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

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

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

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

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

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

Tony Robinson:
That’s a fond memory.

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

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

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

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

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

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

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

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

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

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

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

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

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

Remington:
Bye.

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

Did you play musical chairs as a kid? 

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

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

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

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

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

Why so serious?

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

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

Why is the real estate world so risky right now?

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

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

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

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

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

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

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

Three examples of a market going mad

Example #1: Storing up risk

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Example #3: Vegas-style real estate investing

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

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

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

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

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

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

Value investing – Real estate style

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott:
What a fully baked introduction as always Mindy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott:
In base salary or base bonus?

Chris:
That includes everything, taxes, everything.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mindy:
Oh, okay.

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

Chris:
Roughly, yeah.

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

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

Scott:
Say that one more time.

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

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

Chris:
Yes.

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

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

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

Chris:
Yeah, it will be.

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

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

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

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

Scott:
Do they have equipment that you pay for?

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

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

Chris:
Yeah.

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

Chris:
Sure.

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

Chris:
Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Chris:
Sure.

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

Chris:
160.

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

Chris:
Just for me?

Scott:
Yes.

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

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

Chris:
Unfortunately. Yes.

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

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

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

Chris:
At some point, not today.

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

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

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

Scott:
You said it’s five hours?

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

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

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

Scott:
$56 an hour.

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

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

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

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

Chris:
I think so. Yes.

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

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

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

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

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

Chris:
Yeah. Close enough.

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

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

Scott:
You’ve already mitigated that risk?

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

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

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

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

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

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

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

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

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

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

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

Mindy:
I’m not laughing at you.

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

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

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

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

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

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

Chris:
From a W2, T4. Yes.

Scott:
A T4.

Chris:
Exactly.

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

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

Scott:
Just a simpler way of life up there.

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

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

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

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

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

Scott:
At $50 an hour?

Chris:
No, at my-

Scott:
At 160?

Mindy:
At 160?

Chris:
Yeah.

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

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

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

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

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

Chris:
Nominal amount, not enough to worry about.

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

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

Mindy:
So no benefit whatsoever?

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

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

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

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

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

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

Chris:
Yes.

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

Chris:
We tried this as well.

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

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

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

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

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

Chris:
Three and a bit.

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

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

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

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

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

Mindy:
I’ve had a sewage backup.

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

Scott:
That’s great.

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

Scott:
Yeah. That makes perfect sense.

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

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

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

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

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

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

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

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

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

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

Chris:
Yeah, absolutely.

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

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

Mindy:
It was interesting.

Chris:
Yes.

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

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

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

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

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

Scott:
Yeah.

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

Scott:
Let’s do it.

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

David:
This is the BiggerPockets podcast show 602.

Marjorie:
Don’t second guess yourself in terms of the things that you know. You know a lot more than you think you do, and you don’t necessarily need to have gotten one deal under contract or anything like that. You are smart people, people out there that try and read and listen and take the advice of other people who are smart and read. I think that it’s endless in terms of what you can do. I shouldn’t say with very little knowledge, but if you feel like you can pick apart those parts of your experience where you can apply them to different deals.

David:
What’s going on, everyone? My name is David Greene, and I’m the host of the BiggerPockets Real Estate podcast. If this is your first time listening, this is where you go if you want to build wealth through real estate and you want to make less mistakes, make faster progress, and do it in a smarter way. We help you to find financial freedom through real estate by interviewing different guests that have done it themselves, as well as industry experts who give specific knowledge on elements of real estate investing that will help make you money.

David:
We’re basically real estate nerds. BiggerPockets is a company that is committed to helping others just like you build both through real estate. You can also visit our website where you can look at forums, where tons of questions are asked and answered. Ask your own question, get an answer there. Check out our incredible blog or go to biggerpockets.com/store, where there are lots of books written on different topics of real estate, several of them written by yours truly.

David:
I’m joined today by my co-host, Mr. Rob Abasolo, where we have an amazing show interviewing Marj Patton, who does a really good job of sharing how she invests in a hot market like Denver but does it with all kinds of different deals, flips, multi-family, single-family, short-term rentals, long-term rentals. She really looks at every deal individually and decides what she’s going to do with it. I think you’re going to love today’s show. Rob, what are some of your favorite parts?

Rob:
I like this one a lot, man. We had a bit of a sidebar. I didn’t intend for it to be, but then we got into the sidebar of quitting your job if you have a W-2, a full-time job, and you’re looking to become a full-time real estate investor. When is that a right decision? I think all three of us brought pretty different viewpoints, but we were all on the same page because at the end of the day when it comes to quitting your job, there’s no right or wrong. There’s just what’s right for you.

Rob:
We also talked a lot about being scared to take on new projects, just jumping into these deals and pulling from past experiences to guide your strategy, to help you be successful from a deal. So even though you haven’t necessarily tackled a niche or an asset class, we still have experience and we’re smarter than we think we are. A little compliment to you, I really liked your take on art versus science in this episode.

David:
Yeah. So you’re going to have to listen to this one in order to hear that, and additionally, we had a little bit of fun. Now, we’re trying to keep the shows a little bit shorter in length. So we actually took out some editing and threw it on the very end of the show. So make sure you listen all the way to the end and then keep listening for our insight onto some non-real estate related topics.

David:
All right. Today’s quick tip is if you like following what’s going on in the news, you like a deeper analysis into specific questions regarding real estate like what’s happening with interest rates, what the supply is doing, how our relationship with China is affecting the market here, check out the new BiggerPockets Podcast On The Market. On The Market was a spinoff from the bigger news show that we do here on the Real Estate Podcast, and it’s sponsored by Fundrise, where Dave Meyer and several other BiggerPockets personalities break down what is happening in the market and on the market. So if you’re looking for a show to listen to in-between releases from this one, go check that one out and let us know what you think.

David:
Last thing I want to say before we get to the show is leave us a comment on YouTube. As you’re watching this show, tell us what you liked, what you didn’t like, what you thought was funny, what you thought was boring, and how you would like things to be different. We read those and we do our very best to incorporate that into the way the show is produced.

David:
Marj, welcome to the BiggerPockets podcast. How are you?

Marjorie:
I’m doing well. Thank you.

David:
Yeah. So we’ve had a lot of fun before we actually hit the record button here. I think our guests are in for a really cool show. Can you give us a brief background of what your portfolio looks like now? Then after that, tell us a little about yourself.

Marjorie:
Yeah. So we, we as in my partner and I, primarily invest in Denver, Colorado. We have have about seven doors. So certainly not, not little, but certainly not a lot, a lot of work to do. We do a combination, and I think that’s a lot about what I’d want to talk about today, too, which is we invest in a little bit of everything. I like to think it’s a mile wide and an inch deep. An inch seems too small, but yeah, short-term, long-term. We do flips. We’ve done private lending. We’ve done 10301. We’ve done out of state. So we’ve tried it all. It’s a little bit of a mixed bag for us and we really enjoy it.

Marjorie:
Then a little bit about me, so I am ahead of sales for a global financial technology firm. I’ve been in financial technology for decades. It feels like, but a very long time and I’ve enjoyed it. I really enjoy the sales aspect of it all in terms of getting to know clients and negotiation gets me excited. It hypes me up. I do love to negotiate, which is why real estate actually is a really good fit for me, but I also come from a background of parents who have dabbled in real estate as well. My mother and her grandfather, actually, as an immigrant, came through, started doing private mortgages, which she did a little bit of herself as well. Then my dad is pretty bullish and really enjoys triple net.

Marjorie:
We have spirited conversations about residential versus commercial. We don’t really agree for different reasons, but the conversation is always my favorite. Then, yeah, I don’t know if I mentioned this, but I’m actually right outside of Denver, Colorado. So I’ve been able to go into the BiggerPockets headquarters in Denver and I also-

David:
You’ve been to the Mecca.

Marjorie:
I’ve made pilgrimage to the Mecca. That’s right. Yes.

David:
That explains that glow coming off of you right now.

Marjorie:
Exactly. It’s also my podcast light, but I’ll take that, too, but yeah. So I’ve gotten to meet all the awesome people at BiggerPockets, and hopefully I’ll get to the point where I can tell you guys a little bit about, too, the women’s investor group that we started, which is why we started working with BiggerPockets a lot.

David:
So I 100% want to make sure we talk about the triple net versus residential debate. I own both, and I’ve had. since I bought my first triple net property, a different perspective regarding when those properties make more sense, what type of person they make more sense for.

Marjorie:
My dad is exactly that person you’re talking about. He’s perfect for triple net.

