ll go up above 80. In some cases they’ll go, maybe with the renovation they’d like to go to 85 maybe. But that is going to be different based on who your investor is. Some are more conservative, some are more liberal. It just depends on the strength of the property. Are there other comparables? How many comparables do we have? What’s your experience? For somebody like yourself or David, obviously they’d be much more flexible.
Somebody looking to do this for the first time. Absolutely. They’re going to cap you at maybe 75, 80% of that after repair value which is why you have to run your numbers really assertively. You got to know what you’re going to be going in for, because you don’t want to get $40,000 into a renovation budget and realize you still have 30,000 to go and you can’t get to that ARV with what the lender’s given you. And then you got to go start asking friends and family. Analysis is really important upfront and that comes from experience which is why lenders are more willing to lend more, to more experienced buyers.

Rob:
Well, awesome. Well, yeah. We can get into David’s nitty-gritty here in a little bit, but I appreciate you walking us through this.

Christian Bachelder:
Absolutely. Yeah. Happy to help.

David:
All right. Now, since I’ve taken over as the host of the BiggerPockets podcast, as opposed to the co-host, there’s been some changes around here. And one of the changes that we’ve really tried to make is we’re going deeper into individual real estate deals and the show in general. So rather than just interviewing guests and hearing their story, we’re trying to really pull back the curtain and show you what goes on behind the scenes, give you a lot more detail and a lot more practical help so you can understand this is what we’re actually doing when we’re investing.
And as you just saw, understanding how the numbers work on a deal is one of the fundamental things you have to understand. If you want to have confidence going into a deal, you have to know what you’re going to get on the other side of it when you come out, which means you have to be able to understand your numbers. Now I’m sharing my rehab numbers. I’m sharing the purchase price. We have our lender on here to talk about how we’re doing the financing. But none of that really helps if you don’t know what to enter into the calculator or the spreadsheet to figure out what you’re going to get when it’s done.
If you’re interested in taking your investing to a new level, if you want to make this year, the year where you actually make progress instead of just hanging out around the scene but not getting your foot into the water, I would encourage you to consider turning Pro at BiggerPockets. Now these calculators that we use, you get unlimited access to when you turn Pro, which means you can use them all the time. And there’s many uses for them. We’ve talked about how you can share.
Well, first off, there’s just the fact that you need to know what the numbers are going to be when you’re done on the deal. Is it going to get you money or is it going to lose you money? If the stuff’s going to lose you money you don’t want to be buying and the calculators can help save you if you find the wrong deal. But once you’ve run the numbers you can actually use these to share with other people that might want to let you borrow money, might want to invest with you, even might want to look over the deal you’re doing and see if they think that it would be worth it. So that’s one of the reasons that I went Pro, way back in my wee years where I was using calculators for that very same purpose.
But because you’re listening to this podcast, there’s a level of loyalty that you’re showing. You’re going to get more than what a normal BiggerPockets Pro member would get. If you decide that you want to upgrade after listening to today’s show, I’m going to give you my BRRRR book for free. In addition to the book, you’re also going to get the ultimate package. Now that’s some bonus content I made when the book came out, that’s BRRRR related. And I think one of the most important parts is an actual presentation that I’m giving of how you can explain how BRRR works to someone else to be able to raise money from them to help buy your deal.
You’re also going to get a workshop that Brandon and I did on how to buy deals with no or low money down because technically BRRRR is one of those strategies. I think this is some of the best work that we ever, ever did. This is a phenomenal workshop. You’ll get the, How to Find Great Deals class where Brandon is interviewing different investors that have off-market driving for dollars, different ways that they’re finding deals that would work for a BRRRR. And then you’ll get access to the online boot camps that BiggerPockets puts on which are only available to Pro members.
Now, the most important part is you’re putting a little bit of skin in the game to get yourself committed to this. You’re actually getting into the pool, not just sitting on the chairs on the outside looking in. If you’re someone who knows this is something you want to do but you’re not sure where to get started, I think this is a fantastic first step. Now, if you want to sign up and you want to save some money you just need to go to biggerpockets.com/proupgrade. There will be a section where you can put in a discount code. That discount code is repod21.
Now, in addition to all the bonuses I mentioned you’re also going to get 20% off the Pro annual membership, meaning you’re only having to pay $312 for the entire year. This is probably the biggest ROI that you’re ever going to get on anything investing in real estate. This is less than a home inspection would cost. Many people put houses under contract and then say, “Ah, I’m glad I spent that money on the home inspection because it revealed some things that I didn’t want when I bought the house.” Well, this does the same thing and that it reveals to you the houses that are not going to make sense financially to buy. So if you go to biggerpockets.com/pro upgrade and put in the discount code repod21, you can save 20% off as well as get all the bonuses.

Rob:
Yeah. Just run the math on this by the way. And it is less than a dollar a day to be a Pro member. Some of us, we do like to indulge in the finer things in life like Starbucks every so often, just don’t buy your Starbucks. Invest in your real estate. I really think for the most part on my end, sometimes it takes a little bit of a financial commitment to actually get started. And that’s what BP Pro was for me. I just did that and I was like, “Okay, I’m paying for this. I’m going to start utilizing these calculators. I’m going to start using all these different tools,” and start to realize once you have access to all the resources here, the master classes, the calculators, it really lights a fire under your butt. So I think it is very much well worth the cost, especially if you were going to buy it anyways, you probably were going to. You get 20% off. It’s a pretty decent discount I’d say.

David:
Yeah. I was just thinking, when I sign up for jujitsu, they have you buy a gi on your first day. You’re going to spend a couple hundred of bucks on this gi. But once you’ve got it, you’re not going to not use it at that point. You’re like, “Well, I better be going to class because I bought the stuff.” It’s an amazing investment to actually get your butt in there and start training. So this is just how human nature works. You want to have some form of skin in the game but you don’t want it to be tens and tens of thousands of dollars if you’re not at a very, very high level. So if you’re a beginner, this has everything you need. It’s the full arsenal of weapons that you need to get in there and start building wealth through real estate.
When we talk about this deal, it’s actually very simple. It’s the exact same principles on the deal that I’m doing at maybe higher price points, then it would be if you were working the same thing out on a 50 or $60,000 house, that the math is the same, but you need a way to determine what the math is going to be. So I’ll say one last time, if you want to save 20% off on a Pro membership and you want to get all those freebies that I mentioned, the BRRRR book, the bonus deal, the workshop with Brandon and I, the How to Find Great Deals class and access to online boot camps that BiggerPockets puts on, go to biggerpockets.com/proupgrade and use the discount code repod21.

Rob:
And actually I do want to point out one thing that we always forget to mention. There’s a 100% money back guarantee. So if you upgrade to BiggerPockets Pro and you don’t like it, you can get a full refund within 30 days. So you can literally go and you can buy it right now. You can use the heck out of the calculator to analyze a bunch of deals, you can get into your first deal. You can watch all the master classes and if you don’t like it, you can literally email, no questions asked, [email protected] and get a full refund. So legitimately you have nothing to lose.

David:
There you go. So if you’re ready to get that fire lit under your butt like Rob said, this is the best place to go get it done. And many of us got our start in exactly taking that first step.

Rob:
And now for the moment we’ve all been waiting for. We want to see the BRRRR machine himself, David Greene, walk us through a deal. Everything that he is going through, the mechanics, the deal, the remodels, straight from the man himself. So David let’s get into this deal, man.
I think it’s safe to say that we’ve covered BRRRR in excruciating detail. So now let’s talk about out the actual deal that you’ve been alluding to. Getting everyone all excited about this awesome deal that you’re working on right now in California. So can you walk us through some of the financial mechanics of the funding on this deal before we take a look at it?

David:
Yeah. So I originally was planning on using pretty a straightforward loan when I was going to buy this property. But like we said before, because I have a relationship with a mortgage broker and not a bank, or a direct lender, or somewhere where I run around looking for the cheapest rate, Christian here was actually able to find me something much better that we’re going to be using for the purchase. And then after that I’ll refinance into a different product. So Christian, could you share where we started and where we ended up with your help?

Christian Bachelder:
Yeah, absolutely. As David alluded to you, this is exactly the situation where your broker understanding your finances can lead to a complete game shifting change in your financing, which is what happened here. Typically, we would’ve financed this with our debt service loan as we talked about earlier that doesn’t qualify conventionally. However, David, over offered on this deal. As is required in this market, it seems David offered more than listing price. However, our appraisal came back extremely high. Since he got an appraisal that was significantly higher, 20% down of the appraised value actually lined up perfectly with 10% down of the purchase price. So we were able to leverage the property further because the appraised value came back so much higher.
And this is a situation where the appraisal came back couple hundreds of thousands of dollars higher. And because of the purchase price obviously some of you can expect what it would be in LA, I’m sorry, in California, we were able to do that. I think we landed at just about 11% down on David’s deal here. And it looks like we may possibly get some financing for the renovation cost as well. So in a position where David would’ve been required to put 25 or even 30% down, we wiped all that around and saved him what? Almost half of his down payment. With this purchase price, that was a very significant amount of money.

David:
As well as the rehab here we’ll see like if I want to borrow for that or if I want to pay out of pocket, but it’s nice to be able to have that option depending on what other deals come around. This was something that you brought to me at the 11th hour. You’re like, “Hey, I found a way that we could do this. Would you rather do 11% down instead of 20 or 25?” And I was like, “Tell me more.” That’s not something I would’ve known to go look at. I’ve become a firm believer that many investors focus on parts of the deal that other people should be specializing in. I get people messaging me asking questions that their real estate agent should 100% have asked them.
Many times they live near me and they use a different agent. Then they come ask me and they’re looking for answers that their agent should have been giving them so they shouldn’t have come to me. That’s always weird. Why do you guys do that? Why don’t you just come to me first, but that’s neither here nor there. Or they’ll ask me a question the title officer could have answered or their broker should have known. And what happens is they end up doing everyone else’s job instead of focusing on the part the investor should do, which is finding the deal, coming up with a plan and then executing on that plan.
Even property managers are often let off the hook because the buyer is trying to figure out how to do their job. I’m actually curious, I want to turn that around and ask each of you, Rob and then Christian. Where do you see this happening in our industry? Do you also see that you find yourself doing other people’s jobs or see other investors asking questions that they should be asking of the person who they’re paying?

Rob:
This is a tough one because yes, I find myself doing almost everyone’s job. It’s not necessarily their fault. It’s just more like, I just move very fast and I’m not patient enough to wait for answers. So I typically just go and find my own answers. Especially in this market, we don’t have time to wait. You don’t have time to really hear back from every party before you can move forward. And so a lot of the times I just empower myself to figure things out on myself. But yeah, I don’t know if I’m alone there or not. That tends to be my mindset. Just not a lot of people move at the speed of me. So I’m just going to keep rocking and rolling and I’ll ask questions as needed.

Christian Bachelder:
Yeah. I think Rob hit that right on the head. I work the same way, that speed is everything especially in our industry, in this market that we’re in. I regularly find myself and our team doing the job of title officers, of agents not on our team. Yeah, that happens more than I would like to admit but absolutely, especially in this market.

David:
I still think it’s better for the investor to go to the loan officer and say, “Hey, this needs to get done,” and let the loan officer go do the work instead of the actual buyer themselves. That’s more of what I’m getting at is when they’re like, “Hey, what do you do when this happens?” I’m like, “That is something I would have to go ask a title officer. So why don’t you ask your title officer?” They end up thinking that they have to know it all.
All right. So now Christian, on this particular deal, once the rehab has been done and you guys are going to see pictures of what this property looks like. The plan is to upgrade it, so fix the bathrooms, fix the showers. There’s a basement that we’re going to be including and then refinance it. Then after the refinance, actually look at splitting the property up into different units. So can you tell a little bit about what product we’re going to try to use when we want to refinance out?

Christian Bachelder:
Yeah. Once we refinance out, you’re going to have leases in place. Now, people who are familiar with lending guidelines will know that you probably will need a master lease. So everybody expecting in your exit strategy maybe to be renting out by the room or renting out to individual tenants. Typically, there’s one master lease that covers the entire house. And then each of the tenants will individually sub-lease off of that master lease. But yeah, once that lease is in place, we’ll refinance based on the debt serviceability of that master lease. Also, knowing that your ARV is going to be significantly higher because of the renovations you’re going to be doing and exactly just like we would for other rental property purchases, we’re going to refinance you into our debt service loan on a 30 year term fixed rate. That’s going to be much more competitive than your hard money.

David:
Speaking of people that need to do their job, I’ve got a contractor and he’s going to do a job. And as you guys are going to see, I’m going to show what a bid looks like that I’m getting from a contractor. This particular deal is very complicated. There’s going to be four or five different units we’re making out of this property. We have them listed as units, one through five, and then work that’s going to be done in every unit. A typical rehab is not going to be this complicated, so you can get more level of detail on the scope of work that we’re going to show when it’s just remodeling a kitchen, remodeling a bathroom.
This would be 10 documents if I tried to show that much detail. So it’s a little less detail than what I usually like to see, but I’ve worked with this contractor before and I’m very comfortable with the work that they do. We’re going to show you how I think you should be communicating with your contractor, how you should be getting a scope of work from them to work into your rehab bid. And after that, we’re going to get into some actual pictures and brass tacks of this deal itself.

Rob:
Okay. I have had the privilege or the, I don’t know if privilege is what I would call it to see photos of the before of this property. I’m going to grill David here a little bit on the property. But before we jump into roasting this house too badly, can you walk us through the contractor bid and how you got to this final budget for this house?

David:
This is not a typical rehab. Most rehabs are going to be classified by the portion of the home and what the contractor’s going to be doing. And I always like to get my bids as itemized as possible so I can know exactly what I’m paying for. In this particular case, what we have is one property being turned into four to five, maybe six units, depending on how I use the about 5,000 square footage of space that the property has. In this case, he’s taken units one, two, three, and he’s broken it down for me and said, “Hey, for unit one, it’s going to be this much money. And this is what I’m going to do. Same for unit two, same for unit three.”
We won’t go through the whole bid here. But you can see, this is the way. If you’re watching this on YouTube, you can see what we’re showing on the screen here. This is the way that we break down what work is going to be done so I know what I’m paying for and the contractor knows what they need to do.

Rob:
So yeah. This is not a light renovation. This is really quite extensive based on the price tag here.

David:
Yeah. We’re changing quite a bit of the floor plan of the house, and then we’re doing some upgrades as well. And then the basement area and the garage is all being turned into a completely new additional unit. So the total rehab’s going to be a little over $186,000 on this deal. But as you can see it’s being turned into about four to five different units.

Rob:
Yeah. And then one thing I wanted to ask, because it seemed like there’s a few schools of thoughts. I don’t want to say it’s controversial or anything like that. But I do see on this bid here, there’s just the price per trade. It doesn’t break it out by materials or by labor. Is that something you care about? Do you care if it’s that itemized? Because you said you like it to be pretty itemized in that capacity.

David:
I do when it’s the first time I’m working with the contractor, I don’t know the person. This is someone I’ve worked with many, many times before. And they do a lot of the work for the people that work with my team. So I’m okay. We basically had to get this thing put together earlier than it normally would’ve been to do for the show. So that’s why you’re seeing it like this. There would be nothing wrong if you got a bid like this from a contractor and it showed plumbing $2,000 to have them put in there what they’re going to do for the plumbing. You actually want to have an idea of where they’re going to be running pipes, what you can expect.

Rob:
Okay. So it’s fair to ask for the scope of each trade, but you can leave it at that.

David:
But you also have to realize when they put the trade here, they’re talking about for that particular unit. For unit three, this is what the plumbing would be. For unit four, this is what the plumbing would be. Now, I also walked the house with the contractor several times and we had conversations that are recorded that says, “Hey, here’s what I want you to do.” And he said, “Yep, this is what I can do.” When he’s putting the information here into this spreadsheet for me, it’s done with the understanding that we’ve already talked about what’s going to be happening for unit three plumbing.

Rob:
That’s a little nugget there. Do you always record your conversations with your contractors?

David:
I do now.

Rob:
So, okay. Got it.

David:
Now I do it under the guise of, “Hey, this way we won’t forget everything we talked about.” It does come in very handy if they ever come back and say, “I never said I was going to do that.” Or they do it the way different than what they told you and then they say, “We never had that conversation.” When it’s recorded you don’t have to worry about it.

Rob:
Have they ever said to you, “Are you a cop? You got to tell me if you’re a cop.”

David:
That’s funny you ask that. At the end of this segment here, I’m going to share a story with you about cops that occurred on this property this weekend when I was there taking these pictures and making these videos.

Rob:
Wow, that was… Man, that’s very organic. I didn’t even know this. That was just a joke that led to the greatest little plug there for ending the story. So, okay. Let’s hop in, man. Let’s take a look at it. Walk us through this property, the vision for it.

David:
Okay. So one of the things that I loved about this property in addition to the location is that it’s very private. So you have to drive all the way up to the end of a road that ends in a cul-de-sac, but there’s no other houses on the cul-de-sac. It’s a private cul-de-sac with just nature surrounding it, just trees and bushes and flowers. And then you go up a private driveway, which is what we’re looking at here. I’m standing at the top of the driveway, shooting down. You have to drive all the way up around this little twisty private drive to get to the house so that nobody sees what’s actually happening in the property. And you have a ton of privacy.
Now you can see the picture on the right here, that’s the property. And you see that, it looks like the garage is open. There is a garage space that we’re looking into. And then if you’re standing closer to the garage looking into it you’ll see that there’s another door that leads you into the basement. That’s the downstairs unit that I mentioned is going to be remodeled and turned into livable square footage.

Rob:
I’m only really seeing a preview of this, but the outside actually, it’s very serene. This is just very enchanting. The trees are all curvy. I don’t know what kind of trees, willow trees. I like it though. It’s got some vibes.

David:
Yeah. This is a really nice area in the San Francisco East Bay. This is where, if you’re a professional athlete that plays in Oakland or San Francisco, you’d buy into these type of cities and all the houses actually have names. So this one is referred to as the Castle in the Sky, because it sits on the top of a hill and it’s got a lot of windows to give you a view out over the East Bay.

Rob:
Okay. So now we’ve got the serene outside. Let’s take a look at the inside here.

David:
All right. So this would be the picture that I mentioned. If you’re still standing in the covered garage looking forward, the one on the left here, that open door is going to be the basement that we’re going to be finishing and then converting this garage that I’m standing into, into square footage as well. The picture on the right is me standing in the garage, shooting down at the driveway that would be leading up to the unit.

Rob:
All right. And then is this a basement or a garage?

David:
Yep. This is the basement. So the picture on the left there is going to be where we’re going to be putting the dining room. The picture on the right is part of where the kitchen is going to be. This is all like, man, this is what sold me. When I saw this part of the house I’m like, “Oh, this is a really big space that’s not being used. I’m going to get an entire extra unit out of this property that’s pretty significantly big.” I got excited again, when we’re looking at this unused space, this is what gets investors like me really going.

Rob:
This is something that always possibly would stop me from a deal like this. In this photo there’s like a really big boiler or furnace or whatever this is, maybe AC unit. I see some ducting. How do you build around that to finish out the basement?

David:
We’re actually going to cover it. We’re going to use the type of material, I haven’t figured out exactly what we’re going to use. I’ve got the contractor working on it. Now, it’s not going to be full drywall, but something that aesthetically will wrap around that thing so that you don’t see it. And then the spin to the right of it will be turned into storage area. So we’ll put cabinets there. This is where people will keep their pots, their pans, their cooking utensils, stuff like that. And you can’t see in this picture but from where I’m standing if you look to the right, there’s going to be more cabinet space added there as well.

Rob:
Got it. You’re not necessarily moving these big items. You’re just closeting them in.

David:
There you go. So you can see in this picture here, you can’t see the whole thing but this is a bedroom. And then I’m standing outside of the stairs that you walk up from the basement to get to this bedroom. Next to this bedroom is another bedroom. Behind that is a bathroom.
Now what we’re going to do is we’re going to create an entrance of this house that doesn’t exist which I’ll show you in a different picture. I’m going to knock down the wall that I’m pointing at. So this window you can’t see it, but there’s a stairway that is on the other end of it that goes up the entire backside of the house. Now we’re going to…

David:
… other end of it, that goes up the entire backside of the house. Now we’re going to take out this window and put in a door. Now, this is the view that you’re going to be looking at when that door goes in. So this is a room that you’ll be able to see in other pictures better. And when you walk in this door, there’s going to be a split where if you turn to the right, you’re going to go into the room you’re looking at. And if you go to the left, you’re going to be walking up a set of stairs that would lead you to where I was in the first picture, where I’m pointing at the wall. That wall for that bedroom is going to be taken down. And that entire bedroom and the space I’m standing in the previous pictures is going to be made into a loft.
That’s where we’re going to put in the kitchenette and have like your TV, your living area, and then behind that will be another bedroom with a bathroom. So that will be its own unit. You’ll walk up the stairs and you’ll have a loft and a bedroom and a bathroom. So you saw unit one that will be the downstairs basement remodel. Unit two is the one we just talked about. In this picture I’m standing in the same place where the door is going to be made, but I’m taking a view of what will be unit three. So you see this fireplace, this is an entire big open space with a balcony leading to the outside, where I’m going to put in another kitchenette and this will be a living space. And you can kind of see that hallway on the left side of this picture.
There’s another bedroom with a bathroom that’s right down that hall. So unit three here will be this open space with a one bedroom and a one bathroom. So this right here is me standing near the fireplace we were just looking at pointing in the other direction at where the kitchenette is going to be. On the left side of the wall that I’m pointing at, that’s where the kitchen to the existing house is. So it’ll be very easy for us to tap into the electrical and the plumbing that’s right there. And just put a kitchen on this side for unit three. This is a better angle of unit two that I talked about, where we’re going to be knocking down the wall to make the loft. So this wall that we’re looking at in this picture is what walls off what is now a bedroom that’s what’s going to be taken out so that this is one big open area.
The staircase that you’re seeing here is what leads down to where unit one is, sort of the basement. Right now it’s the garage that’s going to be converted. So that’s going to turn this into unit one. Now that wall basically does nothing, but just have a closet and some framing to make off a bedroom. So this house doesn’t need another bedroom. It’s already got like seven bedrooms. So by taking this one out, we’re going to go create a completely new unit that we can rent out.
So unit four is going to have the house’s existing kitchen. It’s going to be probably the biggest of all the units. So it’s kind of hard to see from these pictures, but that stairway I told you about earlier, where we’re going to be putting a door in that’s right now a window. It goes to the left of this picture right here.
So you’d be walking in from just behind this oven, to the left of it, through a door that already exists, that go on the stairs from the back of the house. So people will be walking into this kitchen. The kitchen’s going to be remodeled before we refinance the property. So it’s got this kind of nice Spanish tile, but it just isn’t very trendy. So we’re going to be replacing the countertops with either granite or quartz. We’re going to be putting in a more modern back splash. Some of the appliances will stay, but the older ones will go and then we’re going to be painting this room as well. So it’s kind of got like, how would you describe the look of this kitchen, Rob? You’re better with this stuff.

Rob:
I would say it’s like very… It’s kind of antique Spanish. But this kind of stuff I always try to salvage on from a design perspective in a flip or in a renovation. But it’s not the kind that you want to salvage. I think you’re making the right call.

David:
Yeah. Especially because we’re going to be rehabbing this house and just giving the kitchen a more modern look is going to add value to the property. Now, some of the cabinets that we’re going to be taking out the area where the refrigerator is, if we see that part. I’ll probably move that to the downstairs unit one. To the kitchen we’re going to having to be building in the basement. Some of this stuff will go down there so I don’t have to buy all new things, but the kitchen here will be upgraded. And then unit four will have this big kitchen space. This is going to be the family room living area for unit four. So the kitchen will be on the other side of the fireplace. You can kind of see the door behind it. So you’d be walking out from the kitchen and into this living area.
I don’t know if we got the best pictures, but the view is spectacular from right here. A ton of light, really high ceilings. So where I’m standing is going to be basically the living area. And we’re going to be putting a bathroom in right where my feet are, which you can’t see because the front door is to the right of me. But we’re going to be walling that off and putting in a bathroom right here. So this area where I’m standing right now is looking in the same direction that the last picture was coming from. So those little stairs that are in the distance, that’s where I was standing shooting towards me now. And the kitchen is currently at my back.
This area where you can see that kind of pink, floral tile is a dining room. We’re going to be walling off and framing off this dining room to create a bedroom where I’m standing. To the right of this picture, just outside the frame is another existing bedroom with a bathroom. So this unit’s going to end up having two bedrooms. And it has one bathroom inside of a bedroom, but that bathroom is a half bath. It doesn’t have a shower. So that area that you can see in the foreground where the stairs are, or the background, I guess that’s going to be where we put in another bathroom with a shower. So that whoever’s living in this unit doesn’t have to walk into somebody’s bedroom to use the bathroom and they can actually have a full shower. That’ll turn out unit four.

Rob:
For what it’s worth. I like the tile right here. I guess if it’s going to be a bedroom, I probably wouldn’t necessarily keep it. But I think it’s really nice. That to me is something you’d want to save.

David:
I’m just going to put carpet down right over the top of it. I’m not going to demo that out.

Rob:
Okay. So the next owner can decide if they want to… They’re going to lift up the carpet and they’re going to be like, “Oh my gosh.”

David:
That’s it. K. Leaving them a little Easter egg.

Rob:
That’s right.