David:
Yeah, and that’s one of the things I wanted to highlight is out of this conversation, one of the things that I would like for the audience to receive from it would just be an understanding that there isn’t a right or wrong way to do it, but there is a right or wrong way for you to do it, and understanding the strengths and weaknesses, pros and cons, what type of strategy works for a property is a huge part of finding success financially. I like analogies, and basketball is one that I go to a lot because I played a lot of basketball. There are definitely teams where a specific player will thrive and look really good and other teams where they won’t, right? Your portfolio is like your team. So you’re trying to create it with synergistic qualities that work around the strengths and weaknesses of your coaching staff and the other properties that you have.

David:
So I want to get into that, but before I do, I just wanted to highlight one of the things that I really like about your story and my understanding of your investing career is you are the type who looks at every deal that comes your way, picks it up, looks at it from every single angle and says, “How could I use this?” versus “Nope, doesn’t work,” throw it off to the side and move on to the next thing. There’s a level of creativity, ingenuity, and maybe even vision. I’m romanticizing this, but I think you know what I’m saying, right?

David:
A lot of the time we teach new people, “Nope. Just look for a duplex,” we try to simplify it as much as possible. I do think for the very beginning investor, they can be overwhelmed by all of the different options, but once you start to get the fundamentals down, you can start to broaden your horizon and look at what opportunity comes your way, and that’s how I do mine like deals cross my desk and I think, “Would I want to buy it? If so, what would I do with it? If not, would it work for someone else? If not, could I list it?” There’s all these different ways that we can help somebody and then help ourselves, and the best investors take advantage of the opportunity that comes to them, which isn’t always going to fit in the same niche.

David:
So I wanted to ask you. How did you get to that point where you took this approach of looking at all of these different opportunities and deciding how to use them versus just the whole pick it up, look at it, “Doesn’t match what I want,” throw it away and repeat that 700 times?

Marjorie:
Yeah. Great question. I tend to feel like if you can use a lot of your experience, not only even if you have a W-2 job or something that you’re passionate about or did before you started to pick up real estate investing, but I feel like patterns are created, right? Patterns compound, right? So for instance, in my job right now, I negotiate contracts. I’m not a lawyer, but I negotiate alongside the lawyers at my company. So I negotiate contracts. That makes it really easy for me, for instance, to feel comfortable with maybe a long-term rental, understanding who the person is doing the background checks, even though we don’t do that with clients, but understanding what goes into a contract and making sure that I understand all of those pieces, and maybe that makes me a better person to be able to analyze a tenant and things like that.

Marjorie:
Also in my job, I negotiate, which I mentioned. I love the negotiation, right? From an early age, I loved negotiating. I love the buy and sell, and with that, that has allowed me to figure out what’s meaningful to people, right? When I am interested in a deal, I want to buy a house, I want to buy some sort of property, I really try figure out what’s attractive to that person. I’m happy to get into a little bit more actually with a deal that we just did recently, right? I think that really shined through in terms of how we tried to negotiate that because as some of you know, maybe a lot out there who invest in Denver, it is a terribly difficult market right now. It’s crazy, but I like to take a lot of the things that have influenced me that I’ve learned, not only through my job, but just through life in general.

Marjorie:
Then the other thing I said was compounding those experiences, right? So taking those and trying them, but then learning from those experiences, right? We did a rehab on a long-term rental and an opportunity for a flip came up. Well, we already did rehab. We set a budget. We found a team. We knew how many months we had to do it. We knew the type of rehab and updates we were looking for. We knew how much rent we were going to get for it. So we took that lesson and applied it to the flip. So I think that’s the example I’m giving is that you can really take these concepts. You don’t have to take them from real estate. There’s so many concepts that you understand inherently as a human being and a smart person that you can bring into these. Then once you start doing those, you’ll notice patterns of types of investing that you’re doing that you can kind of parlay into other types of investing.

Marjorie:
We did a private loan not too long ago. Everyone’s familiar with the process of underwriting unless you pay cash, and good for you. If you wouldn’t pay cash for anything, ever everything, awesome for you, but we need loans. So we’ve gotten many loans before and we know all the types of collateral that we need to deliver to an underwriter to satisfy their terms and things like that, right?

Marjorie:
So can you take that applied knowledge and then parlay that into a private loan, which we did recently, which was really successful, and it actually was twofold where we earned a little bit of money and we were able to get someone into a duplex that they want and pay cash. She’s a friend of mine, too, so that made it that much sweeter, but yeah. I would say that, in general, don’t second guess yourself in terms of the things that you know. You know a lot more than you think you do and you don’t necessarily need to have gotten one deal under contract or anything like that. You are smart people, people out there that try and read and listen and take the advice of other people who are smart and read. I think that it’s endless in terms of what you can do. I shouldn’t say with very little knowledge, but if you feel like you can pick apart those parts of your experience where you can apply them to different deals.

David:
So this is one of the reasons I try to break the mindset of what is the right way to do it like. How do I want to describe that? It’s like the engineer mindset needs a blueprint to operate off of. If they don’t have a full set of complete blueprints, they don’t know how to start building, and that makes sense in certain things in life. Maybe once you’ve acquired a property, there could be a right way to manage that apartment complex, but to get the property or to structure the deal is much more art than science. What I really like about what you’re saying is every one of us has experiences we can draw from from other things we’ve done in life, skills we’ve built from other things we’ve done in life, and real estate is not 100% independent of that.

David:
The things that we are good at from other parts of life will work within real estate investing, and you have to give yourself freedom to believe in yourself. That’s what I hear you saying is don’t assume you don’t know anything. There are some things that you know how to do. The art part of real estate is what makes it fun because it’s not an algorithm that you just follow mindlessly, right? I think the people that look at it that way are trying to remove a risk. They’re trying to remove failure. They’re trying to remove personal responsibility for how you put the thing together, and they find comfort in this understanding that there’s a right way to do it, but there’s not. There’s a right result you can get. There’s laws that have to be followed. There are principles and guidelines that we follow because we finally make it easier, but what I wanted to get out of you is what other experiences did you have in life that you applied to your real estate investing that helped you get seven units in the Denver area, which is a very difficult market to be investing in that others might not realize they could be doing too?

Marjorie:
Yeah. Here’s just an anecdotal story of how I started as someone who really enjoyed entrepreneurial, had an entrepreneurial spirit, had a very much passion for the buy and sell. It just always fascinated me. In the 2000 election, which I’m probably giving up my age a little bit here, but it was just before I could vote, and in Palm Beach County, which is obviously in Florida, they had this snafu where they did these things called butterfly ballots. It was really tricky for people to understand. So there’s a lot of people that voted for I think it was Pat Buchanan who was I think the libertarian. I forget who it was on the sheet. So they misvoted, and that is a piece of voter history.

Marjorie:
So somehow I had read something, that was the internet was all the rage, and I had read something where you could actually sell on eBay your sample ballots, right? Everyone gets a sample ballot before they actually go to the polls. So I asked my mother and father. I said, “Can I have both of your …” They both got one. So I said, “Can I have both of your sample ballots?”

Marjorie:
They said, “Sure, what do you want them for?”

Marjorie:
I was like, “Don’t worry about that.”

Marjorie:
So I put them on eBay and I got $40 for one and $50 for another. My mom was like, “That’s awesome. High five.” My dad charged me a little bit of interest on that. He wanted his cut of it. He wanted to teach me about taxes and things like that, but that’s the start that I had in terms of really just having the courage to just try things, right? Just get in there and try it. I was hooked after that, right? Some of I feel like what I’ve been able to do and with my partner as well is really get excited about deals, right?

Marjorie:
Do the research. Get into those, and I will say there is a little bit of mitigation on my end because I still do have my W-2 job, right? That is very important to me. I feel like I can take on more risk and try those things, things that I don’t know about and things that I have a little bit of research, but I haven’t tried it yet. I keep that job because of that, and not only that, but I like the diversification. So I really try to figure out a way that I can use all of my themes that I have learned, even that example of just buying and selling, where it’s like you didn’t even think about that, but all of a sudden you hear something or you see something or someone tells you something, and then you want to go a little bit deeper into that and you want to do that research and gain that knowledge.

Marjorie:
You don’t have to … People say analysis-paralysis so much, and granted, people should do analysis, but I think it’s so much more of trust in yourself, get those initial concepts together and then go for it. Take that experience that you had in the past. Take those things that you’ve learned, and it certainly helps because I look on the MLS pretty much all day every day. It’s my favorite website, even though I have favorites in terms of mobile apps, but I’m constantly looking at things. Anything that crosses my desk, it’s not a know. It’s really just a understanding of, “What does that look like? What would that look like to us? What would that look like to me? How does that mirror a deal that I’ve done in the past? Is it something that I’m knowledgeable for or I’m knowledgeable on?” and then trying to figure out, “How am I going to use all of my different strategies and all of my knowledge to go after that so that it’s the right deal for me?”

Rob:
So let’s hop into that a little bit because you talk about jumping into something that might scare you. I feel like at the very beginning of your real estate journey, every deal should scare you. For the first four or five years, everything should scare you because everything should still be pretty new. So can you give us an example of what kind of deals you jumped from and what was your confidence level going into them? Let’s start with your very first one. Maybe just walk us through how the progression of your portfolio evolved in the first three or four properties.

Marjorie:
Yeah, I would love to. So I feel like I don’t know how many people have gone into it this way, but we went into it very much like, “Here is the price of the home. Here is our loan. Here’s what PITI looks like on a monthly basis. Here’s what I can get in rent. Awesome. We are killing it. We are going to make money. This is just the start of our empire.” So we had no idea really what we were doing, but I felt as though when you look historically, and you look at really these investments that are more fundamental investments, especially in the history of our economy, I look at downturns and I look at upturns. Is that a word upturns? I look at the ups and the downs. Let’s put it that way.

Rob:
It is now.

Marjorie:
It is now, but I felt very confident because when I look looked at the history of housing prices and things like that, obviously this was after 2008 and 2009, but we were already back on an upswing. When I look at the markets and things like that, I had a lot of faith in order to do this because, A, even though I didn’t calculate for reserves and things like that, which is a pretty massive mistake, honestly, because we had a main line break right after that or we had to like replace the main line. So we didn’t have reserves for that. We learned our lesson pretty quickly after that, but I just felt like my partner and I both came from backgrounds and families where they had done real estate, and that they’d done it a long time ago and it was 2008 and 2009. Now, they’re still doing it.

Marjorie:
So I think we had a little bit of some mentors, if you will, in our past or people that we could mirror ourselves off of that were never afraid to really invest in real estate because it is that really good, tangible asset with tons of exit strategies, which we’ve learned a lot about over the past few years, but we started with that single family home as a long-term rental, and we didn’t do it right, right?

Marjorie:
Looking retroactively, we didn’t do it right, but the reason that we felt so comfortable is because, A, I had a really good partner to do that with, and B, we had a very similar background as to what our thoughts were going into it. So that offset some of the risk for me as having someone else be 50/50 in that with me, but also, historically, I’d had people in my life that had invested pretty heavily in real estate, and sure, they had taken some punches and bruises here and there, but ultimately, their portfolio and the accumulation of wealth had been, cumulatively, it had been up.

Marjorie:
So I just really wasn’t afraid. I couldn’t imagine that getting into this piece of real would really … Maybe I was too optimistic, but I couldn’t imagine that it would really go to a place where I would be in big trouble and then, “Could I sell it? Okay. Even if it takes a 20% hit, okay, that’s what my loan-to-value was 80%.” I was not really afraid because I felt like I had a lot of barriers around that and historically, a lot of confidence that this would just be a good investment, and even if it wasn’t, “Okay. That’s all right. I have a W-2 job. I can take on that risk. I sell it immediately.” There’s a lot of ways to get out of those investments, especially your first ones if it really goes poorly. So I just felt like it wasn’t actually a huge risk when you really looked at it holistically.

Rob:
Sure. So now that you’ve learned the lesson of the reserves on your first deal, how much do you typically keep in reserves? What did you actually learn tactically from that mistake that you called it one of your first big mistakes? How has that set up the procedure for managing reserves in any new investment that you do now?

Marjorie:
Yeah. We had zero reserves, nothing. We didn’t think anything was going to go wrong with the 1960s house like, “How could we have been wrong?”

Rob:
“What could go wrong with a 70-year-old house?”

Marjorie:
“What could go wrong? What could go wrong?” So once we had to replace the main line, which that’s all whole other story about a guy we hired, and then he ran off with some of our deposit, we had to hire someone else. So we got all the lessons in the first one, really. We got them all out of the way. So it was actually a blessing in disguise when you think about it retroactively, but when it was at that point, we were like, “Well, crap. We messed this up, but let’s keep going.”

Marjorie:
We still knew underneath it all that it was a good deal, but now, when we look at properties and whatnot, a lot of what we did on that first one, I never thought about it, but we did a lot of work to that first one. Actually, a lot of people say, “Just buy a place where you only need to update the aesthetics.” When we actually bought it, we were just like, “Okay. We just have money. We know we’re going to update it, but a lot of what we needed to update was the utilities, the functionality of the house.

Marjorie:
So we updated hot water heater. We updated the furnace. Denver has things called swamp coolers, which are synonymous with air conditioners. We updated a lot of those things. So in retrospect, I, in the beginning, was like, “Wow! I spent a lot of my money on things that people are not going to increase the price I get for rent,” and I was upset about that, but then when I think back about it, it’s like, “Well, my reserves actually could be lower because I’ve really fixed a lot of the core things that typically an operating cost would have to take care of,” something that I would have to have a reserve for because we know that plumbing is an issue. We know the electrical is an issue and we updated a lot of that.

Marjorie:
So I feel like what that taught us was we still try to look for houses now where a lot of those utilities are better so that we don’t have to have as much in reserves, but we play with it, right? We put our percentages of reserves based on how much attention that we’ve given to the utilities versus just the aesthetics of the house. So that’s not really a number per se, but I think that that’s how we think about it.

Rob:
Sure.

Marjorie:
We have found someone we really like for every mainline water inspection because in Arvada, Colorado, which is where we have that single-family, we learned that every single pipe that was built in that age range of home is clay, and I don’t know who came up with that, but that’s a terrible idea. So that’s a big one that we keep a little bit for that every single time even if it hasn’t been replaced yet. Sometimes we just say no to a house when it’s that old and it hasn’t been replaced because that’s about a $7,000 to $10,000 fix. So that’ll wipe you out for a long time.

Rob:
Oh, yeah. That could definitely crush returns there for a year. So you’ve talked about mitigating risk. You now have learned a little bit more around, yeah, what kind of reserves you want or what kind of properties you’re buying or not buying. You’re partnering up with somebody. It’s 50/50. So that mitigates that particular risk. Then you also have your W-2 job that is also bringing in the cashflow. So I actually wanted to get into that a little bit and talk about what’s your plan. As W-2 person, especially in your industry, obviously, I’m sure it’s a lucrative industry, but are you looking to seven properties starts to get to that point, especially if you have short-term rentals and everything like that where you might start considering heavying up more in the real estate side and siphoning off your W-2. What do you want? What do you plan to do here in the next few years?

Marjorie:
That’s a good question, Rob, and I feel like it changes probably every quarter, six months, a year. My partner and I like to sit down every year and go over what was our plan at the beginning and then how did it end up, and then what’s our plan for next year. I can tell you my favorite quote is that Mike Tyson quote where he says, “Everyone goes into it with a plan to get punched in the mouth.” I swear, that’s happened to us many different times, and it’s not as aggressive as being punched in the mouth. It’s just we just start to think something else or we want to go after something else.

Marjorie:
So my ideal is that I really still like working in a W-2 environment. I also like the fact that my company has a 401k match. I love the fact that I am diversifying a lot of my income and a lot of my investments through my current W-2 job, but a big reason why I got into real estate was that there was a part of that that was missing that I wanted more control over, and there was a part of that that just excited me at the same time, which is you can see across our portfolio there’s a lot of diversification in our portfolio as well.

Marjorie:
When I think about it long term, I think of it as a slow roll. I think I’m very, unlike a lot of people that I listen to on this podcast because they are about finding financial freedom, somewhat as fast as possible, I don’t quite feel that way. I feel like I get a lot out of my current job and what I understand and what I learn, and I can apply that to being better at real estate investing. So from my perspective, I agree with you. We keep saying that to one another where, “Okay. We keep getting all these properties. How are we going to continue to really figure out how to not only manage them on a day-to-day basis, but manage the bookkeeping of them, figuring out when we have to do all the due diligence around getting our accountant to do our taxes and things like that.”

Marjorie:
So I see it more as like one of those weighted scales, right? So right now, a lot of my time is very much focused on W-2 and here’s real estate because I want to put all of my focus that’s needed into W-2. I don’t want to short change my company who’s really treated me very well. Then I want to just, I think you see it, slowly transition that into potentially more real estate.