David:
So this is me standing on the stairway above unit four, looking out the window at the view I described. Again, it’s not the best shot of it. When I do some of my future content for this project, I’ll make sure I get a better view, but a lot of light comes in right here. And it’s a really cool view looking out over the drive that comes up to the house. Now, part of the reason I said it might be four units, it might be five, it might be six is because we’re not exactly sure how this is going to turn out.
But this photo shows where I want to get a loft put in. We have these really high ceilings and I’d like to add some square footage by putting in a loft at this section here. I have a structural engineer going over the details to see if it can be done, how safe it’s going to be, how much it’s going to cost. So if we can do that loft, that will be an additional unit. If not, then this is going to stay looking the way it is here.

Rob:
Yeah. So after hearing you talk about all of this, it starts to make a lot more sense why this bid was coming in a little bit higher than I was thinking it was going to be. Because yeah, you’re doing a lot. This is a full on renovation I’d say. And honestly, for the bid you got, it seems you’re getting a pretty good deal.

David:
Yeah, no, there’s a little bit more. I don’t think I got all the photos of it, but the last unit is going to be a two bedroom, two bathroom with a living area as well. And so there’s a lot of demo that’s being done in that one. The house currently has a sauna, we’re going to be converting that sauna into a kitchen for that upstairs unit. We’re also going to be knocking down a bunch of walls and then reframing to turn like this huge, expansive master bathroom into a bedroom that can be used by somebody else. And then the bathroom portion will be turned into like a communal bathroom. So part of the reason that the bid’s high is because we’re adding square footage. Part of it is because we’re actually adding a lot of living area to the property and knocking down walls while rebuilding stuff.
So it’s not your typical paint, carpet. Most of the time you’re putting lipstick on something that already exists. We’re actually changing the personality of this property to make it work in a different way so that it will end up cash flowing in one of these really nice areas. And those cash flow should go up every year, as well as the appreciation of the property. And I’m going to get grade A tenants. These are going to be like the best people that you could ever hope for or are going to be renting this property, which is why I’m willing to take on a bigger project. Because I’ll have less headache over the long term.

Rob:
So I really liked this property. I’m not sure if you mentioned it, but can you run us through like the purchase price and then maybe the ARE?

David:
So the purchase price is $2.25 million and I’ve got about $75,000 coming back to cover my closing cost because I have to buy down the rate and the closing costs on properties like this are pretty high. The rehab estimate as we’ve gone over is around $186,000. That could go up once we actually start working on the property and I may want to do some more stuff. The property is appraising at $2.65, and that’s one of the ways this is a good deal because it’s actually appraising for more than what I paid for it right off the bat. Now the appraiser told my agent, Johnny, who helped me get this house. We had him on the Bigger Pockets Podcast on episode 583. He said, “Hey, if this thing was upgraded some of the houses around it, you’re looking at 3.2.” And that’s before the basement has been finished.
So what we’re hoping for is once we do the initial rehab, before we split it into different units, we’re actually going to get it refinanced then. And we’re hoping that 3.2 is the bottom level of where it’s going to be coming in. So if it does appraise at 3.2 with the numbers that I have, I should be pulling out a little bit more than the 2.25 plus $186,000 that I’m going to have into it in the beginning, meaning that I’m going to pull out more money than I put in, and I’m going to have this cash flowing property. And it be even more than that once I add the square footage in the bottom and as the market continues to appreciate.

Rob:
So the quick math here, is the equity on this when you’re done with it going to be the 700, 800 mark?

David:
I’m thinking that it’s going to appraise at 3.2, I’m going to borrow at 2.56. That’s 80% of 3.2, the purchase price and the rehab together is going to equal about 2.496. If you add in $60,000 of holding costs, I end up being a little bit underneath the 2.56 that I think I’m going to pull out of it. So the equity there would be the difference of… What’s 2.496 to 3.2, which is yeah, right around $700,000.

Rob:
Man that was an emotional roller coaster for me because the more you math it out the more horribly wrong I thought I was. But hey, Rob’s still got it.

David:
Right on my brother.

Rob:
So on this property, man, is there anything else you want to tell us? Is there any particular that comes to mind about this? I think you alluded to a little something happening.

David:
So this weekend I went to the house to take some of the pictures and the video to show on the podcast because we knew everybody’s asking, can you still BRRR, does BRRR work? And we knew we wanted to do a show on it, but I wanted to be able to show you guys what I’m actually buying myself. Because I’m not just saying BRRR properties, I’m doing a BRRR. So I go to the property and we’re buying this from a family. The property is a probate sale. So their father had passed away and we’re dealing with two of the sisters. There’s no agents, we’re doing this directly. We told one of the sisters, I was going to be going to look at the property and not the other one. So while I’m there, property currently has security cameras that are recording it all the time because it’s in a really nice area. And I show up on the security camera with the sister that’s never met me.
So she calls the police thinking that there’s an intruder in this house while I’m walking around with my camera, taking videos and talking through what we’re going to be doing and talking to Johnny on my team that was on the Bigger Pockets podcast about, “Hey, tell the contractor, we want to do it this way instead of that way. And have them change the bid.” And going through that whole thing. I look out those windows that I was showing you guys where all the light comes from and I see four or five uniformed police officers with their guns out walking up this hill, tactically from different ways. They’re like approaching it they’re going to be taking the thing down. And I immediately realize, oh no they don’t know that I’m here.
They called the cops. The cops are going to walk into this house and see me not supposed to be here holding my big black iPhone in my hand that look just like a gun. So I told Johnny like, “Hey, I got to get off the phone.” I put it in my pocket. I open the front door. I come out really slow with my hands out. And immediately they all point their guns at me. And they’re like, “Freeze, stop right there. Are you in the house alone?” And they go through the whole thing and just word of caution for everybody don’t argue with police when they’re in that situation. They don’t know who you are. You know who you are. They don’t know who you are. They know that they were called by somebody else saying someone’s in the house that isn’t supposed to be there.
So they prone me out. They do their whole thing. Once everything’s calm I’m like, “Hey guys, I’m actually a former police officer myself, my ID’s in my pocket, check it out.” They run me out and one of them says, wait a minute, “Are you that cop guy that buys a bunch of real estate I’ve heard about” He goes, “David Green real estate, right?” And I’m like, “Yeah, you’ve heard of me?” And he goes, “Yeah man, all the cops think you’re really cool. What are you doing here all by yourself in the middle of a Sunday?” And I was like, “Well…” And I kind of explained what was happening. Orinda police department, shout out to you guys, thank you for being very professional with how you handled that and for staying calm in what could have been a very tense situation. And given me a really good story to share with the Bigger Pockets audience.

Rob:
Well, I hope you got a seller credit out of that, man. That’s very scary, but happy ending right there.

David:
Yeah. So what I would highlight about this deal is that instead of looking for something in saying, would it cashflow or would it not cash flow and then moving on. Is I found a property that I thought I could add value to this property. And then I said, “How could I make it cash flow?” Is there a way that I can make this thing work? And it looks at this point there is. And so that’s where the strategy came from.
And I just want to highlight that in today’s market, you are going to have to work harder than normal. I mean, I’ve got a team looking for people all the time, trying to find deals that will work. And so they came across this one that they thought would work for me. And that’s why I’m buying it. But you got to be dedicated. This is not a market where deals fall into your lap or people come to you and beg you to buy a property and you make up your mind if you want to do it. A lot of competition for these assets right now, they’re going up in value very quickly. Rents are going up just as fast. The stakes are higher than they have ever been. So now is the time to continue taking action.

Rob:
Well, I’m really jealous of this. This is a really… Well, first of all, I love the house. I mean, as much as I was giving you some grief about it earlier. It’s really cool. It’s got a lot of insane bones, a very magical outside, very expensive. So for someone walking into a deal like this, obviously what I want is for them to have the experience to be able to do so. But what are the actual, I guess you kind of talked about it earlier, the holding costs. Because if you’re going to buy a $2.2 million property, I got to imagine you’re doing hard money loan on something like this. So the cost on that, is that like a 10% interest on a total of like $2.4 million.

David:
Yeah. So as Christian mentioned, when we brought him in, he was able to find me a sort of a hybrid hard money type of a deal where my interest rates going to be 6.99%, which is going to sound higher than what most people are used to hearing. But I’m only having to come up with 12% of the purchase price and the rehab, they’re going to be able to fund the whole thing. So the higher rate makes more sense for me. And then, because it’s at 2.25, and I’m only having to put 12% down, it’s still at a pretty high loan amount. So you’re looking at about a 2 million note or so for the time that I’ll be holding this property as well as the property taxes and the insurance and whatever other expenses we’re going to incur, which is just why I keep saying you always have to have a lot of money in reserves. You have to plan for the worst case scenario and hope for the best.

Rob:
Man, I’d have to really look at those numbers. But top of my head that actually seems like a pretty sweet deal. A pretty good loan product for something this size, especially.

David:
Yeah. And that’s one of the reasons that he and I, and a lot of other people in this industry are banging the relationship drum. If we were just trying to find the cheapest rate you could possibly get, you usually end up getting the cheapest representation and your whole deal gets screwed up. But when you work with a broker that actually intimately knows your finances, knows what your profile looks like, and they can go look for someone that would work with you. It doesn’t always work out. K. Like on the deal you and I are buying we didn’t get anything incredibly special. We, instead of putting 30% down, I think we’re probably going to be doing, is it 20%?

Rob:
20, yeah?

David:
We were hoping for 15. But so you don’t always end up getting that home run, but more often than not, when you work with the same lender and you have a property that has options like the one you and I are buying just doesn’t have that many options. There’s not as many investors for a luxury property like that. But when you do work with someone who knows files, they can find you loan products like this that give you some creativity.

Rob:
All right. Well, I’ll be giving Christian a call right after we finish recording this.

David:
Yes, sir. Well, thank you, Rob. I appreciate you sitting here and kind of letting me put you up on game. When it comes to the BRRRR model, you’re asking the tough questions that everybody wants to know.

Rob:
I feel like I’m putting you up on game.

David:
Well, I’m showing you kind of, this is how I’m approaching real estate. And I will admit this is not traditional stuff, but we’re just not in a traditional market. This is the craziest market I’ve ever seen in my lifetime. I’ve been telling people for as long as I’ve been hosting the podcast, the white walkers are coming. Inflation is coming. A crazy market is coming. When a lot of other people were sitting on the sidelines, I was still saying I think you should buy.
And people that have been buying and doing fundamentally smart moves are making a lot of money, but you got to have that creativity piece. This is no longer just the boring churn, rinse and repeat model that I was able to use before when I was stacking up properties. Now you got to see angles that other people aren’t seeing, you got to be willing to do work other people aren’t doing. You have to be thinking about how to run your property better than other people are running it. You got to be a better investor, but when you are, there is still a lot of money to be made.

Rob:
Well according to chapter seven of the BRRRR Bible you say… Well, I was hoping I would land on a really nice juicy nugget, but the whole book itself is a juicy nugget. It wasn’t going to work in this context, a bad ad lib, but it’s a good book. So as a reminder, if you guys sign up for Bigger Pockets Pro you guys are going to be getting a free copy of this. And you know what, as I mentioned, this has been the foundation for a lot of my real estate career. And I don’t even execute BRRRRs really in the same capacity that you do. It’s very applicable to short term rentals, to flipping to every niche within the real estate industry. So excited to get this in the hands of more people.

David:
Well, thank you, Rob. I’m excited to do this podcast with you. If people want to see more about what you’re about and where your amazing aesthetic insight comes from, how can they find you?

Rob:
They can always find me on YouTube at Robuilt, on Instagram at Robuilt =, on TikTok at Robuilto. And that is for all the crispy nuggets that I’m willing to unleash on the internet. What about you? If anybody wants to invest in a flip with you like this, or learn more about you work, can they find you?

David:
Great question. I actually am raising money to do more deals like this. I’m paying other people to use their money so they can go to investwithDavidgreen.com and you can invest in a deal with me, get yourself paid, not have to worry about making any mistakes or doing something the wrong way. And they can also follow me online at DavidGreen24, which I hope you do. Brandon Turner has stepped away from this podcast. He still has twice as many freaking followers as me. So I am not too proud to ask for a pity follow. Please have your mom, have your sister, have your aunts, all of them. I’ll take every pity follow that I can get. Follow me there and let me know what you thought about this show. All right. Anything else Rob, before we get out of here?

Rob:
No, man, that is all I’ve got for today. I’m on a mission now I’m going to go buy a $2.2 million house and I’m going to BRRR it. You mark my words. It’s going to happen on this podcast.

David:
All right, man. This is David Green for Rob, crispy nugget [inaudible 01:32:27] solo, signing off.

After years of record-breaking appreciation, property values are facing their first real test since 2019, as mortgage rates rapidly rise and put downward pressure on housing prices. As such, many real estate investors are rightfully wondering if they should invest now before rates rise, or if they should wait for a possible price correction. 

This is an important question for real estate investors, and luckily, we can answer it for ourselves with simple math. 

In this article, I will talk you through how returns would differ if you bought now versus waiting for a “crash”. I’ll also demonstrate how you can use calculators on BiggerPockets to do these calculations yourself.

The variables

The question I’m seeking to answer is — should I invest now before rates rise further? Or should I wait for a potential price correction? There are just two variables we need to consider to answer these: interest rates and home prices. 

Let’s create two scenarios. The first is buying now (mid-April 2022), where interest rates for an investor on a 30-year fixed-rate mortgage are about 5% and the median home price in the U.S. is $400,000. 

The second scenario is going to be a market crash scenario, where the median home price declines by 10% to $360,000, but that doesn’t happen until the end of 2022, at which interest rates for an investor increase to about 5.75%. 

To be clear, I am not saying that a crash is going to happen. I personally think the more likely scenario is that price growth starts to flatten out in the coming months, and perhaps even decline at some point within the next year or so. But, I don’t think a 10% contraction is likely. 

Overall, low inventory and demographic demand will likely put upward pressure on housing prices and counteract the effect of rising interest rates. However, we’re in strange times, and the direction of the housing market is unclear. 

For the purpose of this article, I am going to model what I would consider a true “crash” scenario – which is a 10% decline in home values. Of course, there are limitless scenarios we could run, but since I hear so many questions about the “crash” scenario I think it’s the most interesting one to model.

In both scenarios, I assumed rent prices of $2800/month and forecast an average of 3% appreciation post-purchase. I did this because even if prices do happen to decline a bit in the coming year or two, I expect strong appreciation in the housing market over the next 10 years. I recognize rent could go down in a “crash” scenario, but I want to limit the number of variables in the analysis, so I kept rent the same in both scenarios. 

Analysis

To make this analysis as easy as possible, I am going to plug in my assumptions to the BiggerPockets rental property calculator. 

Scenario 1: Buy now

Purchase Price : $400,000

Down Payment: $100,000 (25%)

Closing Costs: $7,000 closing costs 

Annual Appreciation: 3% 

Loan Details: 5% interest rate, 30-year fixed rate

Rent: $2800

View Full Calculator Report Here

In Scenario 1, if I owned the property for 10 years, the value of this fictional house would increase to $538,000, and I would be earning over $10k/year in cash flow after a decade of gradual rent increases. If I went to sell the property after 10 years, I would earn a profit of $265,000, which is good for a 13.28% annualized rate of return. Solid returns! 

Scenario 2: Wait for a price drop (10% price correction)

Purchase Price : $360,000

Down Payment: $90,000 (25%)

Closing Costs: $7,000 closing costs 

Annual Appreciation: 3% 

Loan Details: 5.5% interest rate, 30-year fixed rate

Rent: $2800

You can check out the full calculator report here. 

In Scenario 2, if I owned the property for 10 years, the value of this fictional house would increase to $484,000, and I would be earning almost $11k/year in cash flow. If you’re wondering why the value of the property is less, it’s due to the fact that in both scenarios I assume an average of 3% appreciation. In Scenario 2, we had a starting point of $360,000, as opposed to $400,000 for Scenario 1. 

If I went to sell the property after 10 years, I would earn a profit of $245,000, which is good for a 13.44% annualized rate of return, slightly higher than Scenario 1. 

Breakdown

As you can see from these two analyses, the difference between the two scenarios is not very considerable. The total profit is greater for Scenario 1 ($265,000 vs $245,000), but the rate of return is higher for Scenario 2 (13.44% vs. 13.28%). This is because you put $90,000 down to earn $245,000 in Scenario 2 whereas, in Scenario 1, you put down $100,000 to earn $265,000. 

If it feels like I doctored the inputs to make the results come up similar (which I do for the purpose of explanation sometimes), I didn’t. I just came up with a market crash scenario that is within reason and this is how it played out. 

Frankly, I was pretty surprised to see how similar these two scenarios worked out, and I found the results encouraging. It’s reasonable to be worried about the market and where we’re going over the next few months. 

Getting the results of this analysis and finding that “investing now or in a 10% correction is about the same” made me feel more confident in my own investing strategy. 

My thoughts on the market

Although this is a confusing market, I am still actively looking for deals, and here’s why. 

I personally believe the market will flatten out or even go slightly negative at some point in the coming year or two. But, it is incredibly difficult to time the market. I can easily see the market appreciating more in the coming months as well. Overall, I’m not trying to time that market because I’ve done that in the past and lost.

As I said at the beginning of this article, there are two variables in this equation: interest rates, and property values. One of these variables is unclear and the other is pretty certain. In terms of property values, I have personal hypotheses about what will happen in the coming years, but those are just my personal opinions. On the other hand, mortgage rates are almost guaranteed to increase. The Fed is insistent on controlling inflation and bond yields are rising rapidly – making mortgage rates go up. Because the direction of interest rates is predictable, but property value growth isn’t, I am trying to make decisions based on the variable I can better forecast. 

Even if the market does correct in the next year or two, I personally think something along the lines of a 5% correction is more likely than 10%, despite it still being a possibility. A 5% drop, which I’ll call Scenario 3, yields the worst returns of all: $244,000 in profit at a 13% annualized return. This happens because the decrease in prices is not enough to offset the rising interest rates. So, although the difference is negligible in the long run, buying now has a slight advantage over what I think most realistically will happen in the coming years. 

All of these scenarios are better than what I think alternative investments offer. With inflation eating away 8% of money’s value annually right now, I feel a strong imperative to invest my money. Cash is losing value rapidly and I don’t want to let my spending power slip away. Bonds have a negative real interest rate (they don’t even keep pace with inflation) and are unattractive. 

I do invest in the stock market, but I don’t think I’ll get a 13% annualized return over the next 10 years in the stock market, and I don’t know enough about crypto to put any significant portion of my net worth into that asset class. I’ll admit, I am biased toward real estate because I know it best, but I genuinely believe it will outperform all other asset classes over the next 10 years. 

Of course, these are just my assumptions and feelings about the market. At the end of the day, it’s up to each individual investor to make their own forecasts of the market. In fact, BiggerPockets launched its newest podcast, On The Market,  which is hosted by myself and is designed to help you form your own strategy based on changing market conditions.

Once you have a sense of where you think the market might go, run your own analyses! Use the BiggerPockets calculators like I did to determine for yourself if now is a good time to invest, or if you’re better off waiting, based on your own assumptions of where housing prices and interest rates are going. 

The calculators make it super easy! So don’t be stunted by fear – run the numbers for yourself and make a data-driven informed decision about your strategy. 

On The Market is presented by Fundrise

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Dave:
Hi, I’m Dave Meyer, and you’re listening to the very first episode of On The Market, so welcome. We are so glad to have you here. Personally, I couldn’t be more excited to finally have this pilot episode air after months of dreaming up and working on this concept. If you don’t already know me, I’ve been investing in real estate for 12 years, and I am also the Vice President of Data & Analytics at BiggerPockets.
And in that role, my job is to give information a voice. I work with my teammates to connect the dots between data, trends, policy and world news, to help the organization make informed and confident decisions about our strategy. And through this role, it occurred to me that real estate investors could benefit from the same type of information gathering and analysis, so we designed this show with you in mind. In this show, we’re going to bring you the information and news that impacts your investing.
We’re going to undercover which markets we should be watching. What’s with the metaverse? Are 3D printed houses really the future? What strategies work best in 2022? Our mission is to consolidate all the sometimes chaotic information, headlines and stories out there while analyzing and making it simple. On The Market will be your source for everything you need to know about the real estate investing world. And we’re going to make this fun, actionable and easy to understand.
This is definitely not a boring news show where we’re going to read off a bunch of stats and data in a monitory voice. If there’s an opportunity to turn something into a game or make it goofy, I’m going to do that. With that being said, I have an amazing group of expert investors with me in-person here today to assist me with this endeavor all with different life experiences, viewpoints and takes. Let’s get to it. Today, for our very first episode ever, we’re going to be going deep on the 2022 housing market.
That brings us to our first segment of the show, Between the Headlines, where we do just that. We’re going to be looking between headlines to get to the point of every story. And we’re not just going to banter about this, we’re going to make this into a needlessly competitive game every week. And this week, our game is predict this, where the expert panel and I are going to be making predictions about the housing market.
I mean, I think you guys all agree, we all are very curious about what’s going to be going on the rest of this year in the housing market. I want to get all of your predictions about where you see the housing market, and then we’re going to come back to this at the end of the year and see how we all did. All right. But first, let me introduce our panelists this week.
We actually, we got a full house here. First, we have Kathy Fettke, who has been investing since 1997. But she says she’s not a boomer, not quite a Gen Xer, more of a millennial trapped in a grandma’s body. And just to be clear, these are Kathy’s words, not mine. I did not write this.
But she is the co-founder of Real Wealth, where she’s been helping thousands of busy professionals since 2003. Next, we have Henry Washington. You might know him from the real estate show in BiggerPockets. He’s a fairly new investor who bought his first house in 2018 after having a panic attack about being broke. And now he owns over 70 doors and is basically still just trying not to be broke.

Henry:
That’s right, man.

Dave:
All right, next, we have Jamil Damji, who is a Sagittarian wholesale genie, who also runs the nation’s largest wholesale real estate operation. And he’s occasionally on TV that’s very modesty. He is on the A&E show, Triple Digit Flip, which you should definitely check out as well. Lastly, we have James Dainard, who is a veteran real estate investor, who has fixed and flipped over 2,000 homes in the Pacific Northwest.
No house for him is too damaged, too dated, or simply too disgusting for him. We’re going to have to jump into that. From stepping into buckets full of human urine. Oh, we’re dumping right into that. Animal encounters to brushes with death, James put the real estate in … I can’t even get through this. James put the real in real estate investing. All right, I got to ask you about the human urine one later.

James:
Lots of life experiences.

Dave:
Okay guys, thank you guys all so much for joining me here. We are all here live in Denver for our very first show, which is super exciting. In this game, you all are going to make a prediction about some questions that I have prepared to you. I’m going to give you a little bit of context, a little bit of data, and share some news stories with you and then ask you how you see these trends going over the course of 2022.
And we are going to revisit this at the end of 2022 to see just how well we all do at predicting the future. The first question is about rent growth. It just came out that rent growth was up 15% year over year in February. And we’re seeing huge markets like Austin and Portland seeing 39% and 40% year over year rent growth. It’s absolutely insane.
And actually, only two of the biggest markets in the US declined, sorry to Milwaukee and Kansas city. They did see rent declines over the last year, which is pretty wild. Jamil, I’ll start with you. Where do you see rent growth going through the end of 2022?

Jamil:
I think we still have a lot of room. I know that people aren’t going to be happy to hear that, but there’s … I don’t think we’ve caught up to it yet. The housing prices have spiked. The cost of buying a house, if you’re going to have a rental or cash flowing rental, is increasing. I think rent growth is going to be at about 7%.

Dave:
All right, 7%. So just for context, we usually really see rent growth about 2% or 3% per year, so you’re seeing it away above average. What about you, James?

James:
I think it’s going to come in fairly heavy this year, around 10% to 12%. I mean, the fact that we’ve already had a 15% increase in the beginning of the year is getting us that big jump, where I think … And the reason being is, A, we weren’t able to raise rents for the last 12 to 24 months, so it’s backlogged. We got to get those rents up.
And at the same time, the cost of housing has gotten so expensive the metrics are all out of whack. Typically, in Seattle, it’s about 25% cheaper to rent than own, or it has been historically. And that gap has jumped so dramatically with housing prices. Now it’s like around 30% to 40%. So I’m seeing that gap’s going to get filled pretty quickly.

Dave:
All right, Kathy, what do you got?

Kathy:
Well, it obviously depends on the market, and some markets will see the lower growth and maybe even negative, and some will be double digit again. But if you were to average it, I’m going to go with half of what it was last year, because we’re still going to have tremendous demand. So many millennials and Gen Zers now looking for a place to live and many people priced out of the market. So half of … What was it?

Dave:
15%

Kathy:
Oh, so it’s 7.5%.

Dave:
7.5%. Very precise.

Kathy:
Yeah, thank you.

Dave:
All right, Henry.

Henry:
Yeah. I mean, I’m on the same train, man. I think it’s going up. I think you’re going to continue to see a rise. Similar to what James said, you’ve got plenty of people who kind of got on the boat early with raising rents to what these new market rates are and then you’ve got the late comers, the people who’s leases haven’t expired yet, right? And so they’re going to be coming up over the next year, and they’ve been watching and seeing everybody like, “Oh, you can get that much now in rent?”
So you’re going to see that influx of rent raises. As well as most landlords, if they’ve had somebody in for a long time, or if they’re going to do a big rent raise, they also want to do some sort of renovation or sort of upkeep to the property. And the cost of materials is higher now, and so that’s going to cost them more than it typically would so they’re going to try to make up for it on the rent raises. So I think you’re going to see somewhere around 10%.

Dave:
All right. I’m going to go high. I’m with you, James. I’m going to go with 12%. I just think that you’re going to see, with inflation, wages are going up, and I think double digit rent could growth is in our future. All right, James, we’ll start with you this time. What about housing price growth? This is on pretty much everyone’s mind, whether you’re a real estate investor or just a home buyer, maybe a real estate professional.
We’ve seen incredible price appreciation over the last couple of years. And actually recent data from Redfin shows that in February, we were 17% year over year, which is actually the highest it’s been since August. We were starting to see things starting to taper off a little bit over the winter 14%, which is still crazy in historical context. But now we’re seeing it start to accelerate again, which is wild. James, what do you see for house price appreciation in the rest of this year?

James:
I’m going to cheat a little bit and I’m going to answer this two ways. I think the homes that are above, the average above, the median home pricing, where the money is, I think those are going to appreciate continually fast. I think we’re still going to see that 10% growth in a lot of markets, 10% to 15%. I think the first half of the year we are seeing that 15% to 20% growth pretty rapidly, and it’s going to taper down towards the last three to four quarters.
I do think the first-time home buyer market in the more affordable markets, we saw this jump 10% to 15% in this first quarter, and I do think with interest rates rising that it’s going to cut little bit of a clawback, and it’s going to average out more like 5% to 8% in the first-time home buying sector with the rates adjusting. And then again, the luxury, I think it’s going to continue to go up.

Dave:
Yeah, it’s a really interesting point given that affordability that is declining due to increased interest rates is probably going to hit that first-time home buyer lower end of the market harder than the more luxury market. But do we have one number for you? Because we have to grade your scores. You have to give me a number.

James:
I’m going to blend the two together then. I think year over year for this year, we’re still going to see around a 10% to 12% growth. Because I mean, we’ve already seen 20 in the first quarter, so if it slows down, it’s going to average out.

Dave:
All right. Henry.

Henry:
Yeah, man. I’m on the boat it’s still going up, and I think it’s going to go up in all segments. The reason being like you’re the data guy, right? I don’t know a whole lot about data and analytics, but I know about supply and demand.

Dave:
You were just telling me you worked for Walmart doing data analytics for 10 years.

Henry:
I did do data analytics for 10 years, but this is a whole different ballgame, man. We’re talking real estate trends, and I mean, supply and demand. It’s just there’s way, way more demand than there is supply, and I think that’s because obviously there’s way more buyers. And so yes, there is a first-time home buyers pool who is going to be somewhat affected by higher interest rates, but still even these higher interest rates aren’t that high in comparison to where they were 10, 12 years ago.
And so yeah, some people that were kind of on the cusp of home ownership will probably get priced out through raised interest rates. But you’ve also got this pool of investors who want to put their money in tangible assets because the dollar is losing value you. And so you’ve got more investors, you’ve got people who are relocating all across the country because you’re not tied to living where you work as much anymore.
And so you’ve got this influx of buyers, you don’t have enough homes, and I think that’s just going to make the prices increase. Even with interest rates rising a little bit, they’d have to rise pretty drastically, I think, to have a hugely lasting impact. But all I had to say, at the end of the day, I think you’re still right around what James said about that 10% to 12%.

Dave:
Okay. Kathy.

Kathy:
I am going more conservative. Because last time we talked about this, I didn’t really think the fed was going to be as aggressive, now they’re really going for it. And I think they’ve really realized that they overshot, printed way too much money. Inflation is way out of hand. And the only way they know how to combat it is raising rates, and they’re going to go big. And that’s a little concerning.
I agree with all of you, supply and demand is just completely imbalanced. But people are living somewhere right now. And even if it’s a couch, if that’s what they can afford, they’re going to stay on that couch. So I’m going with prices I do believe will still continue to increase. But again, I’m going with half, and it’s my understanding that it was about 15% median.

Dave:
That’s right.

Kathy:
So I’m going with 7.5%.

Dave:
Okay, even.

Kathy:
Yes.

Dave:
All right, even odds. Jamil, what do you got?

Jamil:
I’m a little bit in the middle here. For me, I think that rising interest rates are going to do something, but we really have to pay attention to the other people at the table, right? And so if we look at real estate prices as a product or in relation to, let’s just say, a dinner table, right? You have normal people eating normal meals typically, and you can say, “Hey, if I cook this many chickens, I’ll be able to feed everybody.” But what if you invite a professional eater to the table, right?

Dave:
My dream job.

Jamil:
What if you have David Meyer eating, right, who can eat more than everybody, right? That’s what we have right now. We have a professional eater at the table, and they’re gobbling up all the houses and they’re … I mean, the secondary home buyer right now is crushing the average primary home buyer. You’re a fireman, you’re a school teacher, they’re not competing. They are not competing.
And when they do compete, they’re so emotional with what they’re doing that they’re driving prices ridiculously through the roof. I’m seeing it on my flips. I’m seeing it time and time again. I believe that we’re going to have aggressive appreciation, but I don’t believe it’s going to be as aggressive as you guys think. I’m going to go somewhere in the middle. I’m going to call it 9%.

Dave:
Okay, 9%. I like it. I’m actually with Kathy. I’m a little worried about rising interest rates right now. And I’m going to say that the year over year mark in December will be somewhere around 6%, so maybe I’m the most pessimistic. But I think what’s interesting is because I believe rent growth is going to go up so much and housing price a little bit less, that means that cash flow prospects could actually increase, something we’ll jump into later in the show.
Last question here is something that is on every American’s mind, whether you’re into real estate or not, which is of course inflation. The most recent CPI data showed 7.9% year over year growth, and that was led primarily by energy. We all know gas prices are up a lot. But prices were really up across the board.
Really, the only glimmer of hope is that car prices actually went down a little bit, but not in any significant way that’s really going to be helping anyone out. So inflation, really high right now, and is obviously a huge factor in the housing market and the broader economy in general. Kathy, where do you see inflation going in 2022?

Kathy:
Well, the fed is doing everything they can to slow it down. And generally when the fed wants something, they get it. I didn’t think that they could really raise rates as much as they’d like to because of the national debt. And can the US afford higher interest rates? But now, at least from what they’re saying, they’ve done a complete 180 from, “Oh, this is just transitory inflation,” to, “Oh, we got a problem here.”
And so with their aggressiveness and their intent to slow down inflation, I think they’re going to do what they can to make that happen. With that said, I think it’s probably going to go up. In the next few months, we’re going to see some crazy terrifying headlines in the double digits because of supply chain issues and all that. But maybe that will start to settle down as demand starts to go back, as people have less money to spend it. And so with that said, hmm, let me just see what comes and pops in my head. 7.5%

Dave:
Oh. All right.

Jamil:
That’s awesome.

Dave:
All right. Jamil, what do you got?

Jamil:
I think like Kathy said, the fed is going to get what they want, and they’re going to do it in the ungraceful fashion that we typically see the fed behave in. And so I think they’re going to be aggressively raising rates. I think that they will curb it. How much that’s the big answer, that’s the big ask. I think supply chain problems are going to start to settle down.
It can’t remain the way it is right now and be real. Right? Because at some point, everything’s got to come off the boat, right, or at some point people have to go back to work and start making things, I imagine. Right? So with that easing and with a fed policy, I think that we are still going to have upward pressure. But I don’t think it’s going to be in the double digits, so I’m going to temper it and say 6.19.

Dave:
Ooh.

Kathy:
Wow.

Dave:
Extreme accuracy.

Kathy:
Very accurate.

Dave:
All right. Henry, do you agree? Do you think the fed’s going to get this under control and we’re going to start to see this turn back around or are we in for worse numbers?

Henry:
Yeah. No, I think Jamil hit it on the head, right? And we’re starting to see it. Just as now, as we all traveled here, right, the world is opening back up, right? Things are starting to loop. When I was just on vacation in Hawaii, they lifted the mask mandate while we were there. Right? And people are starting to feel more “normal”. Right?
I still think we’re in a new normal. It won’t ever be exactly as it was, but we’re getting closer. And as we get closer, if interest rates are higher, supply and demand starts to balance out, and I think you’re going to … I’m in agree. I’m not 6.19 in agreeance with you, and I’m not 7.5. I’m right about 7%.

Dave:
Okay. All right. Everyone’s going the same. James, what about you? Do you see it differently?

James:
I think we made some major mistakes in the last 12 to 18 months that are going to take a lot longer than six to nine months to burn through. I mean, I know in my everyday purchasing of things, like construction, I mean, we’re up 20, 25% on costs. And I think we’re on the tip of the iceberg to having all these data points starting to come into the inflation real, and we’re going to see it jump to like 9%, 10%.
I think there’s other factors too, besides the world opening up. And I hear that a lot too, like, “Oh, the world’s opening up now. Things will come off the docks,” it’s like, “Well, we still don’t have enough things in the boats.” And I’m on the coast of California all the time, there is a lot of boats out there, but even if they unloaded all of them, we’re still going to be short on items.
And now we have this Russian-Ukraine conflict. There’s going to be other chain issues. The more supply chain issues, the more expensive things are going to go. And I do think the fed’s doing a good … They have the right plan, raising rates to get it under control, but this is not going to be a quick fix. This is going to be … I think it’s going to spike towards the end of the year, and then in about nine months, we’re going to start seeing it start taper down.
But this isn’t something where they just raise rates and it flips the other way. It’s we put way too much money in the market, the money’s been cheap for too long and it’s going to be kind of a settle down period. I’m predicting, unfortunately, and I don’t want it to be this way, I’m hoping it’s not, but more around 9%.

Dave:
All right. Yeah. I mean, I hope you’re wrong. But I do agree. I feel like we’re starting to trend in the right direction. And this Ukraine-Russia conflict, you started to see gas prices go up, you’re seeing wheat prices go up. And who knows what else can happen in the geopolitical sphere that could impact the US to some things that are completely out of the US control?

James:
They were talking about food shortages. I mean, that’s on the table. Things are getting expensive. I haven’t heard that ever in my lifetime.

Dave:
I do think we’re also going to go up and see it increase. I don’t think we’ve peaked yet. But I’m hoping we’ll peak towards the middle or the fall. And I’m going to just go with 6% and be optimistic, mostly because, I don’t know if you guys have heard this, but there’s this theory that expectations of inflation actually impact inflation.
If people believe there’s inflation, prices actually go up. They demand higher wages, which increases cost for businesses. I’m just going to put it out in the universe that inflation is going down and hopefully we’ll all collectively start believing that and then inflation will go down. We’ll we’re doing our part [crosstalk 00:20:10].

Henry:
So you’re going full on self-fulfilling [crosstalk 00:20:12].

Dave:
Yes, exactly.

Henry:
Got it.

Dave:
I have this-

Jamil:
Let’s just name this podcast Inflation Is Down.

Dave:
Yeah. If we say it enough times, maybe we could do it. Okay, I do want to jump into what all of this means, because obviously you guys have brought some really interesting insights to the table. And we’re going to spend most of the rest of the show talking about how take this information and craft a strategy for 2022, how to invest in this type of climate. But before that, I have to keep you guys honest. I don’t know if you guys have seen the goat who predicts March madness or the octopus who picks like World Cup winners better than all of the experts.
And so Kailyn and I, Kailyn is our producer, before this show we decided that we would just get a bingo ball to prick random numbers to see if it does better or worse than all of us supposed experts at picking these things. So-

Kathy:
This is harsh.

Dave:
Well, maybe everything’s going to come up 7.5%, Kathy, and you’ll have it perfectly. All right. For rent growth, which is what we started at … How do I do this?

Henry:
There’s probably only one 7.5 ball in there, Kathy.

Dave:
Yeah, I don’t think we have fractions there. Rent growth is going down 10%. I think we’re pretty safe at that. That’s a negative 10. Yeah, I also, I doctored the [inaudible 00:21:30] so there were some negatives in there, because we realized they were all positive. All right. Rent growth is at negative 10%. Home price appreciation, a modest 3%.

Kathy:
Wow.

Dave:
I would actually love to see that personally, the chart, have a healthier housing market. And then inflation, I’m worried about this one.

Henry:
Even fate.

Dave:
Negative 2%. Yikes. I don’t think anyone’s in danger.

Kathy:
That’s a little scary. All right.

Dave:
Yeah. I mean, deflation is even worse than inflation, so hopefully we don’t see that.

Henry:
You need to bring the goat out.

Dave:
Yeah, exactly. The octopus will do a lot better. We’ll be back right after this message. All right, everyone, welcome back to On The Market. We are now moving into our next segment, which is called Due Diligence. And this is the meat and potatoes of the episode. This is where we’re going to dive into a larger topic at length.
We’re going to discuss large philosophical questions, trends, data in this section. And today, to continue the theme that we’ve started with, we’re going to talk about how to craft a strategy in 2022. Because as we’ve all heard at the beginning of this show, things are pretty unusual in the housing market. And we’ve heard that everyone really thinks we’re going to see a bit more of the same, at least in 2022.
And I think for real estate investors, that brings up a lot of questions about how to invest in 2022. Kathy, let’s start with you. How are you approaching the 2022 housing market, and how are you adapting your investing strategy to this unique climate we’re in?

Kathy:
We’re kind of doing the same thing we’ve been doing for 20 years, which is kind of sounds really boring, I guess. We’re looking for those markets where there is growth, there’s the demographic movement. And well, I should say migration. Migration patterns, job growth and affordability. A lot of people are talking about affordability lacking, but now with so much movement, for some people, things are more affordable than ever.
If you’re moving out of New York City to Florida, you could buy a whole house, or rent a whole house for what you might have rented a studio for and had four roommates. And the same with San Francisco or LA, people are moving to Phoenix or to Arizona or to Las Vegas and Texas. This movement, we were already tracking that for years. We were helping investors buy in Dallas 15 years ago, when you get a house for $120,000 that was brand new and rented for 1,500.
People are still doing that, they’re just going more into the suburbs with lots more money. They’re armed with so much money, so much cash. People selling homes in high-priced markets, getting multiple offers and taking that cash and just going to buy somewhere cheaper. We’re following the trends. Where are the jobs going? Where are the people going and buying in those markets? Right now, the strongest migration is into the Southeast. We love Florida, Jacksonville, Cape Coral, St. Pete. I’m telling all my secret. St. Pete is-

Dave:
It’s too late. We got you on camera.

Kathy:
… Oh, man.

Dave:
You can’t go back now.

Kathy:
Okay. Well, forget about St. Pete. And then we’re building. We’ve been building homes in places like Bozeman, Montana, which a few years ago people were like, “Why would you do that?” And the reason we did it was the land was cheap and there were no other builders. We were the only game in town. And now, well, Bozeman, I mean, thanks a lot to Yellowstone. You guys, tell me you watched it.

James:
Great show. Great show.

Kathy:
Well, we’re like the evil developer in that show. But we got the land sheep and we’re providing affordable housing in Bozeman. So just kind of staying where the big institutional investors aren’t necessarily going, but kind of going near them or buying things that they’re not interested in. And just areas where we could see there was growth. Again, Bozeman, there’s a huge university there and there was just not a affordable housing. So it was a great opportunity. There’s going to be opportunities, but it’s just kind of getting under the radar, finding where people are moving, but nobody else knows that they’re moving there.

Jamil:
They do now.

Dave:
Yeah, it’s not too late. Henry, what about you? I assume you’re just going to stop buying and pack up shop.

Henry:
Yeah, I’m done. I’m out. No, man. Absolutely the opposite. We talked a little bit about this prior to the episode, right? Real estate investing is like any other investment strategy, right? The general concepts are pretty simple, right? Buy low, sell high, or in the case of most real estate investors, buy low, rent, keep them forever, right? Because the reason real estate investors keep their property forever is because appreciation always wins out, right?
The appreciation is coming if you hang onto your property in the long term. And so are we changing our strategy? No. We’re still in the market of finding undervalue homes. And then we add value to them, and then we make a profit on them by renting them or selling them, right? And the market does shift from time to time. In very few cases, it’ll shift so rapidly that you have to pivot pretty quickly.
But I mean, this isn’t 2008, right? We’re not playing the same game right now. And so even if the market starts to head a different direction, if you’re good at identifying opportunities, right, and then purchasing those opportunities and adding value to them, you’re going to have some time if things start to shift for you to change your strategy. And so our strategy has always been buy a property that you can monetize in more than one way. Or said differently, buy property with more than one exit strategy, right?
If I buy a property, a single family, a small multifamily, I’m looking to make money on it as a rental, but I can also make money on it as a short-term rental, or I can make money on it as a flip, or typically I can sometimes just make money on it by calling another investor saying, “Hey, do you want to take this off my hands?” Right?
And so it’s more about getting good at finding those opportunities. And in this game, opportunity comes where you’re helping someone out of difficult situations. If you can eyeball and find those opportunities and buy those opportunities, you’re always going to be fine. I would say the thing that’s going to be a little different now is maybe how to find the money to buy those opportunities. Right?
Because if the interest rates are rising aggressively, then bank money is going to be a little more difficult to get. It’s going to cost you more. And so you just need to weigh your options. Bank money has never been the only money out there to buy real estate with. Right? There’s tons of options. And so there’s always going to be private money out there. There’s going to be hard money out there. There’s always going to be bank money out there on some level.
And so you just need to weigh your options, maybe how you go about finding the money to buy the deals changes. But for us right now, we’re staying the course. I love the small multifamily and single family space. And you’re always able to identify opportunities to buy at a discount. And if you can do that, you’re usually pretty safe.

Dave:
That’s great advice. I think given interest rates being so low over the last couple years, people assume that bank money is the only money. And frankly it has been the best money over the last couple years when you’re seeing interest rate at 3%. But people have been buying real estate when interest rates were at 15% or at 20%, or even in the ’90s it was between 5% and 10%. It definitely can still be done. James, you said that you were a little worried about the lower end of the housing market. You see inflation going up really high. Is that changing what you’re doing in your strategy?

James:
Yeah, there’s been two major shifts that we’re making for this next year. One is we are focusing on a little bit more expensive areas. We want to focus in the areas where the jobs are, where the money are. The one lesson I really learned in 2008 was we got our teeth kicked in 2008. And the reason being there wasn’t access to financing. The money wasn’t there. People had lost a lot of wealth at that time.
And because of what we’ve done over the last 18 months, 18, 24 months, I’ve seen this huge gap in wealth, right? People with money have made a lot of money, whether it’s stocks, Bitcoin, real estate, assets in general, and those people continue to have it. And so as I’m looking at my short-term projects, I’m going, “Okay, where is the money not going to dry up?”
The first-time home buyer pool is very financing independent. And the higher that rate goes, if it goes up a point, that can bring 10% down in affordability. That’s going to throw a lot of weird metrics when you’re throwing performance on deals.
And so we’re going where the money is. I’m doing more luxury flips. We’ve also targeted. We’re a heavy tech space in Washington. What do they make? We know that the average Amazon person, there’s two types. There’s the single Amazon employee. They buy 750 to 900. That’s the sweet spot. And then when two Amazon employees fall in love and they get married, which happens now all the time-

Dave:
Your dream as a real estate agent, to get the Amazon couple.

James:
… Yeah, maybe we get a little Apple, little Microsoft mix. I mean, those are even better due incomes. The sweet spot is 1.5 to 1.8. We know exactly where the money is, and so we’re actually building more town homes now because it’s falling in play to that space. The other thing that I am avoiding right now, we’re heavy construction guys. We do a lot of serious, studs-down renovations, manipulate buildings.
But as inflation’s soaring, and it’s harder to track, you don’t know exactly what your renovations cost is going to be. So we want to put less materials in. Hedge that bet to where we’re doing less work there. And in addition to, the value ads are great because you get huge discounts, but a lot of times you’re not going permanent financing on that. With hard money or soft money, you’re not getting your actual financing until 12 to 18 months down the road.
If I’m looking at a deal, the rates are right now at like 5%, which is way up from where it was. And it jumps to six, that’s going to throw all of my off. As we’re going into a frothy market, I’m trying to hedge against different variables, inflation, interest rates rising into shrinking the timeframes. So go where the money is and then staying in a manageable timeframe to kind of mitigate any kind of risk.

Dave:
That’s great advice. Jamil, I wanted to ask you, because something I hear constantly is that there are no deals right now.

Jamil:
Lies.

Dave:
And it sounds like it’s all lies. All right, well, you already answered my question. I mean, it seems like all four of you are fairly bullish, maybe with some caveat shifting your strategy a little bit and wanting to be cognizant of the market. But if you’re excited to invest in real estate, how are you finding deals? And how do you recommend people listening to this should find deals in this kind of market?

Jamil:
Great question, Dave. And I think that’s very true, that there’s a gripe that people say there’s no deals out there, but that’s absolutely inaccurate. Because this whole concept of there being low inventory, we’re talking about a different type of inventory. We’re talking about retail product. We’re talking about the houses that people have already improved.
The kind of product that someone’s going to go get traditional financing on, move into, or a hedge fund’s going to buy and turn into a rental, whatever that is, it’s a different kind of product. The kind of product that we go after as wholesalers is distressed property, distressed situations, and life hasn’t changed. In fact, it’s gotten worse for a lot of people. And because it’s gotten worse for a lot of people, these opportunities still exist.
Now, I’m not talking about going in and being predatory. I think the thing is you go in and you do it in a way where you can pay homeowners 100% of as is value. But again, let’s look at this. If there is a house that’s been renovated five doors down that had $80,000 or $90,000 put into it, there has to be a gap between what I’m buying your house for and what I’m going to be able to sell that house for.
All the players in that space, they understand the product that we’re trading in. And so we’re going after ,again, just the pre-foreclosures are back, right? They’re definitely there. The tired landlord exists. And even though they’ve gotten all this equity, they are not interested in possibly raising rents. They don’t want to do this cashflow. They don’t want to do the capital improvement that they’re going to require to increase rents. They’re willing to sell at the height of their market based off of the product that they’ve got. And I’ve seen opportunities in multifamily right now.
I just did a deal where I made $450,000 on one transaction, one six-plex, where all I did was I had one vacant unit. I had five units rented at $1,200 a month that were basically month to month. One vacant unit that I was able to rent out at 1,700. And then I flipped that six-plex to a buyer and made $450,000 on that. And I literally sold that days after closing. And I just put another one under contract. So these landlords exist. These opportunities to spot potential exist.
And that’s all we’re doing as real estate investors guys. You’re looking for potential. Don’t let anybody fool you out there. When you’re looking for a deal, you’re looking for a potential, so how do you do this properly? Learn how to underwrite. Learn how to underwrite. Learn how to underwrite. Understand if you can figure out how much something should cost based off the condition it’s in right now, you’ll spot potential.
If you can spot potential, you can avoid the frothiness that James is talking about. As a wholesaler, I’m in and out of a transaction. I very rarely take title. Think about that. If I’m making money without ever having to hedge risk, I’m in a good place. And I made money as a wholesaler when the market sucked. I made money as a wholesaler when the market’s great. And I’ll make money as a wholesaler when the market sucks again. That’s why I think that, that as a strategy will never, ever end.

Dave:
Are you investing and are you wholesaling, I should say, because you think there’s risk in the market right now, or is this what you just do in any market?

Jamil:
I think I wholesale because I have PTSD from my first go around. I have done well in real estate multiple times. And the first time I did well, I was more in the development phase. I was condo converting. I was taking old apartments, converting them into condominiums. I had a lot of leverage. And because I had a lot of leverage, and I didn’t understand on how to mitigate that well, I got hurt.
As a wholesaler, I hold a lot of cash. Now, of course I’m losing value in my cash because of inflation and whatnot, but I’m still very well positioned for any black swan event. And we are seeing this. 2020 showed us that we never know what’s going to happen. Right? The octopus will very likely win.

Dave:
Randomness [inaudible 00:36:22], right?

Jamil:
Randomness. It’s just the way the universe works, right? It’s entropy. Things are random. And random things are always going to mix stuff up. And if we can count on the randomness of things getting mixed up, then I can just say, as a wholesaler, I’m always going to be there to cash in on the randomness.

James:
Wholesalers are also getting paid right now. It is. I’ve been wholesaling for 20 years, never been paid like this before. So you get no risk and you get all reward.

Dave:
Is that just because it’s so hard to find a deal on the MLS?

James:
Yeah. And it’s also just the perception that everyone thinks that there’s not a lot of deals. It’s put the new pairs of glasses on. I buy better deals on market than I do off, but people want that off-market deal. It’s like I got this thing that no one else has, and they lose their minds over it. But if you put the right pair of glasses on, you can look at different spots and you can find all sorts of different opportunities. But wholesaling is a great business to be in right now. Low risk, getting paid, and people are making a lot of money on it.

Jamil:
Yeah. Dave, I shared with you earlier just our stats, right? February we did 66 transactions, near a million dollars in assignment fees. This month we’ll probably hit somewhere close to 60 transactions. This is just our corporate stores, not our franchises. And we’ll do over $1.4 million in assignment fees.

Kathy:
Wow.

Jamil:
I can’t get that in a rental.

Kathy:
I want to be you in my next real estate life. But I really want to emphasize something that’s so important that you said, that we are in a changing market. The tides are shifting. You’ve got to be aware and you need to be more careful. And one of the ways to be more careful is not over-leveraging.
And so many people are just going wild and crazy out there with their leverage. Anything can happen, so just be wise about that. Short-term loans, be careful of those. Because we don’t know where we’re going to be in a few years. And if you’ve got a refi, you don’t know if the money’s going to be there. What we know is the money’s going out of market right now. That’s the tide.
It was flooded over the last few years and now it’s being pulled out and that will affect us. So be careful of that leverage, get low LTVs, at least not 100%, 80% or lower. Be very, very careful, and get long-term debt when you can. Because even with rates going up, they’re still low. They’re still incredible.