Marjorie:
So I don’t know how long that’ll take and I feel like our goals change pretty often, but I don’t feel the need to 10 properties and then I’m out the door. It doesn’t feel that way to me. It’s much more of a, if anything, I think I would take a lesser job. Some of the things that I’ve thought about are going into real estate technology because that’s an industry that is incredibly interesting to me and deserves a lot of disruption if you ask me.

Marjorie:
So yeah, I think it’s not necessarily a specific number. It’s more of a feel, “When is this getting to the point where I’m just so much more interested in real estate? We have so much more going on. I can do so much more,” and then making that shift. I don’t know that shift is going to be cold turkey. I think that shift is going to be more so cutting down a little bit more so that I can continue to mitigate that risk a little bit more with that W-2, but I don’t have to mitigate it as much.

Rob:
Totally. Yeah. I mean, I don’t think it should ever be cold turkey, personally. I mean, I always tell people, not that I’m ever offering advice on this subject to somebody, I mean, I think when it comes to quitting your W-2, your full-time job, there is no right or wrong, there’s just what’s right for you and what feels right for you, but for me, that moment came when I was working full-time job and I was also investing in properties and I was launching my YouTube channel and I couldn’t possibly do anything more. I couldn’t possibly invest in more real estate or make any more content until I gave something up, and that was going to be my W-2 job.

Rob:
For me, I probably honestly waited a little too long because I called my bosses up on a Zoom and I was started crying immediately, and they’re like, “Oh, no. What’s wrong?”

Rob:
I was like, “It’s nothing. It’s just I’m quitting.”

Rob:
They’re like, “Are you going to be okay financially? Are you okay?” Because I was a mess.

Rob:
I was like, “Yeah. I make so much more money doing the other stuff.”

Rob:
They were like, “Then what are you crying about?”

Rob:
I was like, “I don’t know. Healthcare?”

Rob:
So for me at that moment, it really was, it was the healthcare. It was the $2,000 expense of healthcare was truly holding me back from ever scaling up my real estate business or my content creation business or anything like that. So I’m curious, Dave. I mean, you’ve left behind a W-2 job. What was that moment for you? What do you recommend for people? Because, obviously, in this housing market, we’re having a lot of highs right now and a lot of success in the real estate world. So how would you navigate that?

David:
Well, YouTube both hit it on the head when you said it’s different for everyone. So my personality was I’m more conservative. So I worked that job as long as I could until my turning point was literally I had a listing and I couldn’t get it on the MLS for two days in a row because I was too busy at work. Then I was getting held over so I couldn’t get off work and do it when I got home. I just realized in my gut I’m not doing right by the client. I need to quit the job and focus on real estate, but there’s also the people who don’t have to quit their job but want to quit their job. That’s probably where I would want to put some advice right now.

David:
In a market that we tend to make decisions when we’re investing in real estate or in a lot of things that are opposite of what you see happening, so if you’re in a jujitsu match and someone’s pushing you, you want to pull them. You don’t want to push against them. You’d get tired. So when the market’s hot, we tend to pull, pull back. Don’t buy as much. Be more conservative. Have stricter rules that you’re going to be investing by. When there’s a down market, we want to be more aggressive. Do what you got to do. Borrow some more money. We’re doing things that are traditionally riskier, but because you’re at the bottom of the market, that risk is mitigated by cheaper prices and rising values.

David:
The market we’re in right now, we don’t know if we’re in the bottom or the top. That’s what is so confusing is prices are higher than they have ever been, but every indication says they’re going to keep increasing. So that traditional way of looking at it got a lot of people just arguing right now. There’s people that say you need to be buying, it’s going to run, and there’s people that are saying you be a fool to do that, you’re at the top, you need to hold back.

David:
So my response to that is to say I can’t tell which one of those is going to happen. I can’t predict the future. I tend to be in the camp of I think we’re going to keep printing and we’re going to keep driving up asset prices and so buying in the better cities, the better areas and the better properties is going to make you a winner, but I don’t know that.

David:
So where I pull back would be this is not the time to go live a life of luxury because you got some cashflow coming in from properties. This is not the time to quit your job out of luxury as opposed to necessity. What you two are describing is, Rob, you said, “I couldn’t work anymore. I was losing opportunity. I had to quit,” and, Marj, you’re saying, “I’m not at that point yet, so I don’t see that happening.” I think that’s the wise advice. When we don’t know what direction the real estate market is going to take, I want additional of income that are completely unrelated to real estate.

David:
So if we are at the top, I’m okay, I have money coming in, and if we’re at the bottom, I just lost a little bit of time and effort, but I didn’t actually lose money. So my advice to people is if you’re thinking about quitting your job, if it’s because you can make more money doing something else, that’s okay. Make sure that platform is going to be solid and the bottom’s not going to drop out from underneath you because that is a possibility. If you don’t have to quit your job, don’t.

David:
I know that that’s different than what every single other real estate investing influencer tells you. They’re all trying to convince you, “Quit your job and let me be the one to help you do it,” right? I’m way more into supplement your job. Okay? Fortify your financial position. Build up fortress around your job with rental properties and with flipping properties and with additional sources of income. Don’t look at it like, “Do I have to do one or the other?”

David:
With what we’ve seen changing in the pandemic, so many people are allowed to work from home, you do have more flexibility in many cases than ever before to make additional income, to do a side hustle. So that would be my two cents. Until I know what’s happening with our crazy market, I’m saying get a job and not only have a job, but build a skillset within that job so you’re solid. If they’re going to make layoffs, it’s not going to be you, and if your company does go under, you can get another job that makes more money or even try to make more money within your job.

David:
So I don’t have the crystal ball, but that doesn’t mean I’m not doing anything. So I’m in that same boat. I’m still buying a lot of rental properties. I’m still buying a lot of real estate, but I’m still working. I’m still earning money through these other businesses because I don’t know what’s going to happen.

Rob:
I think just having one stream of income is risky, right? For me, I try to have as many streams of income as possible, preferably a lot of different streams of income from real estate, from different asset classes, which, Marj, that’s what you talked about. I mean, you have a mixture of long-term rentals, short-term rentals. So yeah, I mean, I think that’s the only way to really mitigate risk is just to give yourself more options because for me at that time, it was actually risky, just for me personally, to keep my job because it was actually costing me money on my other businesses, and that was the turning point for me, but I agree. I think you should be really busting at the seams and spread pretty thin with your nine-to-five job and the other stuff you’re doing before you ever quit.

Rob:
I don’t think it should be like, “Yeah. I think I don’t want to do this. I don’t want to work a W-2. I want to just go all in on real estate.” Well, you still need the money. You still need to pay the bills. So I think it’s a tough call for a lot of people, but yeah. I mean, obviously, it’s case by case.

Marjorie:
Yeah. I mean, if you look at some of the largest founders of some of the biggest companies in the world, I mean, they all held their jobs, right? I mean, Steve Jobs or was it Steve Bosniac? I mean, they all kept their jobs before they really went off and put themselves 100% into these large companies. I don’t know, Malcolm Gladwell, I mean, a lot of people read him. I really enjoy all his books. In the Originals, he didn’t invest in Warby Parker when they came to him because he was like, “Well, they’re still holding onto their jobs. They’re not going in full steam, which means they’re not dedicated to this,” and he lost out on probably millions of dollars worth of profit on his investment.

Marjorie:
So I don’t know. I think it’s really just how you look at it and I thought you guys described it perfectly, right? It’s to each their own eye of beholder do what’s right for you. It does not mean you need to … I read a lot of the podcasts or listen to a lot of the podcasts, read a lot of the forums and people are like, “How can I do this immediately?” For those people, that might be right, but I think there’s a lot of people that almost look at it like, “Should I leave because everyone else wants to leave?” That’s the key to a happy life. I think you have to figure that out for yourself.

David:
Now, what about what we talked about earlier when we discussed looking at different deals or different opportunities in different asset classes and making the decision if this is right for you? Can you share your philosophy on your approach to looking at all kinds of different stuff?

Marjorie:
Yeah. I mean, I hate to say that it’s unscientific, but it’s probably slightly unscientific. I mean, I do a lot of it through word of mouth, and I can talk a little bit about this, too, but about three years ago, especially when I was getting interested in real estate and I didn’t really know really necessarily what to do and where to go to get the information, I hadn’t even found bigger pockets yet, and I looked on meetup, which I think a lot of people do to see if there was some real estate group and there wasn’t one.

Marjorie:
So I created one. It’s called Rocky Mountain Women Invest. It’s local to Denver. We started with 30 members. Now, we’re up to over 300. So pretty proud of that, but I will say a lot of the things that I start to get interested in is listening to speakers that come in and hearing about different people talk about things. We had to meetup last night and a woman was telling me, “Yeah, I buy land in Fort Collins. I buy land and I put like yurts and domes on it.” She said, “One of the most highly searched things on Google search engine is unique Airbnbs,” and she does really well.