Dave:
Super. I mean, if you look, before The Great Recession, mortgage rates, at least as far back as I’ve seen data, were never below 5%. Now everyone expects that. You expect, oh, 4% is so high. It used to be 3%. Because people have this fear that they’ve missed out on something. But it is still really low. But Kathy, could you explain for people who might be newer to real estate investing what it means to be over-leveraged, and why perhaps using less leverage is a more conservative or safer strategy going into this market where we all agree is somewhat uncertain.

Kathy:
Well, I came into the industry as a mortgage broker years ago, and boy, was it easy to get loans. Those were the good old days. Oh. There was unlimited investor loans that you could get with no money down. How about that? How about that? That was great, until it all fell apart, right? Because people didn’t actually qualify. I love leverage. I love borrowing at low interest rates. It’s a wonderful thing. You get in trouble when you don’t have reserves.
If you have very little reserves, and you get a high leverage situation and you can’t make those payments, that’s the problem. So just make sure you have plenty of reserves. And expect that if you’re holding rentals like we do, have six to 12 months reserves set aside in case there’s vacancies. Things happen to tenants. Just make sure you’ve got … Again, the reserves is most important.
And then that short-term debt back in 2007, I thought I was really great at investing because we’d bought so many good deals in Dallas. And then I tried it somewhere else. We went to Tennessee and we got construction loans on three homes. And they were ballooning in a year once the homes were built. They were great deals. Everything was fine. The problem was the market fell apart and there was no loans to get.
They changed the rules. The rules can change. The laws are enacted. And in this case, now it went from unlimited investor loans to 10, and we were way beyond that. We had no loans to get into, even though we had these fabulous deals. The construction loan was due, it was a balloon note and we couldn’t pay it. And we had to give those properties back to the bank and we lost all our money on those.
Again, it’s the short-term loans that can get you in trouble. If you’re going to do construction, try to get a construction-to-perm loan, where you lock it in now, you get the construction loan and it converts into a long-term debt. There’s still ways to play the game. Just be careful, and know that what exists today may not be there tomorrow or next year.

Dave:
Henry, I’d like to get back to something you said about this earlier, that there’s other types of financing out there other than bank loans. Are you continuing to use bank loans, and how are you applying leverage in this market?

Henry:
Yeah, absolutely. We are still using bank loans because typically it’s still cheaper money. It was just way cheaper money before they were raising rates. But it’s still pretty competitive. Yeah. But have started looking at and are shopping out over several hard money lenders, and then I’ve recently brought on two different private lenders. And they all kind of have their different lending niche and their different percentages that they want as far as interest rates go.
And so I look at lending, it’s just another tool in the tool belt. A bank loan is one tool. It just so happened that, that hammer worked on all the projects because the money was so cheap. Now you’re going to have to get a little more crafty with your money and with the tool that you use to take down your deals. And so the more relationships you can build, and that’s truly what this is, is people want to know that their money is safe with you, right?
They are concerned about the deal, but they’re mostly investing in you. And so if you can focus on building good, strong relationships, you obviously need to do good projects in order to give people confidence. But they’re getting the confidence in you, not in your projects. And so if you can build strong relationships with people who have money, whether they’ll be hard money or private money. And the difference between hard and private money for folks is people who have hard money are people with lots of money who are in the business of lending the money.
Private money are people who aren’t in the business of lending money, they’re just willing to lend you some of their money, and so the rates and terms can be a little different. But real estate has been an investment vehicle for people. You heard Jamil say it. He’s made money in up markets and down markets. Most wealthy people who understand real estate understand that they want their money in that space, no matter the market, which means somebody’s there that’s going to be willing to lend to trustworthy people who they feel like is going to get them a return on their money.
If you can focus on finding those quality deals, and Kathy was right, you can buy a good deal, you want to couple that with a loan product that’s not going to fall out underneath you in 12 months. Right? Safety net is your cash reserves and your equity, right? Because if the market shifts, and it starts to shift and you can see it coming, and you’ve got equity, you’ve got time to sell and still make a profit. You’ve got time to change your strategy. Your equity and your cash reserves are your safety net.
If you’re going to go out there and pay over asking price for something, because you’re like, “Airbnb is killing it. I’m about to go buy this $5 million mansion with four of my buddies. We’re going to turn it into an Airbnb and we’re going to make a whole bunch of money,” and then the market turns on you, you’ve got no other excess strategies, you don’t have any cash reserves, you’re in a short term loan, you’re in a world of hurt, right?
You just have to be careful of your strategy. Make sure you’re buying with some equity and use a product that’s not going to fall from underneath you in 12 months. And I think you can get out if you need to.

Dave:
That’s great advice. One thing I keep hearing about is that with rising interest rates, it always leads to negative home appreciation. And there were times when that was true. But before The Great Recession, we did see a really strong correlation between interest rates going up and housing prices going down. We all know that interest rates are going up.
I don’t think anyone thinks that’s going to taper off anytime in the next couple months. But at the same time, all five of us said that we think that the housing market is going to continue to go up. James, can you tell us a little bit why you think that’s going to happen? Why is it different now? And why do you think that despite rising interest rates, we are still going to see home prices appreciate?

James:
It comes back to money again. Interest rates are rising, but the amount of capital and what employee wages are in Washington and that are growing, the wage increase is offsetting a lot of this home pricing increase. Now, if you’re in a market that doesn’t have that same job growth and income growth, that’s where you might see that negative appreciation.
But what we know in Washington is the reason we think it’s going to keep going up is we have Amazon come out and they said that they want their … They doubled their execs max salaries. It went from 175,000 to 350,000.

Dave:
What? Are you serious?

Henry:
Holy bowly.

James:
That’s where I’ll double down in that market. I think it’s still going up. The money-

Dave:
I mean, I’m going to quit right now and go apply for a job at Amazon.

James:
… We’re trying to hire. And I got jobs up for EAs, accountants. And these are well paying jobs because we’ve had to make them pretty well paying. I can’t even get people to apply because these tech companies eat up the market. And so depending on where you are, there are these juggernauts in the market to where it won’t affect things as much.
In our local market, I don’t think … The interest rates will rise, but it’s kind of like gas right now. For some population, the cost of fuel is annoying. For some population, it’s detrimental. And so depending on the geographical location in, where you’re investing in, what the demographic in, you’re still going to see that appreciation.
I’m doing it more based on a Pacific Northwest. I think we’re going to look pretty strong. And a lot of these other markets, Austin, I mean, these growing cities with growing jobs, it’s still going to offset the interest rates.

Dave:
I have a question for all of you guys. Do you guys see a lot of people, experienced real estate investors sitting out in this kind of market?

James:
No.

Kathy:
No.

Dave:
What would you say, Jamil, to people who are sitting out? It seems like every experienced investor is continuing to buy right now. I think we all agree. There are some warning signs in the market. We all think it’s going to go up, but things are a little weird. No doubt. Why do you think that everyone who knows real estate really well is bullish on this market?

Jamil:
I think because, again, they’re seeing who’s sitting at the table. It’s when you have different players at the table, things change. Historically, look, if you look at housing prices from the 1930s to today, housing prices have gone up. And there’s been hurt in between. There’s been moments of depression. There’s been things that have happened, but they’ve still gone up. So no matter what you look at for temporary blips, housing will go up.
Now, knowing that, and then knowing that you have a professional eater at the table who’s gobbling up all the houses, that is changing the demand. It’s just changing the game. And the professional investor is looking at the landscape and they’re saying, “I’ve never seen this big guy eat all these hot dogs. I’ve never seen this before, but now I’m sitting at this table with him and I’ve got to do what I’ve got to do to get my hands on as much as I can to at least compete,” because we are heading towards a housing crisis.
I believe we’re heading towards a housing crisis. We are not building enough homes. We don’t have enough inventory. We will always be needing houses. We will always need them. Look, if you’re sitting right now waiting for the housing market to crash, there’s a deeper a problem here. Okay? You have a fear problem. You don’t have an investing problem. And so what I would suggest is do your research, understand.
If you can learn how to underwrite, if you can learn how to value property, and you understand the consequences of overpaying, you understand the consequences of getting a good deal and how you can leverage that to make and grow your wealth, you will do well. How do you move forward? I think first and foremost, learn. Learn, learn, learn. Listening to a podcast like you’re listening to right now, this is key.
This is key because you’re getting insights from people who are doing this at a high level, from different aspects and perspectives of the housing market. Right? Learn from them, see what they’re doing, understand how they’re underwriting and follow their bets. Follow their bets.
And if you’re not following their bets, at least understand why you’re not, rather than just having this overarching idea that, “Well, it’s gone up now. It’s going to go down.” Because I’m sorry. I’m sorry. But yes, things like that, we’ve seen this cyclical nature of the house market, but as cyclical as it is, it’s still up to the right.

Dave:
And when you talk about a professional eater, are you talking about like the Blackstone’s, the BlackRock’s-

Jamil:
Of course. Yes, yes.

Dave:
… whatever those companies are called of the world?

Jamil:
Yeah, I should have called them. I should have given them a name. But yes, that’s exactly what I’m talking about. I think that’s the professional eater at the table right now, and they’re gobbling, gobbling, gobbling, gobbling all the hot dogs.

Dave:
One of my claim to fame is I actually got to be a judge at the Nathan’s Hot Dog Eating Contest at Coney Island. Yeah. I counted for a guy, Pat Bertoletti. He ate 44 hotdog in 12 minutes.

Jamil:
So now that you’ve seen that, you understand my analogy, right?

Dave:
Yes, absolutely.

Jamil:
And when you-

Henry:
You’ve got to buy more hotdogs.

Jamil:
… You’ve got to buy … Yes. When you have the professional hotdog eater there, he’s not the person putting just relish on a hotdog and enjoying it bite by bite, right? That’s not what Blackstone is doing. They’re not looking into a primary bedroom and being like, “Oh, I can see myself of living here.” That’s not the decision that’s being made, right? It’s a completely different decision.
And when you have people making decisions that are taking up near 19% of the housing volume, and they’re not making decisions the way that your primary home buyer would be making decisions, you’ve got a different animal.

Dave:
Absolutely. They’re just trying to capture as much market share as possible right now, and that is going to have long-lasting implications, probably worth a whole show. We’d probably do a whole show on that in the upcoming future. I do want to shift gears a little bit here. Kathy, I’m curious, how do you see the general economy and investing situation with the stock market? Everything else that’s going on in the economy, how is that impacting the housing market right now?

Kathy:
Well, I’m not a stock expert, but the ones I listen to are basically moving into stocks that go with inflation. So food, gas, and of course housing. These are things that inflate, and we know we’re in an inflationary time. Will there be stocks that don’t do well? Sure. But that’s at least the guys that I’m listening to are talking about it that way.
We have so much money circulating, trillions of trillions of dollars. And it wasn’t just the US that printed trillions of dollars. The whole world is addicted to this modern monetary theory that is really just a really bad theory. I sometimes wonder how people think that makes sense. I’ve talked about this before. It’s like we’re all sitting here playing Monopoly, and we’re having a good game. And there’s all these apartments and houses on the table and we’re bidding for them.
And then all of a sudden, the bank comes in and brings another box and passes it around. And now we all have more money, but the same number of assets on the table. What are we going to do? We’re going to bid more. We’re going to spend more, because there’s more money. It doesn’t mean the values necessarily went up, it meant that there’s just more money circulating and the value of the money has gone down.
That’s the situation we’re in right now. And so the economy’s already slowing down. We already see that happening. GDP has been declining and there’s projections that it’s not going to be as robust as expected simply because that’s the fed’s effort, is to slow it down and they’re going to do that. But when it comes to our industry in real estate, kind of coming back to what you said, it’s mathematically impossible.
In my opinion, you can call me on this a year for prices to go down, because we’re not in the same world that we’ve been in before. We’ve never been here. This is unique and unusual with trillions of … We’re in a modern monetary policy that has not been tested.

Dave:
Okay. Guys, thank you so much. That was our first due diligence section. That was awesome. Great job to all of you. I hope for everyone listening out there that this was helpful for you in understanding the 2022 housing market and how this group of incredible experts doing all sorts of strategies are handling this market.
Let’s go to our final section of the show, this is called Crowdsource. And this is where we engage with all of you, our listeners. We’re going to be doing all sorts of fun stuff in this last section. We’re going to be taking questions, or we’ll maybe even bringing people onto the show. We’ll be doing polls. We’ll be gathering data from all you. But as Kailyn and I were planning out the Crowdsource section today, we realized we don’t yet have a crowd.
This is our first episode. We can’t really ask anyone for anything because we don’t have any listeners yet. What we’re going to do is give you, one, a challenge and two, a gift for being a listener on our first show. First, we’re going to give you all a challenge and that is to join our community. And the best way that you can do that is to subscribe to our YouTube channel.
We will have a forum just for On The Market. And so go on there, post your own thoughts about the 2022 housing market. Let all of us know how you are going to handle or approach the 2022 market. And please, we do ask, we would love it if you told your friends and help grow the On The Market community. And in exchange for that, we have our first ever data drop.
The data drop is something that we came up with and it is a gift for our listeners. From time to time, I’m going to prepare a unique data set and you can go on BiggerPockets. You can go to www.biggerpockets.com/datadrop, and you can download the first file that I’ve created for all you, and it is a super valuable data set. Basically what I did was take the biggest hundred markets in the US and I analyzed all of the rent data.
If you want to know what markets have rent growing the fastest, if you already earn a market like Denver, and you’re curious, “Should I buy a one bedroom, or two bedroom or three bedroom? Where are rents growing the fastest? What segments of the housing stock are best to invest in?” this data set is going to be super helpful for you and I hope it is useful for everyone. So hope you enjoy that as a gift for being a listener on the very first On The Market. All right, guys. Anything else you want to say before we wrap up our first ever episode?

Henry:
Dude, you’re giving that away for free?

Dave:
Yeah.

Henry:
That’s incredible, man.

Dave:
Maybe I shouldn’t tell people this. I should be selling this.

Henry:
I don’t think people understand how valuable of a tool just that one data drop is. For you to be able to get that analyze-

Dave:
You can get that.

Henry:
… Right. If somebody wanted to do that, they’d be hunting for months.

Jamil:
Well, they’d have to hire the vice president of data analytics at BiggerPockets.

Henry:
Right, absolutely.

Jamil:
And he’s expensive.

Henry:
Right. And to be able to quickly jump on a tool and be able to know where your money is best spent in your market from a rent perspective, that’s phenomenal. I don’t want to gloss over how incredible of a free giveaway that is. You see free giveaways all the time on the internet, right? “Get my free book,” and it’s just some … This is huge. That’s huge, man.

Jamil:
It’s just pictures of Henry.

Henry:
Yeah. That is [inaudible 00:57:03]

Jamil:
Who says you can’t buy friends?

Henry:
No, that’s a phenomenal, phenomenal thing by the way.

Kathy:
Yeah. We get access to it first, right?

Dave:
Yeah, absolutely. Yeah. Well, we do have a week before this comes out, so you can scour through that data.

Jamil:
And then come to our reseller website at-

Dave:
But really guys, this is what we’re going to be. We’re not going to do this every single week, so you do have to pay attention and watch the show. But we’re going to be leaving these little Easter eggs value for you. In On The Market, this is what we’re all about here at this new show, is giving you the tools and information you need to make wise and confident investing decisions. So to all of you guys, thank you so much for joining me here in Denver. It’s so awesome to do this in-person. It is so much fun, and I’m really looking forward to growing the show with all of you.

Henry:
All right, thanks for having us, man. It’s amazing.

Kathy:
Love it.

Dave:
On The Market is created by Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, edited by Joel Esparza, copywriting by [inaudible 00:58:00]. Special thanks to Lisa Shroyer, Eric Knutson, Danielle Daly, and Nathan Winston. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions and investment strategies.

Ashley Kehr:
This is Real Estate Rookie, episode 174.
My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.

Tony Robinson:
And welcome to the Real Estate Rookie Podcast where what we focus on is those guys and girls who are at the beginning of their real estate journey, who are looking to get started, or maybe the looking to scale from one units to five, or anything in between. But every week, twice a week, we bring you the inspiration, the information you need to get started, or keep going. Ashley Kehr, what’s up? What’s new? What have we got going on today?

Ashley Kehr:
Well, I think we should tell everyone about maybe our phone calls that we just both got at the same time. So Tony and I had take a little break in between recording because we both got phone calls. Tony. Well, go ahead. Why don’t you start with yours?

Tony Robinson:
Yeah. So I’ve mentioned on the show a few times, we’ve been looking to buy some commercial kind of hospitality properties this year. And we’ve submitted several LOIs since the summer, but it finally feels like we’re inching close on one. So I got a text from the broker. He said, “Hey, Tony, please call me when you get a chance.” So I knew this was either good news or bad news. It was kind of in between. So we offered, I think, a little less than what the seller was asking for. So he’s saying if we can come up just a little bit, that he thinks he can make the deal work. So I got to go back and kind of double check our underwriting and see if we can make the numbers work.
We gave ourselves some cushion when we initially submitted the offer, but we just want to be diligent because this will be our first big syndication. And not even big, but it’ll be our first syndication. But I’ve mentioned before that buying a single family house and turning it into a short-term rental, I can do all day, but doing the syndication and raising money from a bunch of different folks is something that’s new for me. And even though I’m confident in my ability, there’s still a little bit of fear I think that I got to push past. So yeah, the data helps me sleep better at night.

Ashley Kehr:
Yeah. And that you’re being conservative too.

Tony Robinson:
Yeah. Right.

Ashley Kehr:
You’re not willing to push the envelope because you are using other people’s money and you don’t want to be as risky. So I think that’s a great asset of a syndicator who does do that, who doesn’t try to push it to the max.

Tony Robinson:
Yeah. But what’s funny about it is as I’m on that call with that broker, you step away and then you come back. So what was your phone call about?

Ashley Kehr:
Yeah. So mine is from actually an off-market lead. I talked to this guy two ago. A friend of mine had told me about a campground that his friend had stayed at. And he knew that the seller was interested in selling. So I found their website and I sent them an email just saying that I’d be interested in talking to them if they wanted to sell it. And so I got the phone call from them the other day. They told me more about the property and they were getting the financials together to share with me. So he called me back now to say he had his financials from the accountant and he was just pretty nervous about sending them to me. He didn’t want his financial information to go public or for me to spread it around, I guess.
So I tried to ease his mind on that I am a professional and I would never disclose. So I’m going to work up a nondisclosure agreement, sign that, and send it to him saying that basically he can sue me if I do disclose his information to anyone. And hopefully, that does make him feel a little more secure. He can show it to his attorney and have that available. But I really want to see the numbers before I even waste my time going out to look at the property because if we’re not even in the same ballpark, it doesn’t matter what the property looks like. I mean, there’s pictures and stuff online. I can already get an idea. So if the numbers don’t work now and before I even go and find more things wrong with it probably, then I don’t want to waste his time. So that’s why I’m trying to get the numbers beforehand.

Tony Robinson:
And Ashley, would you syndicate that deal or would you try and take this down on your own?

Ashley Kehr:
This property? Actually, he hasn’t specifically told me what he thinks he wants for it. So it’s kind of up in there, but I have an idea based on some things he has said. And I’m talking to a lender now about putting a mortgage on it. And then I would like to try to get a private money on the down payment instead of doing a syndication deal. But if it ends up that can’t happen, then I’m actually going to take it to a capital group that does syndications on campgrounds and see if they would like to give up some of the GP with me bringing them this deal. Then my last option would be me doing the syndication on my own.

Tony Robinson:
Well, can we talk a little bit? So why go the route of giving up some of your equity with this other person that knows campgrounds as opposed to syndicating it yourself first?

Ashley Kehr:
When I started in real estate investing, I gained all of my experience for working from somebody, and I learned so much. And I think that has been a huge value to me. And I think that I am a better learner when I kind of have a little sense of security. And so for me, when I worked for another investor, I was learning everything because it was his properties. And there was a little guidance, not a ton, but I would love the opportunity for at least one deal to give that up to work with another capital group, to learn the ins and outs of what they’re doing. You know? I always say on here, “There’s no reason to recreate the wheel.” So if I get the opportunity to be part of a GP with another capital group that’s doing campgrounds specifically, I think that would be a huge value add to me in giving up that percentage.
And I mean, you know just from you starting your first indication that it is very different than buying a single family home. And for me, I think it would be worth it to give up some equity on a property so that I can learn that system and process. And then, okay, maybe I keep going with another capital group and working with them, or maybe I go off on my own and start building my own. But I love the value that you can get out of giving up equity.

Tony Robinson:
So, so true, Ashley. And that’s especially like… So I guess, here’s the way to look at it, right? If this was the only commercial deal that you were ever going to do, then I can see why someone might be hesitant to give up some equity. But I’m sure your plan is this is the first of many. And if you can give up a little bit of your ownership on this first one to learn the robes from someone that’s done it time and time again, then when you go off to your second one, and your fifth, and one in your tenth one, now you’ve got the right foundation and the principles and the techniques and the strategies to make you successful in the long run. So there’s something to be said about being patient. God, I’m going off on a tangent now, but I feel like this is super relevant.
I was listening to a podcast yesterday and the host was talking about Jeff Bezos. And he was saying that Bezos was interviewed. And he said, “People… And this is Bezos speaking. He says, “People think I’m this genius, that I’m like this super intelligent guy,” which I’m sure he is, but he says, “A lot of what’s helped make him successful is that he has patient capital.” Is that if he’s planning for his investment to give a return in 10 years, he’s going to be able to beat the person that’s looking for a.
Return on their investment in three years. And he gave the example of space. Right? Like, think about space exploration. Like, who are the people that are competing with that? Jeff Bezos, Elon Musk, Richard Branson. Like, all these billionaires who know that there’s no money to be made in space today, but 10, 15, 20 years from now, it could be this really big industry. And obviously not everyone is Jeff Bezos and they’re billionaires, but I think if you can find a way to be a little bit more patient in your investing approach over the long term, over the long run, you might be able to find a little bit more success.

Ashley Kehr:
Yeah, Tony, that was great. Thank you for sharing that. And just to add a little bit onto that, even in episode 170 when we had my business partner, Daryl, on. And we talked about me giving up equity too for that. Like, him taking on things that I didn’t want to do, and how much more that was to me getting those things off my plate, and also that he is way more motivated to be the best that he can be at these different roles and responsibilities because he has ownership in it. So I think that as long as people are going to make great partners and you definitely want to vet them, like I would definitely vet this capital group as I’m sure they would vet me too, but those relationships can help you in the long run and really help you grow and scale; is kind of leveraging.
I’m not in a rush right now to make a ton of money off of one campground. And I think that’s even a greater risk of me doing my first syndication by myself is more of a risk in me partnering with another one. And I think that would even give a sense of security to any future investors I have that, “Look. I partnered with this company on this deal. I’ve learned what to do from them firsthand.” So to me that is an advantage giving up equity.

Tony Robinson:
Totally. Well, that’s not what we were supposed to be talking about today, but it was a good conversation. Right?

Ashley Kehr:
Yeah. Yeah.

Tony Robinson:
We still have an actual question to answer for all the listeners who’s all the rookies that are listening in today’s episode. It was not about mine and Ashley’s journey in commercial real estate. But we’ve got a question from a guest. You want to jump into that, Ash?

Ashley Kehr:
I mean, it does have to talk about partnerships a little bit.

Tony Robinson:
That’s true. Right? So there is some connection there.

Ashley Kehr:
Yeah. Giving up equity. Okay. So today’s question is from [Kurt Martig 00:10:15] on Instagram. He said, “Love the show. My wife and I are learning a lot from you and Tony. My wife and I own a short-term rental property and house hacked duplex, which we both manage where we live. Question for you both. We would like to buy a vacation property with my brother and sister-in-law. We would short-term rent it and also vacation together at the house. My wife and I would do all the remote management and my brother would bring the down payment to the table. How do we quantify each party’s contribution when it comes to dividing profit and earning equity in the property? Even though we’re not coming in with any cash, the ultimate goal would be that each party would have 50% equity in the property. How could we structure the agreement to that goal?”

Tony Robinson:
So Kurt, great question. Right? Because I think a lot of folks ask, “What’s the right way to structure the partnership and how do we make it fair,” and et cetera, et cetera. And the first thing I’ll say, Kurt, is that there is no right or wrong way to structure a partnership. And we say this all the time. At the end of the day, what makes a partnership work is that both sides are happy with the agreements that they came to. Right? As long as both sides are happy, then it’s a good partnership. But what I will say is that I think you’ve already answered the question, Kurt.
So the last thing you said is the ultimate goal would be that each party have 50% equity in the property. And you’ve already kind of laid out what the responsibilities are. It sounds like the brother is bringing the down payment. You and your wife are bringing the expertise in the property management. And in my mind, it is a very fair exchange to say, “Hey, we’re going to keep 50% for managing it on an ongoing basis. We’re going to pick up the phone when the guests call and complain about something. We’re going to be the ones managing the cleaners. When something breaks, we’re going to call the plumber. When the guest can’t find their check-in code, we’re going to send it to them. When we need to reorder sheets, we’re going to do that.” Right?
Like, you’re going to be doing all the day-to-day stuff that comes along with managing a successful short-term rental. Your brother, he’s going to put up the capital and then probably just of kickback and then enjoy the property whenever he’s out there. So in my mind, what you just laid out is a very fair and real way to structure the partnership.

Ashley Kehr:
Yeah. I think that’s great. And like you said, they already have their goal. They already know what percentage they each want. One unknown that we have that would be helpful: who is putting the mortgage in their name? Is it going in both names or different names? Because I think if you’re carrying on the debt, that’s going to affect your debt to income ratio. So that could come into play too. So that may be something to discuss with the other family.
Two things that I would do is, okay, separate it into the 50/50 partnership. But, and this is what I did with my very first partner in a couple deals, is for that down payment amount, I would set a note payable back to the family that’s paying that down payment and put maybe a little interest on it so that they’re getting that paid back to them and making a little money off of that percentage. Next, what I would do to the family that’s doing the proper management is I would pay them a property management fee. So this way, basically the other family’s making a little interest on the money they put into the deal. They’re getting their money back. You’re putting in work and you’re getting paid to do that work. It’s because I think down the road, you start adding these properties and you might not want to do the property management anymore, or you might want to outsource it, or it’s going to be more than you thought it was going to be.
So then you have… Okay. Then you stop getting that property management fee and you’re still 50% owner on the property. So when you’re taking on tasks that give you specific roles and responsibilities in a business, I like to divide out the equity however, but then you get paid for those roles and responsibilities. So if it’s not working out, if you can’t manage anymore, it’s not working remotely, it’s not affecting your percentage and you don’t have to restructure it because it’s still fair how you guys are in it even if you do outsource the property management. So I would do that. And then also I would set limitations or expectations on when it’s available for personal use. So Tony, I think you do something like that too with your partners.

Tony Robinson:
Yeah. We limit it to like the down season. Right? Like in Joshua Tree, that’s the summertime. Right? Like, we were really wan our partners using it during the summertime. In Tennessee, that’s like January. Right? It’s a good time to go out there. But you don’t want to lose a week of revenue during your peak season because I think that can be detrimental for everybody involved.

Ashley Kehr:
Okay. Well, I think that was a good question for this week and probably a fairly common question too that people have, especially when you’re partnering with a close friend or family member too.

Tony Robinson:
So let me add one thing before we wrap up here. One of the things we’ve recently started adding into our partnerships, which I also think helps me sleep a little bit better night, is a predetermined end date with the option to renew. So right now, for all of our partnerships, they have a term of five years. And the default exit strategy at the end of year five is that we sell the property. And the only way that the sale does doesn’t occur is if both parties agree to renew, and then it renews for another one year term. And then at the end of each subsequent year, we have to ask the same question. Do we both want to stay in this partnership?
And I think that makes it super clean and cut and easy if things are going wrong to easily walk away from the partnership, but still maintain like an amicable relationship. It’s an easy out, especially if you’re dealing with family. I think having an easy clean way out will help the relationship in the long term.

Ashley Kehr:
Yeah. That’s definitely a great point putting your exit strategy and making it clear in the contract too. And I like how you have it defined for a certain amount of years and what happens and how you decide what is going to happen too. That’s very clear cut. Okay. Well, thank you guys so much for listening to this week’s Rookie Reply. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson. And we’ll be back on Wednesday with a guest. Don’t forget to check out the Real Estate Rookie YouTube channel. See you guys next time.

David:
This is the BiggerPockets podcast show 596.

Amanda:
Is anybody ever ready to invest in real estate, right? I think it comes back to, you can do it from a day one. I talk with a ton of commercial real estate investors and everybody thinks the same. There’s no reason to… You have to start in single family. If that’s where you want to start, that’s awesome. You could also just learn about mobile home parks and go buy a 15 or 20 lot park, and that can be your first investment.

David:
What’s going on everyone. Is David Greene, your host of the BiggerPockets real estate podcast, the best place for you to be if you want to build wealth through real estate, if you’re looking to find freedom for your life, if you’re looking to find more money, if you’re looking to find a way to exercise your creative juices and your God given talents, you my friend are in the right place.

David:
BiggerPockets is a community of over 2 million people that are all trying to do the same thing as you, on the same journey as you. And we want to help you accomplish that goal. We do that by providing a forum with thousands or tens of thousands of questions that different people have asked where you can look up their answers or you can ask your own questions and have it answered by the community. An amazing array of blog articles, incredible books that have been published by different people that are experts in different fields so you can learn from them. And of course the best real estate podcast on the planet hosted by yours truly and my good friend, Rob Abasolo. Rob, how’s it going?

Rob:
Hello, man. I’m telling you, as I was doing this interview, I kind of felt myself growing taller and my beard getting bigger as I became Brandon Turner, wanting to actually get into the mobile park home game. This is a very inspiring episode because Amanda, I don’t know, that’s what I love about this, man. Everybody always makes every niche that they’re in feel so approachable and doable. And she was very relatable I felt. What about you?

David:
Well, first off it sounds like you’re evolving into the real estate Pokemon next evolution that you’re becoming.

Rob:
I haven’t even reached my final form yet.

David:
I wonder what’s going to happen is if the hair at the top is going to slowly go down as it starts to come out your chin. Someone’s just going to pull it from the bottom and then it’s going to come… That’d be really funny.

Rob:
Maybe for the thumbnail, we can Photoshop my pompadour down on my actual chin.

David:
Yes. Exactly, right. Yeah and then you just got to start so good after every three sentences and then [crosstalk 00:02:26] that’s the next step to being Brandon, yeah, there you go. I thought today’s episode was great. It’s full of actual practical advice if you wanted to invest in mobile home parks or if you’re just considering it, this is a really good, well-rounded easy to understand introduction into how you make money doing it, what you’re looking for, how to negotiate these deals. What were some of your favorite parts of today’s show?

Rob:
She talks about three things that she does to avoid going head-to-head against really just big fish in the… I call it the lagoon, the mobile park lagoon, but three strategies that she does to really not compete so much against some of the bigger, more institutional firms out there. And also just a little plug for later on, she also talks about the number one thing that she looks for when investing in mobile home parks. So stay tuned for that.

David:
Yeah, I thought that was really good. And I just thought, Amanda was very open with a lot of the stuff that she’s sharing. So this is one of the best parts about the real estate community is there’s hardly anyone keeping secrets. Everybody is sharing what they’re doing. There’s plenty to go around. There’s so much to learn. So this was a fun show.

David:
Today’s quick tip Amanda shares in the show that she calls the county to get lists of mobile home parks. Now, you may not be a mobile home park investor, but that doesn’t mean that you can’t use other people to help you accomplish your goals.

David:
So today’s quick tip is to call your county and ask them if they can get you a list of different asset classes that you may want to be interested in investing in and call those sellers directly. All right, Amanda, welcome to the BiggerPockets podcast. How are you today?

Amanda:
I’m doing great. Thank you for having me. I’m so excited to be here with you all.

David:
We are excited to have you. So can you give us a brief rundown of what your portfolio looks like right now and what you’re specializing in?

Amanda:
Yeah, so right now we are specializing in mobile home parks. Our current portfolio is three parks, 80 lots total, and then we have a couple of notes as well.

David:
Okay. And who are you investing with when you say we?

Amanda:
Oh yeah, me and my husband. We’re a team. So his name is Jonathan. I’ll refer to him.

David:
Now. I have to ask is being friends with you going to cause some funk in my relationship with Brandon, since you guys are both investing in mobile home parks.

Amanda:
As much as a threat as I am to him, for sure, I think it’s going to be okay. I actually, truthfully I have three things that I try to do to not compete with big investors like him. So I think he’s going to still be friends with you.

David:
And when we say big investors, you mean people that are six foot nine.

Amanda:
Exactly. Exactly. I don’t care if they only have one lot, that’s right.

Rob:
Well, I think that’s a pretty good plug for later like, “I’ve got three things that I do to not compete with big investors.” I want to know what those three things are, but before we jump into them, mobile home parks are perhaps one of the seemingly scariest investments to hop into. I got to imagine you probably didn’t start with mobile home parks. Can you tell us a little bit about how you even got there?

Amanda:
Yeah, so I had a pretty traditional upbringing as far as work and jobs and stuff. My mom retired in elementary school. And so like her, I joined corporate America and I was climbing the ladder at a big credit card company and really just realized one day, I don’t want this. I’m working so hard, I want to be working hard for myself and my family and not for somebody else. So like a lot of people, right. And I started looking at alternatives and eventually stumbled into real estate, which I’d always sort of had in the back of my mind as, “Hey, that would be cool one day.”

Amanda:
And BiggerPockets was really instrumental in giving me the confidence and the knowledge to get started in investing and David, that was right around when you were coming on. So you personally were really instrumental in that. So thank you for that.

Amanda:
And we started. We started with a single family, a duplex technically, and then got another single family. After that, we pivoted to individual mobile homes, something called Lonnie deals. And then after doing that, we started on mobile home parks and we love that and we sort of haven’t looked back and nowadays I actually get to work with other investors too. I’m the commercial subgroup lead for the North Carolina [RIA 00:06:35] and just get to work with other investors and teach them how to come along into commercial real estate too.

Rob:
So you kind of mentioned something here that, I mean, this might seem second nature to you, but as someone that’s kind of new to this world, you mentioned you got into a Lonnie deal. What is that?

Amanda:
Yes. All right. So once we were into single family homes, didn’t like a couple things about them, like managing contractors and all that stuff. And I’d heard about this thing called a Lonnie deal, and I’d filed it in the back of my head. It was from this amazing investor, by the way, his name is Bill Cook. He’s the most amazing creative deal structure out there. And he had mentioned this Lonnie deal.

Amanda:
And so we decided to look into him. Essentially, it’s named after this guy, Lonnie Scruggs. He was from Virginia. He since passed away, but he sort of coined this term. You buy an individual mobile home from somebody who needs to sell it, just like we do with single family homes, right? So you buy it from somebody who needs to sell, you get some price on it and then turn around and you sell it to somebody who’s going to live there, right? A family.

Amanda:
And you hold the note on it. They pay you just like you’re the bank, just like with the home I live in, I pay the bank every month. And so we became the bank for them. And these Lonnie deals can be very, very lucrative. And so I’m happy to kind of walk through how it works with you.

Rob:
Please do. Yeah.

Amanda:
Yeah. Okay, cool. So if we’re thinking about our first Lonnie deal, for instance, so this guy owned a mobile home in Raleigh, North Carolina. He was living in Wilmington. He bought it because he was doing a lot of work in Raleigh for a company. They were doing construction. So he was a hustler. He was smart. He bought this mobile home and then when his boss told him to go to Raleigh, he would rent it out with him and some buddies and charge back to the company.

Amanda:
Okay, well then all of a sudden they aren’t doing any more work in Raleigh. He needs to sell and so that’s a motivated seller right there. It comes up on the end of the month. It’s in a mobile home park. That means lot rent is due. So he doesn’t have any income coming in and lot rent’s due. So he is a motivated seller. He puts this mobile home up for, I think 22,000. We ended up getting it for 12,000 down. And then we gave him another 3000 over the course of two years. Okay. So now we have this mobile home. We did no work to it. It was a very nice home. We turned around and we sold it to somebody who is living there. She bought it from us for $25,000. She gave us $5,000 down and then has a note for $20,000. That note, that payment that she makes to us because we are her bank is at 18% interest.

Amanda:
So we’re making a crazy return on this mobile home without doing any work. And so it’s all passive now. She gets to live in the home and own it when it’s really hard to get financing on a pre-owned mobile home, especially in that price range, so when we’re able to offer that financing, it really becomes a win-win situation and that’s really what a Lonnie deal is.

Rob:
Okay. So let me ask some clarifying questions on a Lonnie deal, because in this instance, when you’re, I guess the executor of the Lonnie deal, do you have to actually own the mobile park in order to do this? Or are there instances in which you’re basically buying a mobile home on someone else’s land and just paying monthly rent to that person while you flip it.

Amanda:
For these deals, we did not own the parks. We were not into parks yet. You just want to do it… Honestly, we don’t even do Lonnie deals in parks that we do own. I mean, we sell homes and parks, we do own, but no, you do not have to own the park to be able to do this. It’s a really good way to get in to investing for pretty low money out-of-pocket. And yeah, you don’t have to own the park.

David:
So there’s a difference between being a mobile home park investor and then a mobile home investor, right?

Amanda:
Absolutely.

David:
When you talked about owning parks, basically, that’s where you’re renting out the spaces that someone paid you to put their mobile home, but they may own the mobile home. In this case, you’re talking about getting a mobile home from a motivated seller and then selling it to somebody else on seller financing basically. And that’s how you end up with a note.

Amanda:
Yep. That’s exactly right. And honestly, those were so good and we really liked it. We liked being able to give somebody a home to make a great return on that. And so after doing a couple of these, that’s when we decide, “Hey, let’s go all in on parks. Let’s do more of this type of thing.”

David:
Yeah. Because you had mentioned you didn’t like being in the single family space, because I think you mentioned the contractors and the organization and all the moving pieces. I call it death by a million paper cuts, when you get into that world. None of them are really super challenging or hard problems to solve, they’re not rocket science, but there’s coming at you so often that it’s very annoying. These ankle biting problems that never go away and you sort of start to lose your drive and your passion when all the fun gets taken out of it. So if you’re getting into what you’re describing now, are you still dealing with those problems or does the seller financing part making you the bank sort of remove the parts you don’t like.

Amanda:
In the Lonnie deals specifically, it really does simplify things. And obviously there’s nothing wrong with single family investing. That’s great. We weren’t that good at it. I wasn’t great at estimating repair costs. We didn’t do enough of them to really get good at it. So when we moved over to these individual mobile homes and that now we have these notes on them, there is almost no work.

Amanda:
It is the most passive thing. I tell myself in a future life or maybe in a decade or so, I’m going to be a note investor. It is passive. It is so much easier than even mobile home parks. The check comes in, we’re not the check. It’s deposited every single month. The only thing currently that we have to do is make one phone call a month to confirm there’s still insurance on the homes in case there’s a fire or something, we want to get paid out as-

David:
Because that’s your collateral.

Amanda:
Exactly. That’s literally the only work for these.

Rob:
Is that pretty hard work in this industry. Because, trying to flag if you’ve got a hundred notes, trying to flag down a hundred people every month. How does that like play out?

Amanda:
That’s a great question. If I had a hundred notes, I would have an assistant to make that phone call. And in fact we do have an assistant even to make the two phone calls that we have, but you’re right. Anything like that, if you get enough of them, you’re going to have to systematize. You’re going to want a system that.

David:
Yeah, I think that’s something a virtual assistant could do fairly easily if you just say, “Hey, here’s the phone numbers call and ask this question,” and the person answers the phone, you can systemize that well. All right. So Amanda, let’s say that somebody comes across a motivated seller and they realize, “Hey, I can buy this place, but I want to sell it to someone else because I don’t want to be responsible for the maintenance.” Right? If you own the actual mobile home, it’s very similar being a single family residential investor to where now you also own the problems that come from that home. You’re trying to pass that on to the owner and be the bank. So is there a process that’s somewhat simple for who you contact, how you structure this, how you set the seller financing up for someone that’s never done it.

Amanda:
Yeah. So there are contracts for that and I’m sure you’ve can Google note contracts, but what makes a mobile home pretty easy to transfer is it’s through the DMV. It’s just titled. There’s no land, so it’s not deeded, there’s no closing. So just two individuals can swap titles of mobile homes fairly easily.

David:
So would you go to a title company? Is that where you would go or are you saying you literally go to the DMV?

Amanda:
Yeah. So you can just get a notary as if you’re selling your car to somebody which you can do on the internet, like Facebook Marketplace then you just meet up and you have a notary say, “Yep, this person’s signing it over to the other person.” And then you do want to go to the DMV because the new owner wants to go to the DMV to register. And then we’re also registered as a lien holder on the home.

Rob:
So I’ve heard that you have a flea story and I take that two ways. This could be a very interesting story about dog fleas or a very interesting story about the basis of the red hot chili peppers. I’d like to hear about it.

Amanda:
A couple years ago, we were doing more of these individual mobile home flips and stuff, right? So we go out to wine, we had it all planned out. I wanted it to be a quick turnaround like I always do. So we had already negotiated with this guy we were going to buy his mobile home. My husband had walked through it. I had not.

Amanda:
So we get there, we paid him, we did the title transfer everything, a couple hours later, I’d already gotten somebody off of Craigslist I think to come out and take the carpet out of this home. It looked gross. So I already had that. The guy came out, he removed the carpet. So then I just went and walked with him through the home to make sure everything looked good because I wanted to put it right back on the market the next day and have a super quick turnaround.

Amanda:
Okay. So I have a three month old baby at this point who is in the back of our car. I get back into the car from walking through this home. I looked down and there are these little tiny black bugs jumping off of my feet. The home was infested with fleas. So, big lesson learned on this and this, I don’t care if it’s a single family home, a mobile home, anywhere you’re going, if you haven’t been before, wear closed tight shoes. I don’t know why I wore sandals in that event.

Rob:
That’s a very important lesson. Yeah. I’ve walked many of my houses in flip flops or Crocs, not advisable.

Amanda:
Hopefully not again.

Rob:
Not OSHA approved.

Amanda:
That’s right. And it was so gross. Luckily they didn’t get in our house or at my baby.

Rob:
Well, luckily they didn’t make you hate real estate investing. Because I feel like, especially when you’re new, it doesn’t take very many bad experiences to put a really bad taste in someone’s mouth and then they just don’t want to do it at all, so kudos to you in kind of fighting through that.

Rob:
Now I have a question about where you’re finding people that may have these kind of properties to sell. Where are you making connections, where you’re getting in touch with someone who owns a mobile home in a mobile home park that might not want it anymore.

Amanda:
Facebook Marketplace is a great place to go to find homes. If you want to infill in a park or if you want to do a Lonnie deal, Facebook Marketplace is a great place to go. Back when we did these, we would also post bandit signs. I know those are controversial, but we would post them somewhat near parks or busy intersections that just said, “We buy mobile homes,” and we would get so many phone calls off of those. That was a really great source.

Rob:
Are you ever finding any of the buyers or sellers on Craigslist?

Amanda:
Yeah, we post right back on… No, actually, sorry, you said Craigslist. Not really. There are some that come up on Craigslist, but honestly I find on Craigslist, it’s more people who are doing what you’re trying to do than people actually trying to sell. I’ve just found better luck on Facebook Marketplace.

David:
Yeah. That’s a good point. I’ll find a lot of the time that realtors are the only people actually attending real estate meetups, because they’re all looking to find clients there. And there’s three people there that might actually be looking for a realtor and 47 realtors that are all fighting and that’s not the right proportion.

David:
So you do want to sort of find places where someone who owns a property would want to be getting rid of it. Not where a bunch of other people that are looking to buy the same thing as you are going.

David:
So let’s say you do find somebody and they’ve got a mobile home, they’re kind of tired of dealing with it. They’re just not going to at managing it. It’s got some problems. They don’t have any money set aside and they are looking at it more like it’s a money pit than it’s a cash flowing asset like what we want it to be. What do you need to know from a seller in order to be able to write an offer.

Amanda:
On a mobile home or on a mobile home park?

David:
Yes. That’s a good… I said park, but sorry, I meant mobile home. We’ll start with that.

Amanda:
Okay. So on an individual mobile home, you want to know how many bedrooms it is, what the lot rent is and you honestly, you’re walking it. You want to know what the problems are and you’re just trying to identify issues that you either will have to fix or just let the other person that’s going to end up buying it know that they need to fix. But there’s not that much that you really need to know other than have an idea of the market at the time, just know what are other three bedroom, 1990 mobile homes going for. And that’s really it. It’s not too much more complicated than that.

David:
So same question. But now let’s say you’d like to buy an entire mobile home park. What is your due diligence consist of?

Amanda:
Oh yeah. So well due diligence is a whole ball game. So let me start first with what you want to know from a seller to even be able to come up with a number to even go under contract. And so there are really three buckets of information as a baseline, you have to get from a seller, right? Just as a reminder, the value of a mobile home park as a commercial asset is based on net operating income, right?

Amanda:
The income that the property produces. So income minus expenses. That net operating income, not including your mortgage, not including your debt, but that net operating income just divided by a cap rate, gives the value of the park. So that net operating income is very important, so you want to know both sides of it, the income, the property produces and the expenses we also want to know about the infrastructure.

Amanda:
So on the income side, we want to know what is the rent? Is there pet rent? What is the vacancy? How many people are paying and not paying? Are there other sources of income, maybe storage or laundry. You also want to know if the homes are park owned or tenant owned. On the expense side, you want to know every expense. You’re trying to tease this out of them through a conversation, right? Who’s managing the park. How much does that cost? What does that manager do? How much does the landscaping cost? What are the utilities costs? Are those paid by the tenants, the residents, or are they paid by the park?

Amanda:
How much does insurance cost? And what type do you have? Is this in a flood plain? Telephone costs, right? The residents are going to need to somehow contact the owner or the manager. Does that cost any money? Are there any licenses and permits? What are the taxes? We can figure out what the taxes are going to be on our own. But we always like to ask as well, are there any recent legal fees?

Amanda:
And then of course you’re going to have overhead. You’re going to want to factor that and you’re going to have to file your taxes, right? And you always want reserves. So the income and the expenses, those two pieces really can give you your net operating income. The other piece you’re going to want to know is the infrastructure side. So if we think about a mobile home park, the infrastructure is critical.

Amanda:
It’s really what separates it from being a piece of land. So you want your electrical. If there’s gas, then gas, your water, maybe it’s city water, maybe it’s well, and your sewer, maybe it’s city sewer, maybe it’s septic systems. Hopefully it’s not a lagoon or something else like that. We won’t touch those. But you want to know what it is. And so getting those three pieces of information is really critical in being able to come up with an offer.

Rob:
So I guess I have a couple questions to follow up on what you were saying on the expense side. So question one, you said you can find out the tax bill for every single individual property, but you like to ask, is this an initial test? Is this due diligence on the seller to make sure that they’re honest?

Amanda:
Yeah. That’s an interesting question. So we always trust the owners, to start with, but it is always good to ask questions that you have a way of verifying because if somebody is trying to pull one over on you, run. They know more about this property than you are ever going to find out during due diligence because they already own it. If they are purposely trying to cover stuff up, I would run away from that asset.

Rob:
Okay. That makes sense. So, number two here, I guess you say that you look at the net operating income, obviously this makes sense, because you want to make sure that it makes money, but on the flip side of this, do you ever go into a park that may not show a giant, net operating income, but you can quickly identify how to slash costs and expenses so that you can effectively, add 25% value to the park in a few months with some rehab and work.

Amanda:
Absolutely. And that’s the number one thing I look for when I’m analyzing a mobile home park is can I increase the net operating income immediately? We’re almost immediately, right? You’ll see a lot of parks listed as value add, right?

Amanda:
I’m a value ad investor. I don’t buy anything that’s turnkey. I think most people listening to BiggerPockets are in the same boat. So that becomes a big buzzword, right? A value add mobile home park. A lot of times the value add is through infill. That’s fine. That’s great. You can infill. You can increase the value. But that’s not what’s going to make mean by a park if infill is the only way to increase the value.

Amanda:
I need there to be a way to come in and increase the rents or bill back the utilities or have some real impact on the net operating income to increase that and therefore increase the value of the park.

Rob:
And just to clarify, when you say infill, that just means getting more tenants in your park.

Amanda:
Yes. Thanks Rob. So infill is a way of taking an empty lot, either a vacant lot that has nothing there or already has the utilities connected, the electrical, the sewer, the plumbing, and bringing a home there so that now you have somebody paying that law rate.

Rob:
Would you consider this one of the bigger risks with mobile home parks? Because I mean, I feel like it makes a lot of sense to go in and say, “Okay, net operating income is not great, but hey, I can come in and we can get these people to increase the rents we can collect the 12 months of rent that we’re owed from these people over here, we can landscape,” we can do this and this and this.

Rob:
But obviously when you’re talking about mobile home parks, just like you said, the infrastructure, if it’s a lagoon, if it’s a septic, if it’s city sewer, all three of those, I have to imagine have vastly different expense implications. So I’m kind of curious do you consider just going into a value add a huge risk or do you see it as a huge opportunity?

Amanda:
It can be both. And I will say the number one least understood item of mobile home parks is really the due diligence on the infrastructure on those utilities. And so we actually have a course on mobile home park investing. And this is one of the main reasons we created it because we did so much research when we were learning about mobile home parks. And still when we were buying our first park, we had no idea how to do due diligence on those septic systems.

Amanda:
That’s what you’re buying is that infrastructure, right? If that fails, you have to put new infrastructure in place. So what we learned through that process is you actually have to go in and pump the septic tanks to be able to inspect them. Now, looking back that makes total sense, but we weren’t that familiar with them so we didn’t really know at the time.

Amanda:
So you need professionals for all of your utilities to go in. So in the septic case, you want the tank pumped so he can look inside and say, “Oh, this is cracked.” We found two cracked tanks in the first park that we bought. It’s not that big of a deal, right? I think it only costs like $4,500 each to fix, but you know that going in. You want to walk the drain fields. You want to make sure that land is actually absorbing the water. So a lot of people don’t know how to do that due diligence on the infrastructure. But in my opinion, that’s one of the most important things you can do when you’re looking at buying a park.

David:
So what are some questions that you might ask the inspector who’s going to be doing the work.

Amanda:
Yeah. So you definitely want them to be looking in the tank and just make sure everything looks good. They can tell you if you need to add a filter, which prevents the sludge if you will, from going into the drain field. Walk the drain fields with the subject professional because they can tell you like, “Hey, this land is soggy.” That’s a bit of a red flag or, “Hey, I smell sewage.” That’s not something you want to smell when you’re in a drain field. And then we have all utility professionals walk through.

Amanda:
We just have an electrician walk through and look at the panels and make sure everything looks good. We have somebody inspect the water lines to make sure that those… We want to know what types of water lines. And we want to know if they’re in good shape.

Amanda:
And so just making sure that you identify professionals for all of your utilities that can be there during due diligence and help you walk the park and look at all of the lots and all of the connections.

Rob:
So I have to imagine that every park you go into is a little bit different and it seems like you’ve done this a couple times now. So how did your team start out when you were getting into this and who is your team now? David calls them his core four and my side of the business I call it my Airbnb Avengers, probably one day I’ll get sued for that. But for now we’ll call the Airbnb Avengers. What about for you? Who are the critical people on your team?