Marjorie:
I just think it’s very unscientific how it comes to me, but then I get a little bit more scientific in terms of doing my research. So I mean, the ideas for things like that, they come and it’s about talking to a lot of people, and we have speakers that it’s so much about just hearing a soundclip or a soundbite of someone that’s doing something different and saying, “Oh, that’s interesting. Would that be something I’d be interested in? Let me look a little bit more into that.”

Marjorie:
Sometimes people come up to me and they ask me questions where I can’t confidently answer them and we’d never done a private loan before, but a friend of mine was like, “I want to have this duplex, and I’m only going to buy it if I really have cash to buy it with.”

Marjorie:
We said, “Okay. Let’s start looking at it.”

Marjorie:
So I don’t know that we try super hard. I’m not sitting over at my computer saying, “This is what I should be doing. I need to go for that.” I think it’s more so I pick up on a lot of it from podcasts and talking to people and certainly the investor meetup and things like that. How it comes to me is very unscientific, but how I research them and things like that I think is where the effort really needs to come in to feel comfortable to actually move forward.

Rob:
Yeah. So do you think you could really just clarify here? When you said that you were the private lender, give us the nuts and bolts of this. Were you actually lending out of your pocket to a friend to fund their deal?

Marjorie:
Correct. Yeah, definitely. So she had a duplex in Tampa, Florida. She actually owned the duplex right next door to it. She had found out that they were potentially ready to sell it, and she was hoping it wouldn’t go on the market. Then once it did, her strategy needed to change. So they had some offers, and she knew that she was not going to get it unless she had cash. So she came to my partner and I and she said … She had some other source of income too, but she couldn’t get that person to give her the full source. So she needed another partner to fill in the rest.

Marjorie:
She said, “I don’t need it for that long. It’s only a few months.”

Marjorie:
Actually, the woman I’m talking about is my co-lead at the investor meetup. So I knew her very well, felt very comfortable. She said, “I need X amount. I only need it for X amount of time, and here’s the percentage that I’m willing to give,” which is pretty standard. We were not planning to do another investment in the short term. Sure, having that money is great if you need to jump on something, but I really wanted to try private lending and I really wanted her to get this property.

Marjorie:
So she asked us for a certain amount. We agreed on a rate. My partner’s father is a retired lawyer, so that’s helpful. So he helped us make sure that we drafted up a good contract, and then I was able to really understand it too and help out and work alongside him because I had negotiated contracts before, but it gave me all the education as to all the things that he was thinking about that I just had never thought about.

Marjorie:
She was able to get that property, and then she just paid us back with interest a couple weeks ago, actually. So she only held the money for maybe three months and she HELOCed the property. So she was able to get that loan essentially to cover the amount and then pay us back. So it worked out really well. We did a bunch of just understanding. She’s super organized. She did all of her due diligence. We reviewed all of it just like we would when an underwriter comes to us and asks a bunch of questions, maybe not that in depth, but we understood. She already had a property right next door. She knew very well the value of the property, which made me feel very comfortable.

Marjorie:
We had my partner’s dad help us with the legal agreement. So that not only saved us money, but we got an education around that. Then I just trusted her in general because I’d worked with her for two years now. So I knew what she was doing. I knew the type of investing that she did and all the signs, all the bright lights of “Should you do this? Should you not do it?” were all pointed to yes. She had shown us all the opportunity that she would have with the HELOC and all the numbers and things like that she would have no problem getting that loan to pay us back. So it all worked out and all signs pointed to yes, and we pulled the trigger and it worked out really well.

Rob:
So if I wanted to go out and lend money to somebody, let’s say David, what are some of the things that we actually need to do? Is it as simple as a promissory note, and is it simple interest, compounding interest? How do the mechanics of something like that come together?

Marjorie:
Yeah. Again, ours was not super scientific. We agreed on a rate. That was what she felt that she could pay. She knew how long she would need that loan for. I think some people might not have done that because is it worth giving? It was about 100 grand, and is it giving 100 grand for X amount of time with that percentage? I think some people might not think the juice isn’t worth the squeeze kind of, right? So they might not do it. So we agreed on that. I think that was the biggest, which was to us, is it worth the opportunity cost of some deal came in? I’m not sure necessarily that I have a yes or no feeling around that, but we looked at what the property was. She already had her property right next door valued so we knew what the value of that was.

Marjorie:
When we went to do the loan or went to do the contract for it, there were a couple different ways that you could do it, right? Something that stands up in court that says you have a lien on this property so we would have to get paid essentially or there’s also the other opportunity where we could have actually had her sign over X amount percent of that property should she default. So there was different opportunities to do that. I felt very comfortable with having something written that basically said we have a lie on the property because you owe us this money. So we would essentially be able to bring that to court should anything have gone wrong and say we own X percent of that property because we paid for it and we’re entitled to that.

Marjorie:
So I don’t know if that’s enough of the specifics per se, but-

Rob:
Yeah. I think so.

Marjorie:
… we locked it up pretty confidently and a lot of that reason is because we had my partner’s dad who had negotiated contracts like this in the past. So we learned about it, but overall, more than anything, and I hate to say this because trust is very important, but obviously in the letter of the law, it’s not important, right? Just having a trust and a hope and a wish is not really anything, but we felt like we had enough information in that contract, which there are many good lawyers to work with that, can put together a contract like that for you.

Marjorie:
We’ve had some speak at the Rocky Mountain Women Invest. So I think you should always have a contract and a lock tight contract and agree on how long it’s going to take this person to pay you back, and then what happens when they don’t pay you back after that amount of time. Agree on a rate. What happens if they don’t pay you that rate? Do you want them to pay you monthly? Do you want them to pay you all at the end? These are all the types of stipulations that you need to review with this person if you’re going to loan them money.

Marjorie:
Again, trust that person, right? Get to know that person aside from just putting the numbers together. I don’t know. I don’t know that I would blindly loan to someone I didn’t really know. That’s not my main business, and if I do it again, it will definitely have to be with someone who can provide me all those numbers, and that I know them because it feels better to me.

Rob:
Sure. So I guess what you’re saying is don’t just lend your money out to strangers, which I think is a pretty good tip. I think that might be our quick tip for today’s podcast, but obviously, when you’re putting together these promissory notes and these contracts, they have to go on some fancy stationery. So I’m curious, do you have any tips for using fancy stationeries whenever you’re curating some of these contracts?

Marjorie:
I have never used stationery except for one specific time, and it was to ask someone to sell me their house off market. So no, everything was digital for that contract, but if that’s your lead into this flip conversation, that is a perfect lead in because-

Rob:
It sure is.

Marjorie:
… yeah, I have stationery. I’m pretty sure that was from college. That was given to me by an aunt or something like that, and I’ve never used it, but I’ve always kept it because I was like, “Someday this will come in handy,” and that was, I think, a big reason how I got an off market property, actually.

Rob:
So yeah, tell us about this deal.

Marjorie:
Yeah. So this deal was in the best location possible, and when I say it was in the best location possible, it was in the best location because it was across the street from us. So it was across the street from our primary residence. We actually didn’t really know these neighbors very well, but another neighbor who I was very friendly with had said that this couple was moving out of state. They were retiring, they were moving out of state.

Marjorie:
I said, “Wow! Do you think they might want to sell their house to me?”

Marjorie:
She said, “I don’t know. Go ahead and ask.”

Marjorie:
So I was outside getting the mail, doing something, and I saw her. Her name is Wendy, going to start walking the dogs. I walked up to her and I said, “I hear you’re leaving us.”

Marjorie:
She said, “Yup. We’re we’re flying the coop. We’re going to retire in Northern Idaho.”

Marjorie:
I said, “Wow! Are you guys going to list your house soon?”

Marjorie:
She said, “Yeah, I think so. We haven’t really decided what to do with that.”

Marjorie:
I said, “Well, listen. We have a couple rental properties in the area. We’re familiar with buying and selling real estate, and we would love to make you a really competitive offer to sell.” I said, “We have a friend of ours who’s an agent and so you would actually have to pay no commission because she would come in and partner with us. So we’d save you on that. You wouldn’t have to go and get your house in a good state for sale,” because they had three dogs. So I know that they did not want to have to shuttle these dogs in and out to do showings and things like that.