Amanda:
Yeah, so I got to work on the name. I don’t have a cool name like you all do, but for every park you want to make sure you have a lender and an attorney that have mobile home park experience, not just a commercial lender, not just a commercial attorney, particularly on the lender side, remember the person you’re talking to when you’re talking to a lender is essentially a salesperson, right?

Amanda:
They want you to bring your business to that bank. They are not the underwriters. They’re not making the final decision. So if you go with a lender who doesn’t have a mobile home park on their portfolio, there’s a real chance that you could get to the final stages and they could walk away and then you won’t have funding.

Amanda:
So lender and attorney with mobile home park experience is a must and then utilities, right? The professionals in all of the utilities having all of those contractors, those are really the big pieces that you need.

Rob:
What about the day-to-day side of things? Do you have a team that’s effectively running the operation for you?

Amanda:
Yeah. So depending on the size of your park, you may want a manager in place or not. And everything is a spectrum, right? There are some people with single family houses that prefer to do all of the day to day management themselves.

Amanda:
And you can certainly do that 5, 10, 15, 20, 50 lots people do that all themselves. So you don’t have to have a manager. We choose to have managers in our parks. And so we have somebody who’s on point to make sure rent is collected, to make sure the grass is mowed to make sure there aren’t a bunch of cars sitting out that can’t even run. So we do have a person on point day-to-day and Jonathan works with the manager on an ongoing basis and keeps in a loop that way.

David:
I like it. Let’s say that you’re like, “Hey, I think I want to be a mobile home park investor. I want to be an Amanda Cruise, I want to be a Brandon Turner. And I have a good idea of how to analyze a property, income and expenses. Now I feel like I know what to look for in due diligence.”

David:
When you get bombarded by all of the opportunities that come your way, when you’re looking on LoopNet or CoStar, wherever you’re finding these deals, give us an idea what Amanda’s lens looks like when she’s looking at a property. When you’re scanning it, what are the things that are jumping out at you that make you think this would be a good deal?

Amanda:
Yeah. So for me, it goes back to that income piece. I want to know what is the current rent and what are the market rents. And I may need to do a little bit of research. In order to find out market rent. That’s really pretty easy, you can call local parks in the area and pretend to be buying a mobile home park.

Amanda:
My husband really likes to… He enjoys doing that with a fun accent, if he’s calling in the mountains or something like that. And so you’re figuring out what are those rents and what can I bump it up to? Where can I remove expenses. Water bill backs, I know you guys talk about that a lot with, or Brandon talks about that a lot with parks. That is one of the biggest things is taking utilities that may be absorbed by the park.

Amanda:
A lot of parks are owned by the people who created them decades ago, and they just absorbed the cost of water or the cost of electric. So being able to meter that and have residents pay for the true usage that they’re having is a big way to produce expenses.

Amanda:
We’re looking for places where… I’ve seen a park that was a 20 lot park that had a full-time and a part-time manager. There is absolutely no need for one and a half people to manage a 20 lot park. So looking for areas where you can reduce expenses and streamline, and it really comes back to that net operating income.

Amanda:
And I know I hit on this a minute ago, but we don’t touch anything that’s a lagoon or sort of those private systems. Septic is fine for us. I know that scares some people, but really septic, we’re comfortable with lagoons step too far.

Rob:
So why is that? Tell us, I mean, I have a general idea, but for David, explain.

Amanda:
So it’s very, very expensive to put in a lagoon. I mean, it could cost $200,000, $500,000 and you have sometimes counties, sometimes state restrictions and testing that goes on. And if all of a sudden that testing comes back and you have risks, there’s almost no alternative.

Amanda:
It’s not like you can just connect. Almost never can you just connect to the city infrastructure without it? I mean, most of the time you can’t even connect. If you can, it’s hundreds of thousands of dollars to be able to do so. So when you’re talking about a park that may only be worth 800,000, one and a half million dollars, that completely devastates your investment.

Rob:
That’s very interesting. So I guess, now that we have a rundown here of the due diligence, what to look for building the team, what not to get AKA, a lagoon here, which honestly changes my perception of all those neighborhoods that are like, “Blue lagoon,” and it’s on a lake and all that stuff. Now I’m like, “Why would you call it a lagoon?” But moving on from that you did mention earlier something that I wanted to get to. And you said there are three specific strategies that you talk about that you actively do to avoid, I guess, going up against some of the bigger fish in the lagoon, if you will.

Amanda:
Yeah. So a couple things here. One, I can think of any big investor and they’re going to want 150 lot mobile home park, right outside of Raleigh, North Carolina. That’s very desirable. The population’s growing like crazy. And that makes those investments very attractive and therefore very, very expensive.

Amanda:
So if we’re thinking back to how mobile home parks are valued, the income divided by a cap rate equals the value. Those cap rates get really, really compressed. And they trade, they sell for so much money to big investors who get cheaper funds than people like I get.

Amanda:
So we are comfortable in tertiary markets. We really like tertiary markets. And I’ve heard people say this recently about apartment complexes as well, right? Looking in tertiary markets with stable populations, we don’t want the population doing a nose dive, stable populations, but with multiple industries for jobs. So you still have a strong market, just not as competitive as the big markets.

Amanda:
So that’s where we’re able to find some better deals. Another thing we’re doing is looking at smaller parks, a lot of the big investors cut it off at a hundred. I think Brandon cuts it off at a hundred. So we’ll go in and look for smaller parks and put them together if they’re in the same area. So for instance we have a 50 lot park and a 28 lot park, a couple miles away from each other. Well, now I have a 78 lot portfolio, a 78 lot portfolio is a lot more desirable than just a 28 lot park.

Amanda:
And if you can get enough that you’re over a hundred lots, well, now that portfolio can really sell from maximum value. So that’s one of the strategies. And I would say, even if you’re not looking to add together to get a hundred lots or something like that, even looking at smaller parks, 5, 10, 15, lots, there’s just not as much competition for those.

Amanda:
So if somebody’s looking to get into mobile home parks, there’s really a lot less competition in those smaller parks so that could be something to look at. The third area where we really try to differentiate is doing something big investors can’t do, which is to say forming those personal relationships with the sellers. We are in contact as many sellers as possible, especially in the areas where we already own parks.

Amanda:
And as soon as somebody says they might one day be interested in selling then, “Hey, guess what? I’m going to be out in your area next week. Can I come take a look at your park? Can you show me around?” And you can just have a conversation. A lot of people love to tell their stories. How did they create the park? Was it them and their spouse, maybe their spouse passed away, or maybe their son doesn’t want to take it over, whatever it might be, just getting to know that person and the investment.

Amanda:
And then when you’re connecting with them, because you always want to follow up right? Every couple months, you never know when they’re ready to sell. They know you and they remember you. And then if you can give them a reasonable prize, they’re going to be more inclined to sell to you than some big investor from across the country.

David:
I’ve always wanted to ask this, but I didn’t want to upset Brandon. So I never did, but I’m going to ask you Amanda, because you seem like a much more reasonable person than that six foot nine bearded giant. I would imagine this is speculation, okay, and this is where I don’t want to offend anybody. But dealing with owners of mobile home parks would probably be a little more relationship-based, maybe less formal than when you’re dealing with residential apartment buildings where you sort of have institutional money that’s going towards that. You have a lot of people that like to use big fancy words.

David:
For instance, they’ll say finance instead of finance, because it makes them sound smarter. So it’s a little more intimidating in that world and they’re better at marketing. So they’re looking for who’s the top buyer I can possibly get and you got to win them and dine them a little more. And I’ve always imagined the mobile home park owners are kind of the mom and pop style. And it’s been in the family for a long time and they more want to feel good about the purchase. Am I way off with how I perceive this or have you found that to be the case?

Amanda:
Absolutely not. And so I think there are two classes of mobile home park owners. Like you just alluded to, there are the people who developed them. Those don’t exist as much in apartment building these days. Whereas in mobile home parks, there are still a lot of people whose families either they created them themselves, they built them or their parents did or something along those lines. They don’t even think of themselves as commercial real estate investors. They just own this park because that’s what they did for money for decades.

Amanda:
And if you look at the bigger investors that are getting into it, or if you’re going to buy from them, they want top dollar, they know exactly what they’re doing. So you really want to be looking for the people that built the parks. They’re the best ones to work with and they want to see the park succeed, right? They’re going to give you all the information, they’re going to work with you. And if you have a problem, you can call them up and say, “Hey, I couldn’t find this one tank that we…” Whatever. And they’ll actually help you because they really want you to succeed.

David:
Yeah. They’ve sort of given away their daughter in marriage and they want to make sure that you’re taking good care of her versus the person’s like, “I don’t know, this was just a business for me.” And there’s 40 different people involved doing some little part of the transaction and nobody’s very emotionally connected to it at all.

Amanda:
That’s exactly right. Yeah.

Rob:
Well, Amanda, this is all really gold. I think my question here and I’m sure a lot of people in the audience probably have this question too, but at what point is someone ready to invest in a mobile home park? You did the Lonnie deals and you kind of worked your way up. Were you ready for the mobile home park when you did it? What was that defining moment for you when you said, “I’m ready for this,” or, “I’m going to do it regardless.”

Amanda:
Is anybody ever ready to invest in real estate? I think it kind of comes back to, you can do it from a day one. And I think a lot of people say that, I talk with a ton of commercial real estate investors and everybody thinks the same. There’s no reason to… You have to start in single family. If that’s where you want to start. That’s awesome. If you want to start with an individual mobile home investment, that’s awesome too.

Amanda:
You could also just learn about mobile home parks and go buy a 15 or 20 lot park and that can be your first investment. So really, as long as you’re willing to learn how to do it, you can jump right into that and be a commercial real estate investor from day one.

David:
Alrighty. Well, I think that, that’s really good. I think we got some really good insight into how to get started as well as if you’re already investing in mobile home parks, sort of like your due diligence stuff was really helpful. So thank you for sharing that.

Amanda:
Good.

David:
We are going to move on to the next part of the show, which is the deal deep dive. Amanda, do you have a deal in mind that we can devour?

Amanda:
Yeah, I sure do.

David:
All right. Awesome. So question number one. What kind of property is it?

Amanda:
It is a mobile home park.

Rob:
Question number two. How did you find it?

Amanda:
This is a 50 lot mobile home park. We found it by cold calling sellers. Quick tip for people who are interested in finding these, some of the counties you can call and ask for a list of mobile home parks and they’ll give it to you. So that’s what we did in this case. And then backtracked the owners and called them.

Rob:
Dang. That’s a good quick tip, David-

David:
Yeah. You got the county actually doing something useful for the first time ever.

Amanda:
Right.

David:
Usually they just make everything harder. They’re like, “Oh, this could be easy. We could just give you a form right now.” But where’s the fun in that, let’s make seven unnecessary steps and bounce around to make sure you really want it.

Amanda:
True. And you might still have to do that.

David:
Wasn’t there a guy that worked for Puff Daddy at one point. I don’t know if you still called Puff Daddy. I’m making myself look old.

Rob:
I think it’s P. Diddy now.

David:
P. Diddy. All right. Because at one time he was P. Diddy and Puff Daddy. I don’t know how P works better than Puff, but whatever.

Rob:
I also recognize that, that might also make me look very, very, [crosstalk 00:41:45] he goes by a new name.

David:
And he would have that guy run all over town doing ridiculous stuff like, “Go and get me a slice of cheesecake from this particular place.” And the guy would come back going, “Ah, it’s not cold anymore.” Doesn’t that sound familiar? I feel like that’s what the counties do. They just P. Diddy you all over the place.

Amanda:
Totally. And the DMV. Yeah.

David:
Yes. The DMV. Same thing. That’s a very good example. Okay. Next question. How much was this mobile home park?

Amanda:
590,000.

Rob:
How did you negotiate it?

Amanda:
Not super well. I think we wanted it for under 615. We went in at 570. Mrs. Betty came back maybe a little over 590 and we ended up settling on 590. We went under contract. I mean, looking back now, that was just a crazy good price, but we didn’t know, right? And so, as I mentioned earlier, we found two cracked septic tanks as part of our due diligence. And we tried to go back and ask her, “Hey, we found these things. We’re going to have to repair them. What do you think is fair here?”

Amanda:
And she wasn’t hearing any of it. She was like, “Look, I’ve been wheeling and dealing my whole life.” She created this park. She is very hardened. She’s been wheeling and dealing her whole life. If we didn’t buy it, she was going to keep it. She’s not taking a dime less than 590. So we paid 590.

David:
And how did you end up funding this deal?

Amanda:
We used savings and we pulled money out of retirement accounts.

Rob:
What did you do with it?

Amanda:
So we executed our business plan. We increased the rents, we build back water. We fixed the infrastructure, both the septics and the roads, we made it look nice, put up signage and we refinanced it.

David:
The next question would be, what did you end up doing with it?. So it sounds like you refinanced it and you kept it.

Amanda:
Yeah. So we refinanced it and the new value of the park was a million dollars. So we paid 590 a year and a half later it was worth a million dollars. So that meant we could take a bunch of money out and a cash out refinance. We could have taken about 300 minus some legal fees and stuff like that. And we ended up taking 250 out of it.

David:
How do you feel like you did not need negotiate that well, when you bought it for 590 and it was worth a million a year later?

Amanda:
We didn’t know any better. And by negotiating it we thought we would get money off for the septic takes. It turns out we got a great price for it. We just didn’t know any better at the time.

David:
I think that’s just such a great point to highlight. There’s so many people that a year ago, two years ago got so caught up over a $4,000 gullible with the seller and they thought this isn’t fair. And now the property’s got up $300,000 and they won that battle over 4,000, but they lost it over 300,000.

David:
And when you’re in different markets, you just have to understand what leverage you have. And sometimes sellers have leverage and sometimes buyers have leverage. When sellers have leverage, that usually means the market’s going up. So you don’t have to win that battle as much. When buyers have leverage, that usually means the market’s going down or it’s staying the same.

David:
So winning those battles is more important, but if you can understand that it kind of gives you freedom to not get caught up in minutia that just is sort of largely unimportant.

Rob:
A hundred Percent. Just be because you didn’t get money off, doesn’t mean that was a bad negotiation. I mean, honestly, at the end of the day, the negotiation was buying a under market value. You just have to kind of look at it from a broader view. That’s awesome. Congratulations. That’s a lot of equity in a year.

Amanda:
Thank you. Yeah. Great points there. Thank you. On that negotiating piece. Hopefully people got something from that.

David:
So we just shared one lesson that we learned from your deal, even though we’re not being interviewed. Do you mind sharing a lesson that you might have learned from your own deal?

Amanda:
Yeah. So a lot of people talk about being afraid, right? You’re so afraid we’re doing this new big thing and that you know how to overcome it. For me I really learned that identifying the source of the fear is a big piece. So for me, I was afraid people weren’t going to pay us. This deal closed the first week of April 2020. People were in lockdown, losing their jobs left and right and I was terrified they weren’t going to be able to pay us.

Amanda:
So what I did was I analyzed that. I put numbers around it so that I could look at it and logically say, “Okay, 50% of people need to not pay us before we can make our mortgage payment.” And that allowed me to be able to move forward. So I would say the big lesson is analyze the downside, look at that number, and then you can make a logical decision.

David:
All right. Well, that is fantastic. And thank you for sharing. We’re going to move on to the last segment of the show. It is the world famous-

Speaker 4:
Famous Four.

David:
In this segment of the show, Amanda, we are going to ask you the same four questions we ask every guest every episode. I will start with number one, what is your favorite real estate book?

Amanda:
I really liked Ken McElroy’s ABCs of Real Estate Investing. It was really eye opening. It walked through a CD apartment complex that ended up having a ton of value added to it. It was my first real introduction to fix and flipping in commercial real estate.

Rob:
Question number two. What is your favorite business book?

Amanda:
I really liked Unscripted by M.J DeMarco. In that book, it’s by the way, worded way too long. It’s like 17 hours on audible, but there are a lot of really good pieces in there. There’s a great quote, he says, “When there’s a gold rush, sell shovels.” I love that line. It’s a really good way of thinking.

Amanda:
And it really helps me think through things like Rob you’re in short term rentals, that’s huge right now, right? One of my good friends, Sarah Weaver created an entire company to furnish short-term rentals. It’s stuff like that that’s just so smart and I love that Unscripted really highlights some of those really smart business moves.

Rob:
Sarah’s really great. We just had her on, I don’t know, a month and a half ago. She was one of my first interviews in the BiggerPockets family. So question number three, hobbies. What are your hobbies outside of killing off flea infestations in mobile home parks and adding value.

Amanda:
Yeah. I like to see different places, even if it’s just going an hour away to do a walking food tour. I love to just see different cities, experience them, especially through food or hiking and really just learning about new places.

David:
In your opinion, what sets apart successful investors from those that give up, fail or never get started?

Amanda:
Everybody has something that would make it way easier to get into real estate investing. There might be a couple people out there who think, “Oh, it was easy for her because she could take money out of retirement to fund her mobile home park,” right? Hopefully not too many people are thinking that.

Amanda:
But when I was starting, I would look at people in there 20s and think, “Oh gosh, it’s so nice that they have their weekends and evenings free. They don’t have families, they can go out and look for new properties.” Everybody has something that would make it easier. Being able to turn the lens and think of what is my advantage? What do I have? Is it funds? Is it a network? Is it time? I think successful people are able to look at their advantages and run with those.

Rob:
Bringing the fire today. Amanda, lastly, perhaps the most important, or it’s not technically a question, it’s a statement to you, but tell us where people can find out more about you.

Amanda:
Yeah. So I have a couple cool videos on my website, it’s five ways to find off market mobile home parks or three ways that mobile home parks are better than single family homes. You can get to those @voyageinvesting.com/freebie. I also post about investing and about mobile home park investing on Instagram. So come follow me @investingwithamanda.

Rob:
David what about you, man? People want to come and catch all your fire and knowledge bombs. What can people find you?

David:
Well, I’m davidgreene24 everywhere except TikTok. So I finally gave in and said, “Okay, I’ll start at TikTok,” and guess what? Some Slips ball out there took my name, just like they did to Rob. So he became [robuilto 00:49:46] and [ David Greeno 00:49:47] didn’t have the same ring to it. So I’m trying to think of-

Rob:
I feel like a fancy Seltzer water though.

David:
David Greeno. Or it could be the stuff you pour down your drain to get out the grain gunk type of a deal, a little less classy. So stay tuned for what I’m going to pick for TikTok. I think we’re still working on that. And then my YouTube channel is David Greene Real Estate. Super simple. I’m not very creative or fancy. If you want to find my stuff, just put in my name and you can find it there. How about you, Rob?

Rob:
You can always find me on the YouTubes, smash that like, leave me a comment. Tell me something you learned from my videos that @robuilt Instagram, robuilt, TikTok, as we said, robuilto, just a friendly reminder guys. There are a lot of fake bots that comment on the channels and on Instagram, David and I will never ask you for crypto or to invest in Forex or to message us on WhatsApp.

David:
Please get in the habit, and this is good for everyone of looking very closely at the handle of the person that messages you, it is very to take all of Halle Berry’s pictures, make a fake account and call it like Halle’s Berry and then message people and say, “Hi, I’m Halle Berry, and I want to give you money.” That happens all the time. So if there’s an underscore where it doesn’t belong, they’ll have to put a period in there.

David:
It looks like a real profile when they message you, because they have all of our pictures, but there’s so many of these fake ones we can’t even keep up with it. So if anyone out there has a connection with Instagram, they can get us the dang blue check mark so this doesn’t happen. That’d be great until then please like Rob said be very careful that you’re not responding to a fake person and giving him your information.

David:
Also, I want to give you a shout out, Rob, you recently put out a YouTube video of the property that we’re buying in Scottsdale. That is fantastic. I have only got into the first half of it and it’s super good. So please go check out that video if you’re listening to this.

David:
Rob is very good at making these things and it kind of showcases the property we’re buying, how we got to buy it little behind the scenes look. So if you want to check that out, please do. Amanda, I’m going to give you the last word. Is there anything you’d like to share with our listeners that you think is extra important?

Amanda:
Just thank you. I mean, it was so great to give back. As I mentioned, BiggerPockets was so instrumental in getting me into investing. So thank you for having me Rob and David, and just look forward to hopefully giving some people some information.

Rob:
Awesome. You did. You gave me a lot of information. I think we’re going to hit you up because I have this vision of turning a mobile home park into like a luxury glamping kind of mobile home park. So we should talk.

Amanda:
Absolutely. I already told you, I would love to do it. Let’s talk about that.

David:
Okay. All right. Thank you very much, Amanda. This is David Greene, for Rob the YouTube wonder Abasolo signing off.

David:
This is the BiggerPockets podcast show 595.

Brian:
So as you go through and evaluate how good an asset protection plan is, just remember that acronym, ECCC, effectiveness, control, cost-

David:
What’s going on, everyone? It’s David Green, your host of the BiggerPockets Real Estate podcast, the show where we teach you how to build financial freedom through real estate. Look, if you want to grow your wealth, if you want to improve your life, if you want to get your time back, if you want to travel the world, if you want to spend more time with family, if you want to have a better overall life, and you know that real estate is way you want to do it, you, my friend, are in the right place.
BiggerPockets is a community of over two million members, all strong, all walking the same journey as you, and we at BiggerPockets are committed and dedicated to helping you achieve that goal. We do it through providing a forum where you can ask questions, an agent finder service where you can find real estate agents to help you with your deal, blogs with articles written by people that have done well, and this podcast where we bring in experts in the field that are relevant to what you need like we have today.
Today’s a fantastic show that I can’t believe we’re actually going to be able to give you for free because it’s awesome, where we dive deep into asset protection with our guest, Brian Bradley.
Now, in our show today, we cover a lot of topics about how to keep yourself safe as a real estate investor, as well as how to grow to the point where this would become relevant. Here joining me today is my awesome and fun co-host, Rob Abasolo. Rob, welcome to the show.

Rob:
Hey, man. I always like being described as fun. I also would’ve accepted funny, but I can’t demand that. It has to be earned.

David:
It’s funny you say that because we were just talking about how you add Y to the end of most words and create another word. I think it was bridgey that you just described and now fun and funny. You just can’t help yourself.

Rob:
It’s the millennial way, man. It’s the millennially way. Do you ever feel like you have it, something about what you’re learning or an aspect of your business where you’re like, “I have this down, I have figured it out, I am a pro at this,” and then you talk to somebody so smart and well-versed in that specific area and then you’re like, “Oh, my goodness. I know nothing”? That’s kind of how today’s talk went when it came to asset protection.

David:
You thought you had protected your assets, but you found out maybe you hadn’t.

Rob:
Yes. Yeah. Yeah. Brian talks a lot about, well, A, trusts and how he relates it to Baskin-Robbins. There’s 29 flavors. There’s a lot of different types of trusts out there, common misconceptions about LLCs. He talks about protecting yourself and your assets, how it’s like layering up with clothes and how each layer of clothing gets a new layer of protection on your business.

David:
Yeah. I think we also got into some of the very common misconceptions when it comes to different corporations or levels of asset protection where people think they’re safe where they’re really not. So make sure that you pay attention to what the first word means in an LLC and how that describes what you can expect from that company.
We talk about what piercing the corporate veil really means. We talk about the safest way to protect some of your assets and when that might be necessary. Then also as a bonus, we got into how some of these structures can protect you in one sense, but can also build your wealth in another. So there’s a dual side to all of this. You’ve got the tax strategy side where you have to claim your income within these structures and you can benefit or you can maximize your tax benefits, and then that’s the offensive side, how you’re going to make more money. Then you’ve got the defensive side, which focuses on how you prevent people from taking it away from you.
Now, this is probably the most commonly asked question in Robinized world is everyone would come to us and say, “Should I buy an LLC or should I buy in my own name?” So we wanted to bring you a show just like this with an actual attorney to go deep into how to know how you should start and where to go. Anything else you think that they should keep an eye out for, Rob?

Rob:
No, man. This is really great. I’m really excited to have this because people always ask me about legal questions and I’m always just sweating profusely because I’m like, “I’m not an attorney. You can’t sue me.” So this episode I’m going to be like, “Here you go. Just listen to this. This will answer most of your legal of questions and it’s free.”

David:
So here’s a good question. What type of things should people reach out to you to ask about?

Rob:
If they want to invest or if they want to learn how to start an Airbnb or if they have questions about running an Airbnb business, anything in that capacity, but when it comes to taxes and legal liability, no, thank you. That’s not me. That’s not my jam.

David:
That does make you nervous. People should reach out to me if they want to know about financing real estate, having an agent to help them to get it, if they’re looking to invest their money with somebody or if they want to be connected to the people I have in my world that do provide these services. So here’s just a good note. Please don’t ask us for legal advice, but you can ask us for the people that we use to get our legal advice. We would sweat a lot less if that was the case, and then I would be drinking less water from doing less sweating.
All right. Before we move on to the show, let’s get to today’s quick tip. It’s so nice that I don’t have to do that high pitch quick tip that Brandon was always trying to do, and it was so hard to get my-

Rob:
Quick tip.

David:
Oh, so you do that so well. You’re just like Brandon. It is tax season. So I would like you to think about every single thing that you’re dealing with right now that you wish you were not and put a plan in place so that next year you don’t have to deal with it. The best way to do that is to get connected to a good CPA and actually plan throughout the year.
So what I do is I meet with my CPA monthly. We go over my books. We go over the properties that I’m buying. We go over tax strategies, where I might be on the hook, and what type of real estate I would need to buy or what I would need to do to reduce my tax liability. I highly recommend doing the same thing. Meet with your CPA semi-regularly so that they’re not super long meetings and they’re not in the middle of nowhere where they’re busy and you’re like, “Hey, I got to talk to you right now?” Have it set up on a calendar so you can work around it, and if you don’t have a CPA you like, I’m happy to share with you mine. Send me a message on Facebook Messenger, Instagram, BiggerPockets or if you have my email, send it there and I’ll make a connection for you.
Rob, anything that you’d like to leave our listeners with before we jump in to this jampacked show with Brian?

Rob:
No. I’m not a lawyer or a CPA. So I’m just going to let Brian do all the talking today.

David:
It wouldn’t be fair if you were a lawyer or a CPA and had a beautiful singing voice to match that face of yours. God, can’t give you every gift. It wouldn’t be fair to the rest of us.

Rob:
I’ll take it. I’ll take it.

David:
All right. Let’s bring in Brian.
All right. Brian Bradley. Welcome to the BiggerPockets Real Estate podcast.

Brian:
Thanks David and Rob for having me on. Today’s an important topic and I’m going to try to keep it less dense and not legal boring, and I’m not anyone’s attorney here, and I’m not a legal guru. We’re just going to be talking in generalities, and we’re going to be learning a lot, and I hope the concepts that we talk about help you and your listeners understand this area of asset protection. Specifically, we’re going to spend a lot of time later on on asset protection trust just to understand this world a little bit better.

Rob:
I would argue that this is not boring at all. I mean, for the people that are actually at home listening to this or watching this on YouTube, these are some of the most asked about topics on the BiggerPockets YouTube channel, on my YouTube channel, on our social media. So I’m actually genuinely excited to learn how to protect myself so that I don’t get sued, Brian.

David:
Yeah. Brian, how would you sum up what asset protection is?

Brian:
Yeah. So what asset protection actually is is just think of it as a legal barrier between your assets and your potential creditors before you need it, and that’s the key word, before. That’s it. It’s just like a safe for your gold or your guns or your valuables, anything of value you want to put behind the legal barrier and out of your personal name so that it’s not easily attached with the lien or reach. To mimic the rich, and I love that Tony Robbins is saying that success leaves clues. So the rich don’t own things in their personal name, their businesses do, their asset protection trusts do. They just get the beneficial use and enjoyment out of them while separating out the liability. Then as you grow, you just create different layers as you grow and scale up your planning.

David:
When you talk about layers, in specific terms, what does that mean, also in layman’s terms?

Brian:
Yeah. So in layman’s terms, let’s just break it down as key concepts and tools that we use. So I want you to think of each tool as a layer of clothing, and we add layers as you and your wealth grow. So these tools generally are going to be LLC, so limited liability companies, limited partnerships, and then as the protection trust, and where you land in this scale depends on your risk profile, your profession, the asset classes that you own, for example like single family, multi-family, commercial, where you own them at, the states you own them in, Texas, Nevada, California.
Then we look at your total unprotected net worth, and then we look at this holistically and then start creating plans based upon where you’re currently at and then your growth and what you’re investing in.
So I want you and your listeners to think about winter. So when it comes to asset protection, like I mentioned, we have different layers. That first entry layer is your base layer. It’s the foundation, and it sits on your skin. This is the LLC and insurance. This layer is generally when you’re just starting out. You have no unit, zero to three units or properties. Your net worth is generally going to be around below 250,000 nets.
Then as you grow and you add more assets and you hit that four-unit spot, you’re investing in probably multiple states with different LLCs in different states, your net worth has probably hit around 500,000 to 700,000 nets, you want a mid-layer, which is usually going to be a little bit thicker. It’s generally going to be made out of Merino wool or for you ladies a cardigan, and this is your management company.
We personally use limited partnerships for this management company, that mid-layer. I broke those two layers down the LLCs and the limited partnership on BiggerPockets Rookie in great detail, but that mid-layer limited partnership will be owning all those LLCs. So this way, you only maintain one tax filing at the end of the year.
Then when you hit around one million net worth, you want an outer shell layer. This is your waterproof layer. This is like we’re going out skiing, we’re in Siberia or somewhere really cold for some reason. This keeps you nice and dry and warm when the weather is really bad. This is your doomsday lawsuit protection layer. This is your asset protection trust. We’re going to be spending a lot of the time on later on talking about these today, but by layering, you’re now more flexible. You can adjust and make yourself more comfortable.
Now, for all these layers to work, I want you to think about this acronym, ECCC. These are the four things that must be true. So one, your plan has to be considered effective. Two, you’re going to want to control your plan and your assets. Three, you’re going to want reasonable and sustainable cost, and then four, you need to worry about compliance. It can’t be too difficult for you and your IRS CPA to figure out how to make this compliant with the IRS. So as you go through and evaluate how good an asset protection plan is, just remember that acronym, ECCC, effectiveness, control, cost, and compliance.

Rob:
Okay. So let’s unpack this a little bit because for me and for a lot of the people that we talk to that are just getting started out, a lot of people seem to get very wrapped up in an LLC and often associate LLCs with both legal protection and taxes. I get a lot of people that are like, “Oh, do I need an LLC to file taxes as my business?” So could you share a little bit of the journey of someone that’s investing when they would start with an LLC? Then I think you briefly touched on this, but at what one would then take the next step to get, I guess, into that next level, which I think you said LLP?

Brian:
Yeah, the limited partnership or a management company. Yeah. So the LLC, the Limited Liability Company, it’s that first layer. It’s basically asset protection 101 along with insurance. So the entry level base layer that most of us are all going to be familiar with and I think a lot of people spend a lot of time talking about is this LLC. That’s going to be holding your real estate and your risky assets. Anything that has a key or needs insurance or can go boom, these all go into an LLC.
So we know about LLCs. People hear about partly the effectiveness of them, but there’s some things that we’re just not told about them, and I think it’s really important to understand these three big misconceptions of the lack of effectiveness on LLCs to then understand the reason for the next layers as you grow.
So once you move from zero to three units and you’re getting into probably four units, about 500,000 of unprotected net assets or more, you’re going to start accumulating a lot of LLCs. So we need to start cleaning these things up for your accounting system so you’re not being nickel and dime on all these K1 filings, but also, one of the big issues with LLCs is that the courts now have a tendency to disregard single member LLCs.
So when your corporate veil is pierced, it’s not very effective. Remember, that’s one of the most important things. We are looking for an effective plan, meaning it needs to work when you’re in courts, and CPAs tend to set up LLCs as disregarded entities for tax purposes. That’s really great for taxes, but it’s really bad for lawsuits.
What being disregarded means is that the IRS is not taxing your business separate from you. It passes through to you personally, and because of this, they’re basically worthless for asset protection or lawsuit protection because that liability also passes through to you, but don’t get me wrong. I still use LLCs but at that base layer entry protection, and then we add the next layers up as we need to as you and your assets and your wealth grow. So that would be that limited partnership.
Eventually, you want those LLCs to be owned not by you, but by that limited partnership. Then as those taxes pass through to that limited partnership because they’re disregarded, you only have one tax filing, but now you’re getting the protection from the limited partnership.
The other two big misconceptions about the LLCs is just where do you even set these dang things up in? Do you go to Wyoming, Delaware, Nevada, Texas? You hear about all these states and it’s technically called charging order chasing. So they’re chasing different states’ laws. The problem here is that this is not creating a business like Dave and I or Rob and I going in and selling widgets. We’re holding real estate and LLCs as a holding company.
So you can’t really go and buy another state’s beneficial laws and bring them to another state that you have no jurisdictional connection to. So if I own, for example, real estate in California and Ohio and Washington, and then I go stuff them all in a Wyoming LLC, I can’t take Wyoming law with me to one of those other states because there’s no jurisdictional connection there. The damage that you’re going to be getting sued from is going to be from where the injury is at, where the lawsuit is coming from, where the property’s at, where the person’s at.
So a lot of people have this misconception that I’m going to go buy another state’s more beneficial law so I’m just going to go use a Wyoming LLC without understanding I can’t just take these other state laws with me to where I’m actually getting sued.

David:
You mentioned two things I want to point out. The first is that when it comes to these legal entities, at least the way I see it, is you’ve got protection in case you’re sued or something like that, and then you’ve got tax purposes. So they function in this dual role and you highlighted how that can become confusing. So I’m going to ask you in a second if you could maybe give us a summary of how to understand them as they function in those two roles.
Then the other one was you mentioned that you can pierce the corporate veil, and we just kept going. Can you explain to people that this misguided understanding that an LLC is a iron tight if you have it in LLC, you get sued, they can’t get anything outside of it, it’s actually not the way that it works in the legal system?

Brian:
Yeah, absolutely. Let’s start with that one. I think you just need to pay attention to the first word, first letter, limited. I mean, they just tell you straight out in the name, “This is limited protection,” and what piercing and the corporate veil means is there’s certain ways that we go through and say, “Okay. This LLC is not an actual business. It’s an extension of you personally.” So because of that, that’s where we’re piercing that limited liability veil and now holding you personally liable.
A couple of the easiest ways to pierce this veil is, one, just the nature of real estate. All right? We use LLCs and business entities as holding companies. We don’t operate out of those LLCs. You generally use an operating company. So when I’m trying to pierce through that LLC, the number one argument that we use that would work nine times out of 10 is saying, “Well, Your Honor, this is just a holding company. This isn’t actually a business. It does nothing but hold this company for David or for Rob. So this is actually just an extension of themselves.” That argument in itself will win nine times out of 10. Then the next ones we look at is funding issues. How is the LL-

David:
Well, it’s true, right?

Brian:
Yeah.

David:
I mean, isn’t that why most of us are using an LLC is I just want to stick a property in it and I don’t really do anything else other than that?

Brian:
Absolutely, and that’s the thing that you don’t want to do is operate out of the holding company because now, if you’re going to be getting sued through your business operations, now the whole point of separating out the asset from the operation defeats the whole purpose of what you just set up the LLC for. So that’s why people need to realize the nature of real estate and investing in real estate is completely different than taking the same analogy of we’re going to go create a business and sell widgets because our widget factory actually has a business to it. Our real estate LLC that’s a holding company has no business connected to it. It’s just holding the real estate for us and then we operate it out of something else.
Then it goes into funding issues. A lot of people don’t realize that one of the biggest ways to pierce an LLC is just bad money management, funding the LLC incorrectly, bad accounting, co-mingling assets, which would be I got paid from the renter, it goes into my business account connected to my LLC, and then I go buy groceries out of that business account on the LLC versus paying yourself first. So those three right there beyond the list of a lot of other why LLCs get pierced very easily.
The next question was charging orders. What a charging order is is just saying, “We’re trying to stop what damages can come to you and hold it just in the LLC itself.” So the charge that you’re going to get from a court stops at the LLCs and doesn’t bleed into you, the owner or manager of that LLC. Every state is going to be different on how strong those charging orders are going to be. Some suck. Some are horrible like California. Some are very strong like Wyoming or Arizona and Florida. So at that base layer LLC, we’re not chasing charging orders. What we’re doing is creating LLCs at the state the asset is at.
That second layer, it comes to becoming important of where we create that limited partnership at, which I generally use Arizona for the limited partnership just because they have a specific statute that we like to play off of, but other than that, I don’t think chasing charging orders or chasing states with beneficial laws is that important at LLC level because you have no jurisdictional connection there.
Then taxwise, the third part of your question, taxwise, realize asset is not tax planning and tax mitigation. We’re protecting your assets. So it’s going to be tax neutral. Your tax, we need to talk to your CPA and coordinate with your CPA. Your CPA and wealth manager is going to be where your tax mitigation strategy comes through. So it’s the three of us talking together, the attorney, the CPA, and the wealth manager of saying, “Well, first, we need to protect the assets,” because if you get sued and lose your assets, your CPA and your wealth manager have nothing to do tax mitigation strategies on.
So the first advice is protect the assets as strong as you can. Then the next part is talk to your CPA and your wealth managers to then accelerate tax mitigation strategies as aggressively as you want.

Rob:
I think that this is probably the part of the show where everybody’s hitting that share button and sending it to their partner and they’re like, “Oh, my God! The LLC isn’t enough,” and they’re all like, “Oh, we’ve been told wrong.”
So now that we know that LLCs aren’t really quite bulletproof, I mean, you mentioned also pairing that with a good insurance to, I guess, level out some or to mitigate a bit. Then I think I’m still, if you could unpack a little bit on the limited liability protection or the LLP.

Brian:
The limited partnership?

Rob:
Yeah.

Brian:
Yeah, what it is or?

Rob:
Yeah, yeah, because I think you mentioned here that the LLP could somewhat function as like a management group for the LLC.

Brian:
That’s exactly. So really, you’re using a family limited partnership at that second layer. When you use them for asset protection, they’re just called an asset management limited partnership. All right? So they’re like LLCs and they also have some charging order protection. I like them better at that second layer because limited partnership have a delineation between a managing partner called the GP, the general partner, and the minority partner who does not.
So think of it like a split personality. We like having both a general partner interest and a limited partner interest, and we use that limited partner as a starting point for our clients, as that holding company or that management company because it can hold all of those LLCs that you’re creating so all those K1s will flow directly through that limited partnership, and then there’s just a one page attachment of a 1065 that your CPA will file. Now, you only have one tax return versus some of my clients have 30 LLCs with hundreds of properties, thousands of properties all over the place.
The great thing is we can segregate out those properties and then have all those K1s flow under the management company. So it’s still very easy accounting, just one tax filing.
Then the other benefit here is that people don’t realize is, one, limited partnerships are perpetual, whereas other states, they have an annual report on filing LLCs. Privacy, though I’m not a big component of anonymity and privacy because once you get sued, privacy goes out the door, but partnerships statutorily are private to where the name party, the GP is not named by the state on there. So you have a statutorily privacy built in and limited partnerships by themselves cannot be disregarded entities by nature.
So there’s statutorily a lot of really strong builtin mechanisms and mechanics that are just stronger than an LLC. So some people do the wrong thing of saying, “Okay. I have my base layer LLCs at the bottom.” They layer up by adding another LLC like a Wyoming LLC. That’s the wrong next layer. Really, it should be a limited partnership because then we can come in and attach the asset protection trust to own that limited partnership not you.

Rob:
Great. Okay. So obviously, there are a lot of moving parts with setting up, establishing, forming, evolving your business. So there are obviously going to be several different types of lawyer attorney roles in this. So I would imagine you’re an asset protection lawyer and that would be … What you do would be a little different than what a business lawyer who’s just setting up the business does or do you do at all as an asset protection attorney? Is there a difference between different people in this field, different, I guess, niches in this field?

Brian:
Yeah. That’s a great question. I related to, I think, a good analogy is look at it as like medical doctors. They all go in a medical school, but they all have different specialties. So sometimes you’re going to go to your general family doctor, but you wouldn’t say, “Okay. You have a brain aneurysm.” “Hey, doc. Cut my brain open.” You’re going to go to a brain surgeon. You’re going to go find a specialist in that.
So your real estate attorney is going to be focusing on what? Real estate deals, closing your deals, and doing the paperwork for that. Your business attorney is going to be focusing on the business aspect internally of your business. They’re generally not going to know as the nuances of asset protection. Generally, what you’ll find is their knowledge stops at the LLC level of protection to where I’m not going to go in and do your real estate closing for you, that’s not my job. I’m going to create the buckets that we’re going to be transferring title and holding all of those assets in.
So I’m making sure that we set up the protection system fine. Your business attorney should do their job helping you and advising you on the internal running of your business and contracts. Your real estate attorney should be focusing on what their job is, successfully closing the deals that you’re getting, and then we just all communicate together depending on whatever the deal is.

David:
I was going to ask you, Brian, if you had to sum up how a newbie could understand when it comes to these legal entities, how they protect you in case of a lawsuit as well as how they save you money in taxes, can you just give us a brief understanding of how they work in those two roles?

Brian:
Yeah. At the base layer, LLCs really work as smoke screen and as a financial deterrent. So they’re good for little things like grandma slips and falls, breaks her hip. Pizza guy slips on ice, breaks his arm. You hit somebody in your car, it used to be it can help for that, but now you’re seeing radically excess damage awards, even just in fender benders and people getting …
I had one client call that said, “Oh, I got on a fender bender. We were both taken away in an ambulance. I don’t remember much. What can I do to protect my assets?” I’m like, “Well, you know you’re possibly getting sued now so we have to walk a very fine line, but if you’re being carried away in an ambulance, even if it’s a fender bender, expect this lawsuit is going to probably run to be expensive in damages.”
So the LLCs, like I said, they’re good as deterrents. So if you think about a leg, what you’re doing is with an LLC cutting off one leg of the plaintiff’s attorney suing you because you’re trying to make it harder for them and more expensive for them to collect damages on you because law firms are what? Businesses. Businesses have profit lines.
So if I’m going to sue you for $100,000, I have to make sure that when I get the settlement from the case or a judgment, I didn’t overspend and break even. We have to create a profit. So each layer cuts off more legs of the chair to where then the chair is unstable and it’s either going to be too costly to push the case forward so they’ll take the insurance coverage or a settlement or in certain big cases like I have, I was talking about off screen with you guys, we have that California client, who’s a doctor, who owns a Jersey property, rented it out to a gang member, didn’t know, didn’t know he was a gang member. There was a fight that broke out. Guns were pulled. Someone was shot and killed. Who’s was getting sued? Mr. Deep Pockets, white coat investor here with the rental property for negligence and wrongful death.
Would insurance and an LLC hold up and protect you in that case? No, because whoever’s suing you has a war chest and now they’re going after millions of dollars for lost earnings and wrongful death. That’s where a stronger protection needs to come into play, and that’s where very strong asset protection trust come in to protect you because in those type of cases where you have a doomsday lawsuit and you’re going to potentially lose everything, we have to be able to what’s called break a bridge and move your equity out of a US jurisdiction to protect your assets, and that’s where the different layers really come in depending on, and strength comes in. It just depends on the type of lawsuit.

Rob:
So effectively, if I’m hearing this correctly, we’re trying to bog people down in the actual legal flow. So LLCs, there’s going to be a lot of paperwork that you have to mitigate through or go through as someone that’s in this lawsuit. So that can already be costly, but then to then start going into that next layer of the LLP and having to go through all of that, it just takes more time and expense for the other party that’s trying to take legal action. Is that about right?

Brian:
Yeah. That sounds about right. Then the final layer, the asset protection trust. If you’re using, for example, a bridge trust, a very strong asset protection trust, we can break domestic compliance, meaning move the equity to an offshore account to where no judge can actually reach that money legally, and then that generally, once the party suing you sees that a foreign trust is in play at that point, they’ll just go away because it’s just too difficult. We can break through all of that when we talk about trust and why it’s so strong, but the ultimate deterrent is saying, “Even if you win that $10 million judgment against me, I’m uncollectable.”
Really, what we’re trying to do is make sure in a doomsday scenario, you’re going to lose this lawsuit. You’re going to lose bad and you’re going to probably lose most of your wealth. We want to be able to make sure you’re not collectable legally.

Rob:
Yeah. So let’s dive into it a little bit because I want to know a little bit more about trust. I actually, not too long ago, set up a family trust and I was under the impression, “Hey, is that it? Am I good to go? Is that all I need to do here?” Are there different types of trusts just like there are LLCs and LLPs and all that kind of stuff? Is there a whole branch of trusts out there that a lot of people don’t know about?

Brian:
That’s a great question, and it’s absolutely true. A lot of people have this misconception that trust our trust, “Well, I have a trust so I’m good to go,” and it’s not. It’s like Baskin-Robbins, 31 flavors. It’s all ice cream, but there’s different types of ice cream.
So asset protection trusts are that final layer of your planning. Like I said, it’s that full bad weather outer shell layer, but it’s the heart and soul of the system. So trusts have been the longest lasting entity of all entities, and you can sculpt them to fit however you want them to fit or they can morph it as you need them without dealing with funding issues that you see with LLCs and business entities that we talked about before that can generally get them pierced.
So I just love trusts, and then having a trust at the very top of your planning is just very powerful and so is picking the right place to actually set these things up in. So to keep with my Baskin-Robbins theory, the standard 101 trust that everybody’s familiar with, Rob, that you mentioned that came from the ’60s is the family revocable living trust.
So trusts don’t die. So when you do and you actually funded your trust by transferring ownership and title to it, you don’t have to go through the courts and probate, and that changed the landscape of estate planning, which is not asset protection planning. That’s just estate planning to avoid courts and probate.
Then you also have land trust, which I’m sure some of your listeners have heard other people talk about for real estate. They hold your real estate and the land, and then you connect those to an LLC, but land trusts don’t have any protection in and of themselves. They’re only as strong as the LLC that they’re connected to. So land trusts are just a privacy mechanism. They’re not a protection mechanism.
Then from here, you have higher levels of trust that are called asset protection trusts. If you guys don’t mind, this is where I think that we can really spend a lot of time breaking these three concepts down of an offshore, domestic, and then a hybrid because then I think after this you and your listeners will probably know 99% more and all the attorneys out there just on asset protection trust.

Rob:
No, I don’t mind at all. In fact, I would very much welcome it. What about you, Dave?

David:
Yeah. I don’t think you can ever have too much of this information. I mean, there is a stage in your career where you’re listening to this and thinking, “Well, this doesn’t apply to me. I’m trying to get my first property or my second property,” but the thing with real estate is it doesn’t grow in a linear way. It grows exponentially. You get a property, you get a second one, you start to think, “Holy cow!”
This happens all the time. One property made me more wealth in a year than all the money that I made at my full-time job after I was taxed. This paradigm shift starts to happen where you realize gaining assets is how you grow wealth, and I’ve been banging this drum for a long time. I think people are finally starting to listen to me, which is nice, but there is a massive problem with inflation going on in our country. We are devaluing our currency, and in that environment, you can feel like you are getting wealthy because you’re saving money, but you’re really not. Your money is losing massive amounts of value every year it sits there.
So you almost have to be investing just to breakeven. Just to stay where you want to be you have to be taking action. I really believe more and more people are going to start to figure this out, and you, BiggerPockets fans, you heard it first, right? So you had an advantage, but you’re going to see that we’re not likely heading to a crash in the real estate market. It’s just going to get hotter as wealthier people start putting their money there to protect it from inflation.
When that happens, there’s always vultures that will circle because it’s easier to go and take your money than it is to make their own. I think what Brian’s talking about, which is beautiful, is this is how you make it harder to take your money, right? When you were talking about how we set up these foreign trusts and different ways to make it difficult, it made me think about I believe it was World War I. Actually, I should know this. I’m sorry that I don’t, but when the Russians pulled the Germans into invading Russia and they just kept sucking them deeper and deeper and deeper into Russian territory and their supply lines got stretched out and then winter hit. It was very, very difficult to go after the Russian so they finally gave up and said, “I don’t want it.”
Well, you could think about your wealth in that same way that as people are coming after it, the more obstacles that you put in their way and the longer of a process you make them spend, the more money they have to spend on their lawyers to try to get to it. They’re either not going to fight that war or they’re going to quit once they start. So this is a very thing to be learning, especially if someone really likes real estate because it’s going to become more and more important in the future.