Marjorie:
I realized, too, in talking with her that she also really didn’t want to do a lot of work to the house, and the house did need some work. They did a good job keeping it up, but they hadn’t made any aesthetic updates. They hadn’t really done any large scale updates that probably might have needed to some deferred maintenance that needed to be done.

Marjorie:
I said, “Think of us. Let me know what you think. If you want to talk with your husband, we’re certainly willing, and there’s no time frame for us. So we can be as flexible as you guys need to be.”

Marjorie:
She said, “Thanks.”

Marjorie:
So I went back into the house and didn’t think anything more about it, right? I’m going to shoot my shot and see what happens, but I did want to memorialize the conversation. So I took that really pretty purple stationery. I don’t like pink and purple. That’s not my color, but I took that pretty purple stationery and I wrote a very nice note on it just to memorialize our conversation and say, “Wendy, we would love to do all these things. Here are the things that I think would be really beneficial to you. Let me know if that works for you guys.”

Marjorie:
Got the mail. She had waved one time when I was driving away and said, “We got your mail. Thanks,” blah, blah. Still thought nothing of it. A month later, she caught me as I was doing something outside and said, “I think we want to go with you guys.”

Marjorie:
This is after we had just finished stabilizing another long-term rental. So we were exhausted. We were very tired. So I called my partner on the phone and I said, “Hey, so good news? We got another property.”

Marjorie:
She was like, “I thought we promised ourselves that we were going to take a little bit of a break.”

Marjorie:
I was like, “Nope. This is too good of a deal. Let’s do it.”

Marjorie:
So anyway, it was a flip across the street. So we did get 30-year mortgage for it. So we knew we were going to have some carrying costs, but I think the magical thing about this was that we brought in an investor, a friend of ours who’s actually an agent because I do not have my real estate license and neither does my partner. So a big opportunity for getting this under contract I think was that the seller did not have to use. They didn’t have to have a representation.

Marjorie:
So our agent, our friend, our investor acted as a transacting broker. So she was representing the seller and she was representing the buyer. I think the nice part about this whole thing was that we actually hugged after we got to the contracting table. They were so happy. I think in a lot of ways you think that you’re taking advantage of people. They were so happy that we were doing this for them. They were so happy because they were building a house in Northern Idaho. We were giving them cash immediately. We did a rent back for her because she had a little bit of a retirement party that she was going to. So I feel like both sides really got something really good out of this. I think a lot of times people feel like, “Oh, you got a house off market. You must have tricked them,” or “You’ve done something,” or “You offered them something, and that wasn’t right.” No, this was fantastic. Both sides were equally happy about this.

Marjorie:
So in terms of the numbers, which I’m looking at right now, but in terms of the numbers, so we paid 460 for the flip and we felt like that was actually pretty good. We thought we could actually spend all the way up to probably about 500 or a little over 500 and still make the money that we wanted to make. Aside from the acquisition cost in terms of rehab costs and carrying costs, we paid about 95,000 combined, and then we wanted to list. So we got ourselves into the 550 range. We had assumed that we wanted to make about a 100K. So we were going to list it at about 650 if I’m just creating simple math, and because the market just exploded while we were doing this, we already thought we would do well because we saw some of the comps, but we ended up listing for 645 and we sold it for 741.

Marjorie:
So like I said earlier that Denver’s a hot market, Denver is a hot market, but to some of the stuff that we were talking about earlier, this is where I just couldn’t say no to this deal. We had never done a flip before, but you just knew inherently by knowing different things about the deals you had done previously. We had talked to so many renters that were going to rent some of our properties and telling us what the rentals look like, how they had to rent because they couldn’t buy a house.

Marjorie:
So we ingested all that knowledge somewhat ominously in terms of we just knew it was a good deal because we had been in this space, we had seen what the numbers were doing, we had friends that had told us what was going on. Rocky Mountain Women Invest speakers had also told us. So it was just through osmosis that we had understood that when we looked at this deal and we looked at all the numbers, we were like, “Yeah.” We already had a crew to do the rehab, and we have a fantastic crew. I mean this, our contractor is like our older brother. He’s amazing. It just ended up really, really well. We nailed it and I’m so happy that we went forward with the deal.

Rob:
Congratulations. Well, I think that’s a very rare circumstance where you want to hug the opposite party at the end of a transaction. I’m waiting for that day where I want to hug the opposite side of that because it’s always a little tense there at the end. So that sounds like a really good deal. Congratulations. So what was the exact profit on that after you listed it and you said it went for 741?

Marjorie:
Yeah. So splitting it three ways across the three of us, everyone got about 55,000 each. So in terms of return on investment, it was about 75%.

Rob:
Really nice. Congratulations. So then obviously, you took your 55,000 and bought a nice car?

Marjorie:
Do you mean that we put that money into the house that we just closed on this week because we’re gluttons for punishment and we can’t stop. We’re just real estate junkies.

David:
I don’t know how much punishment that is making $55,000 three ways.

Rob:
Oh, man. I hate making 55,000.

David:
Yeah. I was just really tired from the last deal and I didn’t know if I wanted to. I just gritted my teeth. Real estate’s horrible.

Marjorie:
So here’s the other problem where in the beginning of the story I said it was the best possible location. It’s actually the worst possible location, too, because now you have neighbors that know that you were the ones that did this work because all your other neighbors saw it. So I don’t feel badly. We did a really good job on that house, but I think it was somewhat serendipitous that we got this other place and we’re actually moving into to it.

David:
Well, you made those neighbors a lot of money is what you did. Their houses are all worth quite a bit more after that.

Marjorie:
That’s right. We had some realtors on the street that had been looking, and I was looking across the street through the window and we had some other neighbors looking through it and I was like, “We must have done something well. They’re so curious.” So they were very happy.

David:
All right. So you’re clearly good at making money on deals. We want to hear about another deal that you’ve done. We’re going to move into the next segment of our show, The Deal Deep Dive. All right. Marj, in this segment of the show, we are going to dive deep into one particular deal you’ve done, Rob and I will alternate asking you questions and you can fire right back at us. Question number one, what kind of property are we going to be talking about?

Marjorie:
We are talking about a multi-family property. It is a triplex.

Rob:
Question number two, how did you find it?

Marjorie:
So like I said, we can’t stop ourselves from looking on the MLS. I’m on Redfin all of the time. I think that they have the best mobile app experience, actually. So when I have a little bit of a break or I’m waiting for someone to join a Zoom, I am constantly looking on the MLS to see what’s going on, if not for a property, to see what other houses look like and what the price is and things like that. I’m just ultimately curious about every single house that gets listed.

Marjorie:
So we saw this one. It probably was on the market for I think less than an hour when it it listed and I shot it over to my partner immediately. I was like, “This is really interesting. Please look at this.” So they came into my office and they said, “What are we going to do? This is interesting.”

David:
How much was it?

Marjorie:
The price, it was listed at 1.4 million.

David:
Okay, and then how much did you buy it for?

Marjorie:
So I’m very prideful of how we got this deal because we actually decided to go into it. We just directly called the seller’s agent and we introduced ourselves and said what our intent was, “We’re investors in the area. This is a really interesting property. We want to live here. What’s your comfort level in terms of being a transacting broker?” Come to learn now, he is a commercial broker. He’s not a residential agent. So I think in general, he works with the guy that owns this, who owns a lot of commercial real estate. I don’t know if I can say this, but it’s actually an NHL player that we’re buying this property from. He actually used to be part of the Colorado Avalanche, but I guess it’s all public records so it doesn’t matter.

Marjorie:
So we started talking with him and presenting ourselves in a way that we thought that he would be very interested. When we started to talk with him more and more and ask questions, the place was fully furnished. The seller didn’t want to deal with furnishings. The seller was out of state. This guy being the seller’s agent was going to have to do everything, right? He was going to have to work on the staging. He was going to have to get the mobile notary. He was going to have to do everything.

Marjorie:
We said, “We’ll do all that for you. You don’t have to worry about the furniture. You don’t have to do any of that stuff.”

Marjorie:
The other thing I think he was pretty nervous about was that this was a very funky property in the sense that it’s surrounded by a lot of single-family homes in that price range. I think he wanted someone to take it on that understood that type of real estate and that wasn’t afraid to take on something along those lines because I think when people think about paying $1.4 million, they want an amazing single-family home and this was not. This was not the same thing.

Marjorie:
So we really presented ourselves as someone who really understood what he was asking for. We would do everything, and then we would not bring a buyer’s agent so that he could figure out with his client. He could save his client some money. He could also negotiate his commission with his client because they have a long-term relationship. So he could come out looking really well, too, and then he could really have more control over the deal as well.

Rob:
That sounds basically how you negotiated it. How did you fund it?

Marjorie:
So we funded it through a majority of the profit that we made off of the flip and then we had done a cash out refi on our primary residents. One of the speakers that I listened to at the Rocky Mountain Women Invest had said to me once, “When you have equity in your home, you’re not earning equity on your equity. You’re earning that because you bought the house to begin with and that house itself is earning the equity, but if you took that money out, you’d still be earning the same amount on that house. So you’re essentially just having money sit there and do nothing for you.”

Marjorie:
So we ended up taking money out of our primary residence. So we used a combination of that and a combination of the profit from the flip, and that was what we were able to use as a down payment, but it was a residential loan so we did 20% off of that, and we offered through talking with this agent who did accept being the transacting broker and talked to the client and they were all comfortable, we talked with him and said, “What is going to get this deal done so that no one else goes and sees it?” because when I called I was pushy and I was like, “Just let us see it. I know it’s not staged or cleaned. Just let us see it. We don’t care. We don’t care at all. Please just don’t,” and he didn’t have any appointments till Saturday. We made an offer with a expiration of Friday night. So we made an offer of 1.5. So we went 100K because we were like, “We’re done with this. We know how hot the market is. We know what the opportunity is for this property. We’re just going to go for it.”

Marjorie:
So we were out Friday night, got a text from the agent who said, “You got yourself a deal.” So no one else even saw this property. It was ours. They took it off the market immediately.

David:
How did you fund this deal?

Marjorie:
So we funded them through a 30-year fixed mortgage, and we put 20% down because it was a residential property because we would be living in it. So we didn’t have to pay the extra 25 or the extra 5% that you would with more of a standard loan on investment property, which would allow us to outfit this property in a way that we were okay living in a multi-family because we haven’t lived in one before.

David:
I’m curious, how did you find whatever lender you ended up using?

Marjorie:
So lender we used is actually a woman that had spoken at the investor meetup, who I invited to speak and she’s fantastic. I’ve actually used her for almost all of our deals. I know that people shop around for a lot of different rates and whatnot, but because a majority of our income and debt and things like that are in real estate, I really feel comfortable with her because she’s very creative in terms of how she can get the underwriter to understand what our assets are, that rentals are not necessarily debt but they’re assets.

Marjorie:
So she does a really good job of helping us and being creative to get not only good rates, but also get us under contract. So it was a lender that we had worked with. I think she’s done all of our rental properties at this point.

Rob:
Awesome. What did you do with it? Flip, BRRRR, rental, all of the above?

Marjorie:
I would say it’s still pending, but we will be moving out of our primary residence in Arvada. This house is in Denver. So we’re moving out of our primary residence. We will be occupying … So it’s a three-unit in the sense that there is an ADU, a brand new ADU in the backyard, so an accessory dwelling unit in the backyard. We will be living in that. Then there is a front house to this on the same property that has an upstairs unit and a downstairs unit. So like the theme of this entire podcast, we’re going to try our hands at something new again. This is our first multi multifamily, but it’s also going to be our first short-term rental. So we’re going to short term rent the basement unit while we’re there. So we’re trying another one.

Marjorie:
The nice part about this deal, too, is that in terms of what we were paying for our mortgage on our primary residents to get into this house, obviously more money down, but to get into this house, it doesn’t really increase our mortgage at all. So we’re going to be able to offset quite a bit of the cost of this with renting out the front unit upstairs and downstairs and then get over ourselves an education on Airbnb as well because that’s the next thing that I really want to learn more about.

Rob:
I wonder if there’s anyone that could help you with that.

David:
Something I want to highlight about what you mentioned is you bought a much more expensive house but your payment did not go up. I like to bring this up because a lot of people associate higher price with more risk. It’s like this leap of faith. You have to take, in many cases, higher price equals less risk. You get into better neighborhoods. You get better tenants, especially when interest rates were lower. Now, you’ve got several units that you can be renting out. So you’ve diversified income streams. It’s less risky than when you’re buying at a lower price point in a worse neighborhood or a worse property. So that can be tricky when you’re making your way through real estate and you’re getting into bigger and bigger deals. They feel scarier, but that doesn’t mean that they are, and you also answered the question about what was the outcome. So last question will be, what lessons did you learn from this deal?

Marjorie:
I learned, I think, how to communicate with my partner and encourage them to live in a multi-family deal with me because there’s some no-nos that we have in our relationship, which is I’m not going to live in an eight-unit apartment complex. Craig Curelop always says, “The more money you make based on the more uncomfortable you are,” and we’re not okay with all of that uncomfortability. So I feel like we found the perfect property to figure out how we both could live in this and feel good and have it be a good investment, but also a comfortable space for us to live in.

Marjorie:
So I feel like that was a milestone in our relationship, which is trying to figure out what is our limit or what can we do from utilizing or leveraging our own ability to live in these properties that we want to invest in. So I think that was a win and that doesn’t seem like much, but actually, I think with people who are spouses and things like that or have partners, it’s actually good to figure out that common ground of where you can be.

Marjorie:
Then I think in terms of that outcome, I’m excited to learn something new. I’ve talked with a lot of people that do Airbnb, but we’ve never done it ourselves. I feel as though it’s somewhat a less risky way of getting into that being that you’re right there, which could be a good thing, could be a bad thing, but I think while we live there, it’s great and our exit strategy can always be we could rent the whole thing. We could rent long term upstairs and downstairs. So lots of different exit strategies. I think it’s just another notch in our education process to help us continue to want to invest in different types of opportunities, but also different types of real estate investments.

Rob:
For sure. Well, for the record, I do think that being there is definitely the least risky way to do it. If you’re there, you can pretty much handle any situation instantly. Whereas if you start investing a little bit farther out, you got to depend on your team more than on yourself. So I think you’re doing it right.

David:
All right. That will bring us to the last section of the show. It is the world famous-

Speaker 4:
Famous four.

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

Marjorie:
Real estate-related? I’m currently reading Brandon Turner’s Multifamily Millionaire, which I think people like to have these obscure ones and things like that, but that one is just so dead on, just really easy to understand. Multi-family, I think for some people it’s intimidating, but the concepts that he uses in there, it’s like I can hear Brandon talking to me and narrating this book because it’s so in Brandon Turner speak, but he makes it so incredibly simple that I feel like he’s just beating me over the head with these concepts, and if I can’t get at them, then I don’t think anyone can get them, hopefully. I don’t consider myself such an amazingly smart person, but I think it’s so well done and it breaks it down so easily that it’s a two part book. This one’s the smaller multi-family and then there’s another instance of it.

Marjorie:
So I don’t know if I would say it’s my favorite, but that’s what I’m reading right now. I tend to read books that are not necessarily as much real estate-related. So that’s what I’m reading right now. I’m enjoying it, and if you want to learn about multifamily, I feel like that is a really good, concise, easy to pick up and easy to read book.

Rob:
Awesome. Okay. Question number two, favorite business book.

Marjorie:
Okay. This is the one that I was excited for, but everyone has those turning point books in their lives. My turning point book, and it actually was one that I heard another guest on the podcast talk about, which I got it for networking, honestly, and it ended up being conceptually so much of what I live my life by, but the book is Give and Take by Adam Grant, which I’m sure other people have talked about on this podcast, but I just think the good of it is just so amazing, and a lot of what it talks about is really around that giving, it makes you so successful in so many areas of your life, business, relationships, networking, everything.

Marjorie:
It’s really what I think about when I do any deal, whether that’s in real estate or in my W-2 job or in my relationship or in a friendship and just it’s amazing to me if you are a kind person that gives back, you will ultimately be successful. There’s so many ways that that can infiltrate your life. So I highly recommend. I don’t even know if it’s so much business, but it’s just such a good book. The person that I got that from, he was a master networker, and he thought that book was really good and helped him. I would say yes in networking, but every single area of your life. So I really highly recommend it, and I think it makes me very much a better negotiator. It’s giving back to the community with Rocky Mountain Women Invest, but highly, highly recommend.

David:
Yeah. We interviewed Adam Grant on our podcast episode 467. So if anyone was curious to learn more about old Adam, you can check him out where Brandon and I interviewed him. I also recently think he made cameo on HBO series Billions. I’m pretty sure I saw him on there. It’s a really quick scene, but if anybody out there has any access to the production team of Billions, let them know that Rob and I would be a very good asset to bring in for a real estate-related role. All right. Back to regularly scheduled.

Rob:
We are willing to be ascendants also, just if you’re just looking for that.

David:
Rob, you could probably play my butt double, I suppose. You mean do a couple months of squats, make sure I look good, but yeah, I can see that.