Brian:
Absolutely. I like to piggyback off of that. I’ll use my ex brother-in-law as an example, a guy who couldn’t rub two pennies together and then decided he was going to go do a flip and fix, and then that turned into a short-term rental, that turned into a sixplex, that turned into him specking out a couple homes, and three years’ worth of time, he has over a million dollars worth of assets and unprotected net worth just by listening. I’m like, “Hey, go listen to BiggerPockets. Go listen to these guys. Start learning this stuff, but execute it. Don’t just read it and get stuck in analysis paralysis.” He actually did. The next thing you know, from the not being able to rub two pennies together, it’s amazing how fast real estate can accelerate wealth.
So the whole point of this is if you’re just starting out, it’s good to know here’s the foundation, but you need to know the direction that you’re heading because then you’re going to set up like most of my clients come in like a complete mess. They’re going to come in, “I own 15 properties, either all in my name in all these different states,” or “I have a Wyoming LLC,” or one was, what, four days ago, “I have a Montana LLC.” I don’t know why Montana. “I have 15 properties in all these different states in a Montana LLC that I don’t live in. I have no connection to Montana, whatsoever. So what can you do for me?”
I’m like, “Okay. Well, now we’re going to have to disassemble all of this craziness that you did, but let’s make this flow and let’s put you in a stronger jurisdiction for this trust.”
To get into the strength of these three different trusts, but going offshore as particularly the Cook Islands does is they have this beautiful thing that’s called statutory nonrecognition. All right? What this means is that if you have a judgment against you in the United States, and you took it down to the Cook Islands. US judgment there is completely worthless. It literally has no value whatsoever because it has seven very strong statutory standards.
So if somebody wants to sue your trust that you create in the Cook Islands, they’d have to start the case all over from scratch there. The person suing you would have to prove their case beyond a reasonable doubt. So that’s the murder standard, the 99% sure standard, not the US civil case 51% called a preponderance of the evidence like, “Oh, maybe, I don’t know, but sure. Let’s give them their money.” You’re talking about the highest legal standard in the world.
You can’t get a contingency fee attorney to represent you there because they’re not allowed down there. It’s unethical like it used to be here in the US, but that got changed in the ’60s because lawyers now control our legal system and they want lawsuits to get started so they can get bigger pay days.
The claim, meaning the lawsuit, is not amendable. So once you file your complaint, that’s it. Once you start sending out discovery and you start digging around and poking around, you can’t just say, “Oh, okay. Well, we’re going to now change what we’re suing you about and sue you for this even though we didn’t know we were suing you for that. So we’re going to amend our complaint.” You can’t do that down there. The person suing is going to have to front the entire court cost plus flying a judge from New Zealand, and you can’t take your US attorneys with you down there.
The kicker here with this is if you lose, you pay. So this is one of the single worst things that we don’t have here in the United States, that the loser does not need to pay the legal fees of the winner. So if you get sued by somebody for something completely bogus, I mean like a frivolous lawsuit and you spend $200,000 defending yourself on legal fees and then the judge decides, “Hey, you know what? This is ridiculous. I’m throwing this case out,” you’re still out $200,000. They’re not going to be getting the bill for it because that’s discouraged in the US because that will discourage people suing other people. Then there’s only a one year statute of limitations.
So while you have now the most effective, remember the four things I told you to think about, effectiveness, cost, control, compliance, while you have the most effective trusts in the world by far, I mean, statutory nonrecognition, right? Doesn’t get stronger than that. Those other three factors, if you’re going to go purely foreign, it falls short because now costs are going to be very high like $50,000 to $75,000 to set up a purely foreign trust. You’re going to be out of control of your assets, and the IRS compliance is insane. You’re talking about full disclosures, FACTA disclosures, full trust disclosures.
So for most people, that’s a hard pill to swallow. So that’s why we rarely, rarely ever see going purely foreign. What most people then default to is going domestic. It’s cheaper to start up. You’re going to be in control of your assets. The problem is they suck on effectiveness and they’re starting to get pierced because we have what’s called a constitution. Article four section one, full faith and credit clause, meaning if I own a California piece of property and I have a Nevada LLC, I can’t take that judgment, go to Nevada, and Nevada say, “Hey, sorry. We’re not going to exercise that judgment,” they legally have to adhere to that judgment and even litigate the case because you have to give the full faith and credit to other states’ judgements and recognitions.
Then you have crazy judges nowadays that are just, what is it, litigating from the bench. So you have radical judges now not following case law and statutes and using their super power called public authority, public policy. So the way you combat this is you want to take the best of both worlds. You create what’s called a hybrid trust or a bridge trust, and you take an offshore Cook Islands trust, and you domesticate it through the IRS. Now, it’s cheaper to start up. It’s cheaper to maintain. You have no IRS disclosures, whatsoever.
While that trust is domestic, okay, the maintenance is going to be easier, but I have that strength in my back pocket. So if I ever do get sued and, for example, there’s this Louisiana case that happened some time in September I think it was. There was a guy Airbnbing his property. The short-term renter like a lot of people party we know in short-term rentals. All right? Guy got plowed, decided to do a head dive off the back patio and landed in the shallow pond, broke his neck, became a quadriplegic. Sued the land owner of the property and got an 11 million judgment out of him because he was a dumb drunk.
So what this means is if you’re that land owner getting sued and you had a bridge trust, we can do what’s called a demand on the assets. Break the IRS compliance and now your trust is what it is. It’s purely foreign. Now, we have that strength in our back pocket because we set it up beforehand. So now, even when you lose that 11 million lawsuit, I’ve moved your equity, I’ve moved your money, you’re safe. Now, we can either have them just completely walk away, which most people do nine times out of 10 or the case is settled for a penny on the dollar. Once the case settles, you redomesticate that trust and it’s back to being purely domestic again.

Rob:
So I actually have a question about this because a lot of interesting stuff here. So let’s just say in the case where you have a trust, let’s say the hybrid trust, for example, and that holds all your real estate and you have an $11 million judgment. So that judgment is against your trust, which is more protected because it’s offshore. Do you personally just as a person walk in the streets of America, have any sort of liability at all or any kind of charging order or any money that you would be on hook for from that $11 million?

Brian:
So what would happen is at that point, removing the equity and removing you as the trustee. So the likelihood of them following you, so we’ve had to break over 300 bridges and move a bunch of equity offshore. We’ve never had or seen over decades a client actually follow us down to the Cook Islands because it’s just too daunting of a task if you go through those seven prongs that they’d have to do. The only people who ever go down there is the IRS, the government, the man who can print money and has infinite amount of resources, and all they do is lose down there.
So do you have liability walking around? Yes. Can you run from that? No. Do you have a judgment against you, a valid judgment? Yes, but we did is make it legally to where you’re not collectable on that judgment because the offshore trustee is going to say, “Sorry, this is the Cook Islands. We don’t recognize any country’s court orders or judgements. You have to sue us here,” and that’s out of your control. This is the US versus Grant case to where a guy stiffed the IRS for 36 million, stuffed it in a Cook Island’s lawsuit, had a heart attack, died.
The IRS came after the wife for the back taxes and the money three times and three times lost, and then tried to hold her in civil contempt of court and throw her in jail until the money came back and the court said, “Listen. It’s not her choice.” Now at this point, the offshore trustee is the one in control saying, “No. Sorry. You don’t get access to this because it’s under duress,” and she even tried to instruct the offshore trustee to give the money back and they kept saying no because it’s under duress.
The court said three times to the prosecutors, “We can’t hold her in civil contempt of court because it’s no longer in her control.” So that’s how effective and strong that becomes. So you’re walking around with a liability, but it’s the ultimate settlement, big red button that works that you have in your toolbox.
So generally, before you go down that route, you’re going to be settling the case because the attorneys at that point realize a foreign trust is in play. It just is up to me, the attorney, to decide when I’m going to use that option or not because of the ultimate negotiating factor.

David:
So I have two questions about that. The first would be, how quickly can you get this set up? Is this something where you’re like, “Oh, boy! I’m in trouble. I can’t get it moved over before a judgment is issued”? Number two, approximately how much money should someone plan to set aside to do this technique?

Brian:
That’s a good question. So it generally takes about 30 days to set up and transfer all the assets over.

David:
That’s fast.

Brian:
Ideally, you want to set this up, yeah, it’s pretty quick. Ideally, you want to set this stuff up before you even have a whiff that you’re going to get sued because realize states have look back periods. The most extreme is California, a 10-year look back period. Other states have two-year look back periods, meaning you set this up and then if you get sued next year, someone’s going to look and say, “Okay. Well, this is a fraudulent transfer. Unwind it because you had a reasonable expectation within this timeframe that you could have been sued.”
Anyways, that’s irrelevant because you’re not getting sued, but that’s the argument that’s going to be played. So you want to set these up like any defense system before a lawsuit happens. Okay. Once a lawsuit happens, you’re starting to go too far down the rabbit hole, and you’re really limiting the options that we have, and if you have a big lawsuit against you already and you come to me, I’m either going to have to exempt that lawsuit or just go purely foreign, and that’s going to be very expensive. Purely foreign, like I said, you’re generally talking like 45,000 to 75,000 to set up plus 10,000 to $15,000 a year to maintain. That’s why we don’t use them very much and the IRS compliances. It’s just too much.
That’s why you go the hybrid option to where, generally, with a bridge trust with a limited partnership, you’re talking about 29,000 to set up plus around $2,600 to maintain a year, and all of this is asset protection. So it’s a tax write off. The profile that generally fits a bridge trust set up is you have about one million, like I said, of unprotected net. You probably have four to six or more real estate properties in different states. Either you’re a pure real estate, 100% into real estate investing at this time or you have some other type of high risk career like you’re a medical doctor investing in real estate or a lawyer, CPA, something that has more profile besides just the real estate itself because I think people don’t realize how much bad things can happen in real estate even if you’re the most wonderful landlord in the world. You can’t control mold issues. There’s a lot of things that are just … Renting out to the wrong person, a fight, breaking, someone dying. There’s just so many things that go out of your realm of control. That’s what these trusts are for.
I tell people think of it like a pie chart. There’s three quadrants, the things you know, the things you don’t know, and the things you don’t know that you don’t know. Most bad things happen in the third quadrants and that’s where most people own their assets, the things that I don’t know that I don’t know. If I know something, I already know the answer. If I don’t know something but I know Dave or Rob knows the answer, I’m going to be like, “Hey, Dave. Hey, Rob. What’s the answer to this?” and you’ll tell me, but if I don’t know that I don’t know something, I don’t even know how to ask the question. So the idea is shrink that portion of the pie as much as possible, but create protection around yourself so that when something does blow up in that quadrant, we’re safe.

Rob:
Okay. So I think for offshore, you mentioned that it’s expensive 45 to 55,000. Can you also break down that for, I think, for the domestic side? I don’t know if I missed that particular number. Then that’s one that you said if I remember correctly, offshore, highest level of protection, most expensive, domestic, more affordable, but not as much protection, and hybrid, basically marries the best, right? So what would be the cost on those side of things?

Brian:
Yeah. So the domestic side, the purely domestic side, on average you see a domestic trust fall in the realms of I would say 9,000 to 12,000 to set up, and probably around a thousand dollars a year to maintain. Again, the weakness with that is purely US domestic. So there’s no escape option. So just realize that’s the weakness of it. Okay? We’re having a lot of case law come down of judges, even in states that have asset protection statutes and self-settle spendthrift statutes just completely ignoring those statutes now or you have states like California that don’t have self-settle spendthrift legislation and people running off to Nevada, for example, to create an out of state asset protection trust.
Well, the courts in California came down in Kilker versus Stillman in 2012 and said, “Ah, ah, ah, not anymore. We’re not going to allow you to do this anymore. We’re not recognizing out-of-state asset protection trust,” or people run off to create Delaware statutory trust. Well, California doesn’t recognize them anymore. So you have very thin lines of what states recognize them and what states don’t. So when you combine where your assets are, where you’re resident of, where the potential lawsuits come in, that really weakens the effectiveness of anything purely domestic.
So yeah, I can spend $12,000 on a domestic trust, but I feel like we’re buying false sense of security at that point, and then that’s where the domestic comes in in-between, but what you’re doing, like you mentioned, Rob, is taking the best of both, the pure strength of the foreign, the ease and simplicity from tax purposes of the domestic, combining them together and then that falls within a half price range around $29,000.

Rob:
So okay. Yeah. I mean, it’s still up there, but I mean, I think now hearing the benefits of it, I mean, it starts to make a lot of sense, especially when you do have a very quickly growing portfolio. I also wanted to get some clarity on something you said about the, I guess, if you solely do real estate, then the trust is going to help you, and then if you’re in another high risk job like a doctor or CPA, a podcaster, YouTuber, in those instances as well, if you got sued personally out in the streets here or whatever for something you said or something you did, you would still have protection on all of your assets, even if what you’re getting sued for isn’t necessarily real estate-related. Does that make sense?

Brian:
Correct. Yeah, absolutely, because your assets are out of your personal name. They’re owned in the proper buckets, the real estates and the LLCs. You have the management company as a second layer. Your trust really owns everything. So since everything’s out of your name, you’re going to get sued personally, but they’re going to have to break into the system. Let’s say they do pierce veils, and they do get into that system. Everything’s unwinding. You’re in your doomsday health situation right now. You had a glass of wine at date night with your spouse and you hit somebody with your car and then they died. That’s just a general negligence on you personally. They’re coming into your trust to try to get it. That’s where those layers come into play, and then that trust disconnects does a unilateral with demand on the assets and it’s gone.
So even though you have a judgment against you personally, your asset protection trust is what’s going to be owning everything, and then that offshore trustee eventually is what’s going to be the ultimate door in that judgment’s face. It’s just a matter of having the layer set up, again, keyword, beforehand. So that’s where when we create the trust and everything before you’re getting sued, now I have that option to break the bridge or that compliance because it’s in my toolbox already, just like you’re hiring a contractor to build your house. I want to make sure the contractor has all the tools and knows how to use them and not saying, “Oh, I’m going to go put the roof on and I need to get a crane, but I don’t know how to use a crane.” So you need the pieces and the tools in place beforehand.

Rob:
Okay. Okay. See, this is, truly, this is all mind-blowing stuff for me. So the only other real question around the trusts, well, no, actually, I have a thousand more questions, but the one big one that I think a lot of people are probably wondering at home is once you start getting into … Let’s say you put your property in an LLC or you did a quick claim into an LLC or you did anything in that world, refinancing and doing a cash out refi and moving those deeds over, that can already start getting tricky at that level. So my question is once you completely move your properties into your trusts, how does that affect doing any kind of financing in the states? Does that get murky at all or is it the same straightforward process?

Brian:
That’s a great question, and I would say it depends on the type of trust that you use. We specifically use a grantor’s trust so there’s no murkiness, and banks and lenders prefer to see a grantor’s trust because you are the one that’s maintaining the control of the management of your assets. There’s other types of trust that you create that you hear some people saying, “Well, I have an asset protection trust in Nevada, and it’s so difficult to get lending through or using it for bankers.” Well, that’s because it’s not a grantor’s trust. So it just depends on the type of trust that you’re using at the end of the day.

Rob:
So if it’s owned in a foreign, well, I guess, it’s hybrid, but if it’s owned in this hybrid thing, it doesn’t necessarily have really bad ramifications on going to a bank and saying, “Hey, okay.”

Brian:
Not at all because it would just be a foreign grantor’s trust. The hybrid trust is a grantor’s trust, and all that the banks will see is a domesticated US grantor’s trust, and that’s all that they’re going to see, and it’s just like everything else. Another form of a grantor’s trust is your revocable living trust. That’s another self-settled created for you by you. So they’re familiar with that.
If you start going away from grantor’s trust, then you’re going to start seeing banks or lenders saying, “Oh, I really don’t understand what this is.” So like the basic KISS principle, keep it simple, stupid, it’s the same thing that you want to apply when you start creating asset protection plans. Some attorneys that don’t do this at higher levels create very convoluted message for clients who just becomes a nightmare for what you’re saying lending purposes or even tax accounting purposes, and then they just stop using it and unwinding what they did, and they just completely wasted a bunch of money because the system was so convoluted and so difficult to use and maintain that is completely contrary to what you want to do.
So again, remember the acronym, ECCC. You want to make sure you can maintain your compliance and the costs are going to be easy to maintain. So that acronym, just everything that you do, realize if it looks convoluted as corona probably be convoluted to you, so you want to really simplify what you create. Just make sure it’s strong and has different multiple layers.

Rob:
Okay. I want to pivot a little bit here, not super left field, but a question here because, obviously, in today, in 2022, today’s world, cryptocurrency and digital real estate, NFTs, and other things, that’s obviously a really growing industry at the moment. So I’m curious, when you start factoring in technologies like crypto and blockchain, is there anything you can speak to with protecting that through any kind of trust as well?

Brian:
Yeah. Absolutely. I almost feel like that’s a whole another episode in and of itself, but just remember that the IRS defines cryptocurrencies as a property. Okay? It’s very, very important for your listeners to understand this, and what this means is that it can be targeted with legal action and you are legally required to disclose that you own it, and how much of it you own and where.
So people have this misunderstanding that because you purchased this cryptocurrency and that is private, that they think that it can’t be traced or that it’s inherently protection in and of itself, meaning that simply owning your cryptocurrency is asset protection in and of itself, and that you’re hiding wealth.
This is the farthest thing from the truth. If you ever are subjected to a money judgment and you’re brought into debtors court, because the US classifies your crypto as a property, you’re legally required to disclose it, and like any property, it can be frozen and ceased.
So if you don’t disclose it, you’re lying to the court, you just come into perjury and perjury means people go to jail. So what we need to do is assign your exchanges and your wallets out of your name and into your asset protection plan to protect those assets. Now, this is where blockchain technology and the law is really getting fun. So there are things called blockchain trust that we’re developing right now ourselves using the same concepts as the blockchain that’s powering crypto. That then can be used to create these unique trust. You can make changes and amendments to these trust that they’re going to be recorded in the blockchain, and then it’s going to be forever verifiable.
We can build our pre-builtin triggers into a blockchain trust that allow the trust to alter its structure based on certain events that are happening. For example, a trust can convert into an irrevocable asset protection trust if you’re ever in a lawsuit or it can become an irrevocable income-only trust before a beneficiary ever needs to apply for Medicaid. So the blockchain trust, based off of all this new technology, is really starting to accelerate the trust that we’re using for the future, but this is all in beta development now, but I expect to see big changes starting to happen there.

Rob:
Awesome, man. Well, we’ll bring you on for a whole another deep dive on that. I guess a general disclaimer for everybody out there, David and I will never ask you to send us crypto. We’ll never ask you to contact us on WhatsApp. So if you’re on the BiggerPockets YouTube channel, you’re going to see a lot of BiggerPockets-branded accounts at our scanners that are saying, “Hit me up on WhatsApp, send me Forex trading.” I don’t really know what it is these days. It’s not true. We’re never going to ask for that.

David:
That is a good point. Every month, I get a new fake account where they will have some variation of my screen name. Do we call them screen names? Did I just go back to AOL days right now on the podcast? What do you call your social media name?

Rob:
Well, it’s a handle now. The cool kids say handle, your handle.

David:
All right. So they’ll copy some variation of my handle. They’ll leave off the E at the end of Green or they’ll turn the E into a C so it doesn’t look like it. They’ll copy all my pictures and then they’ll say, “Hey, send me your bank account information. I want to give you some money,” and I get so many people that say, “Hey, I thought I was sending you my bank account. I sent it to a scammer.” I was like, “Why would you send it to me? That’s a terrible idea,” but yeah. Please be very careful with these DMs.
Brian, I think now would be a good time to transition over to the fire round section of the show. Did you have anything that you wanted to say before we move on?

Brian:
No, I’m ready for the fire round.

Speaker 4:
It’s time for the fire round.

David:
Awesome. Okay. This is a segment of the show where Rob and I will fire questions at you and we will see how you would reply in your best response where you fire them back. So what is the biggest myth surrounding LLCs?

Brian:
Yeah. So the big myth right now is this wonderful word called anonymity like, “Let’s go create an anonymous Wyoming LLC and we can completely ghost and disappear lawsuits.” That’s not how the legal system works, but I get this call probably three times a day. Sorry. I’m cracking up as I say it, but it amazes me that this isn’t the general train of thought that we’re creating this anonymous Wyoming or Delaware LLCs. Now, I don’t have to show up in court and I can never be sued or discovered.

David:
It reminds me of the person who can figure out somebody’s MySpace password and then they think they’re a hacker. They’re like, “Oh, I’m in.” They think that that’s what computer hacking is, right? It’s the same type of thing like, “If we just fight an anonymous thing,” or there’s this one move that they know about that nobody else knows that can win them the fight. It’s the same type of an idea, but yeah, when you go to court, they unpack everything. There’s no five-finger death punch.

Rob:
I’m going to say you can definitely think TikTok for that. I mean, TikTok is 15 to 32nd viral videos that are like, “This hack is going to save you millions of dollars in a lawsuit, Wyoming LLC,” and then it’s like, “Oh, gosh!”

Brian:
Well, and that’s where this comes from because you have so many promoters, and even attorneys and CPAs have no idea about this because they just take a continuing legal education course and then just realize, “I can use this for everybody,” and cast a big net and don’t realize, “Well, what really happens and plays out in court because I am a trial lawyer by trade?”
It’s like, “Well, you do get this thing called you’re getting a service so that personal agent of service that’s legally required to be attached to that Wyoming or Delaware LLC, their still job is to be like, ‘Hey, Rob. Guess what, man? You just got served. Here’s your lawsuit. Now go get a lawyer and show up in court.’”
Well, there’s no more anonymity at that point. So now you got to show up in court and the judge is going to say, “Hey, you’re going to potentially have a judgment against you. So here’s this great thing called an asset declaration list. Write everything down that you own, and if you don’t and you don’t disclose everything, now you’re going to commit perjury on the court and go to jail.”
So once you get sued, anonymity goes completely out the door. Now, if you want to hide your assets, you’re the weak link on that because you’re going to be the one going to jail. So just realize anonymity is a private seat mechanism, not a lawsuit ghosting mechanism.

Rob:
All right. Awesome. Let’s move on to the next one here. How will investors use blockchain in the near future?

Brian:
I think investors are going to be … From the legal side or contract side?

Rob:
Yeah, yeah, smart contracts, anything in that side of things.

Brian:
Yeah. So I would go and look at what is a company. I’m not pumping any one specific currency or anything like that, but at ADA, they’re really getting into … What it’s called? Cardano? Yeah, ADA is Cardano. They’re really getting into the smart contract play. So realize, blockchain is about transferring a title. So now, you’re going to have these smart contracts and it’s going to be really easy, clear title.
So the importance of that even in the legal field is you can’t go in and manipulate a piece of evidence and document because it’s all going to be transparently there in the blockchain, and you can’t just go in and start manipulating these agreements.

David:
All right. Next question has to do with building your team. So in the book that I, David, wrote, Long Distance Real Estate Investing, I talked about the core four. You want a deal finder, a property manager, a contractor, and a lender. You have those four pieces, you can invest anywhere. Outside of those pieces, Brian, who do you think investors need on their team?

Brian:
Yeah, and that’s a great book there. I actually wrote that your book is a really good book.

David:
So you’re the one that read it. I’ve been looking for you.

Brian:
It’s me. It’s me. I should get a little courteous like, “Hey, man,” but I bought all the covers. So I just gave them out as gifts, but anyways, no, the key pieces beyond those I would say become friends with your CPA. Really, you should be talking quarterly to your CPA to take better advantage of your tech strategies. Your asset protection attorney, before you buy something, before you sell something or if you have a sniff in the wind that you did something wrong and are about to get sued. So we need those two to talk and we need to talk to each other and your wealth manager because we need to protect what you have. Your CPA needs to be able to file the proper tax forms and your wealth manager needs to be able to do whatever tax mitigation strategies that you want in place.
So I think those are the three key pieces of your investment world that you need to be constantly talking to. Some people are afraid to talk to the lawyers. Some people don’t realize you should be talking to your CPA probably quarterly to create proper plans on how to write a lot of stuff off, and then your wealth managers take your CPA’s job to a whole another accelerated level. So if you really want to accelerate wealth, get in with your wealth manager, tell them your strategies, tell them how aggressive you want to be, and let them do their magic.

Rob:
Totally agree, man. I mean, that’s a whole nother level on the Avengers, right? I call mine Airbnb Avengers. I think David calls his the dream teamers, core four. This is now your financial, I don’t know. We don’t have to think of the name for them now, but yeah. I mean, teams in every aspect of your business, I guess, there’s no limit to the amount of teams that you can have when you’re trying to scale and protect your assets. So thanks for answering that.
So I’m going to be re-listening to this podcast myself. Just I’m going to digest it and then come back and then relisten with a whole new, I mean, I feel like I’ve just evolved to the next level of what it takes to really know your business. So Brian, for you, are there any final takeaways or anything you want to leave the viewers or the listeners with as we close out?

Brian:
Yeah. I would just say in the realm of what we’ve been talking about, it’s too late after you’re getting sued. So you got to think about this stuff beforehand and then just layer it up and structure it as you go. In the investment side of things, I would just say don’t get stuck in analysis paralysis. Eventually, you got to just jump in and kick your arms and feet around and realize, “Let’s float then swim.”

Rob:
Where can people find out more about you, Brian?

Brian:
Yeah. They can jump on my website, www.btblegal.com. I have it set up more as an educational resource with a bunch of case law, frequently asked questions, video content because I’d rather have you be educated to ask better questions when you are shopping around versus just coming in at a blank slate or you can just email me, [email protected] I generally do a one-hour free consultation, whether we’re right match or not. I’d rather, again, just have you have a long, educated opinion and then take that and see what other people have to say.

Rob:
Announcing that you’re about to get all the hours on your calendar filled out for the next year, I think.

David:
I’ll say, you know this really is-

Rob:
David, what about you, man?

David:
You know this really is a trial attorney because you’re referring to case law. The second I hear that I’m like, “Okay. That’s actually a person who is going to end up being in court and knows this from a practical standpoint not just a theoretical standpoint.” I always notice that when I worked in law enforcement. Those of us that were in court testifying had to pay a lot more attention to the case law involved in those that never did anything.

Brian:
Well, and I would say that’s a great thing to ask people when you’re vetting your attorney is asking for some case law because most of them won’t send it.

David:
That’s exactly right. So the 15-second clip on TikTok person probably doesn’t have case law. I think that’s an awesome litmus test. All right. Well, thank you, Brian.

Rob:
I think that’s it.

Brian:
I’m thinking about creating a case law TikTok.

Rob:
Hey man, you could probably go viral with that, Brian. You want to hit up TikTok after-

David:
I think that’s also how you know if someone’s like-

Rob:
David, where can people find you?

David:
You could find me at DavidGreene24. Find me on Instagram, find me on Facebook, find me on Twitter and LinkedIn. I’m going to be making a TikTok for the David Greene team. I’m just trying to figure out who the right person is to make that thing. Brandon Turner has warned me very, very carefully, “Do not get sucked into TikTok.” It’s like putting on the ring in Lord of the Rings where it just can pull you right in. So I’m going to be making content for TikTok, but not ever actually watching it because I’ve been warned of the dangers of it.

Rob:
Oh, it’s true. They know me well. They know me well. You can find me on TikTok, @robuilto, Instagram, Robuilt, on YouTube, @robuilt as well. Remember, everybody, it’s David Greene with an E24. It’s not DavidCream25. We will never ask you for crypto.

David:
All right. Well, thank you very much, Brian. This has been a fantastic show, probably more practical knowledge and insight than almost anywhere else you could get. I mean, this is just like the consultation that you’re going to give to somebody. Many people would pay money to get this information. So thank you very much for coming and bringing it to our audience. We appreciate you. I think Rob and I will now be having another talk where we say, “Oh, my God! Do we need to do anything differently? What could happen here? Do we want to go to Monaco? Do we want to go to Switzerland? What’s the key going to be?” but we appreciate you, man.

Brian:
We’ll be in touch.

Rob:
We’ll be in touch.

David:
This is David Greene for Rob robuilto Abasolo.