Rob:
We’ll negotiate off camera. Question number three, outside of taking on really crazy real estate projects that scare you and that you’re willing to take on head first, no, that’s not, take on head on, there we go, what are some of your hobbies?

Marjorie:
I love sports. I’m a highly competitive person, which makes me a really good fit for a sales role, but also, I’m a big car enthusiast. It was how my dad and I bonded I think a lot as a kid. So there’s a guy I follow who invests in Northern Colorado, Mark Ferguson, if you guys have heard of him, and he’s a 95%-

David:
He talks about his Lamborghini every now and then, doesn’t he?

Marjorie:
Just a moderate amount, just a moderate amount, but I like his theory on it because I think it aligns well with mine, which is he’s also open to alternative investments, which you could. It is classified that real estate investing is an alternative investment, but cars are also alternative investments. So I try to though just like him find cars that are unique enough that they appreciate and value because it’s a little bit of a bad habit in terms of opportunity cost sinking money into that versus real estate. So I try to keep it at a point where my partner and I both agree that it’ll hold its value or it will appreciate, and that I don’t go and sink something into a car that’s just going to just tank right off the lot or something along those lines. So you can find me definitely at some car meetups because I do love that.

David:
All right. Last question for me. In your opinion, what sets apart successful investors from those who give up, fail or never get started?

Marjorie:
I think looking at every deal. I think know your bounds, but anything that fits into your bounds always say, “Yes, I’m at least going to review this.” Try something new. From my perspective, I think once you get dead set in doing something, you have blinders on to other opportunities that might come up. I think it’s great to get very specialized, but don’t, I guess, negate the opportunity to listen to a new deal or someone’s experience or something like that, and then go research it for yourself. Try it. There’s so many different ways and so many different people that can help you figure that out, and don’t be afraid to take on the risk.

Rob:
Well said. Well, final here, not a question, but, Marj, earlier you were telling us you had 300 followers on Instagram and we got to pump up those numbers. So can you tell us a little bit more about where people can find out more about you, where they can follow you on the socials?

Marjorie:
Yeah. David and I were talking about those. I have a terrible Instagram name, but if you want to follow me, I sometimes posts there. My Instagram is TheeMarjPatton. So T-H-E-E. Terrible, but I am much more active on our Rocky Mountain Women Invest Instagram. So it is just like it sounds, Rocky Mountain Women Invest except the Mountain is spelled MTN, and you guys should absolutely come if you are in the Denver area or if you’re just going to be here sometime if you are a female or a woman looking to get more, find a community, network with people, listen to really good speakers. We’re trying to grow this thing and it’s just one of my favorite things. So I’m always happy to talk and certainly talk about this podcast and you can tell me if it actually was helpful or not helpful, whatsoever. So I to totally welcome it, but yeah, look forward to that.

Rob:
That’s awesome. Did you say that your Instagram handle is thee like T-H-E-E?

Marjorie:
Oh, yes. Embarrassingly, yes.

Rob:
Very proper. I love it. David, I think we just figured out the solution to your TikTok problem, TheeDavidGreene.

David:
Because you do copy Zerber so it fits with the sir thing.

Rob:
Yeah.

David:
Yeah. This is good. Increase thy pockets or something. I can see a way that we could work this in there. Increase thy pocket size.

Rob:
Thy David Greene, and you could keep the 24 if you want. I’m relatively certain there aren’t 23 people that-

David:
No, but we should change it to one score and four more or something like that. Isn’t a score 20 from the old Abraham Lincoln? Four score in 20 year. I don’t actually know how much a score is.

Rob:
I think that is correct. I just don’t know what it means. I’ll be totally honest. I’ll be vulnerable just for all of us.

David:
Well, you’re doing it in a moment of ridiculousness, so good idea. Rob, if people want to find out more about you, where can they can they do so?

Rob:
They can always find me on the YouTubes. If you’re looking to learn how to build tiny houses, Airbnb businesses, unique spaces, real estate investing and everything in between, you can always find me at Robuilt, R-O-B-U-I-L-T, Instagram on Robuilt, TikTok Robuilto, and yeah. That’s it for me. I mean, you can follow me on Twitter, too, if you want, Robuilt channel, but the first three are more important.

David:
Yeah. I forget I have a Twitter a lot of the time. I need to be better about that. I just hired a social media company to help run my pages. So I need to remind them that.

Rob:
Well, this is going to be the turning point where we get you to go viral in the Twitter sphere. So what are your handles?

David:
I heard AMMA, he’s actually a former Olympic wrestler, Henry Cejudo, was trash talking someone else and he said, “You couldn’t pin a tweet,” and I thought that was very funny, and also reminded me that Twitter is still around. So my handles are DavidGreene24. As Rob likes to say, there were 23 that came before me and I was able to snag the 24 spot, and then we’re trying to figure out what my name’s going to be on TikTok because everybody else … I think TikTok is the most visited website in the world more than Google, right?

Rob:
It’s true, especially now that you’re dancing on there.

David:
Well, do you think that I could have something to do with that? I’ll take the credit for it. It seems impossible that something could have more visits than Google. That is one of the feats of the world I would say that you should put up there the most impressive accomplishments anyone has ever accomplished. To have anything more than Google seems like it would have to be up there. So yeah, that TikTok thing. I’m also afraid to get on it, though. Brandon has warned me numerous times how addicting it is. So I just won’t look at it. It’s like Medusa. As long as I just don’t make eye contact, I think I’ll be okay. So I’ve hired other people to go post stuff on there.

Rob:
I hang out with some friends every Wednesday night and at the end of the night, one friend always broadcast his TikToks, what he’s liked, and it’s always just crazy stuff. Then I always look at mine and it’s always entrepreneur, real estate, tiny house-related and I’m like, “All right, good. I haven’t fallen for it yet.”

David:
You’re dancing with the devil in the pale Moonlight. I got to tell you, Rob. All right. If anybody would like to invest with Rob and I, we are still raising you for a deal that we are doing. You can go to investwithdavidgreene.com or you could just shoot us a DM, credit investors only at this time, but if you’re looking to make some money and you’re just nervous about this market, you don’t want to try to figure it out yourself. This is a great alternative, Marj, I want to thank you for being on the show and being such a good and compelling storyteller. This was a very good time. Is there anything you’d like to leave our audience with before we get out of here?

Marjorie:
No. Come see us at Rocky Mountain Women Invest. Thank you guys so much for having me on the show.

David:
All right. This is David Greene for Rob dancing with the devil in the pale Moonlight Abasolo signing off.

David:
What was the name of that guy that was on the cover of all the romance novels.

Rob:
Oh, Fabio?

Marjorie:
Fabio. Fabio.

David:
Fabio. You could be a Fabio.

Rob:
I don’t think I could pull that off.

David:
You are, man. You’ve got this very, very Dos Equis most interesting man in the world presence.

Marjorie:
You’ve got the hair for it I think, too.

Rob:
That’s right. Well, maybe I’ll change my channel to Fabiobuilt.

David:
Well, yeah. It’s just Rob is so flat. It doesn’t do you justice. That’s just my opinion.

Rob:
Hey, you know what? Your opinion is valid. We’re all entitled to our opinions.

David:
Yes, and you’re entitled to change your name to something that fits whenever you see fit.

Rob:
Hey, you can call me Fabio anytime you want. By the way, welcome to BiggerPockets.

David:
All right. Marj, welcome to the BiggerPockets podcast. How are you?

The real estate market is still as hot as its ever been. Despite rising interest rates over the past few months, the market continues to set new records. 

Many anecdotes point to it being a simple farce. For example, homes have sold for a million dollars over asking price in San Jose, Washington D.C., and San Francisco.

In Jackson County, Missouri (which holds most of Kansas City), only 0.8 months of inventory was left in March. In other words, for every five homes that sold in March, four remained on the market going into April. For comparison’s sake, a “balanced” market that favors neither buyers nor sellers has six months of inventory.

Overall, prices are up 14% year-over-year and have almost doubled since the trough of the Great Recession. But a few other national stats from Forbes paint an even better picture:

• “Active listings (the number of homes listed for sale at any point during the period) fell 22% from 2020 and 41% from 2019.
• “45% of homes that went under contract had an accepted offer within the first two weeks on the market.
• “32% of homes that went under contract had an accepted offer within one week of hitting the market.
• “43% of homes sold above list price.”

Indeed, the average sales price was 100.5 percent of asking. If you look at home prices from 2000 to the present, even the Great Recession looks like little more than a minor setback:

And while the pace of increases has slowed with rising interest rates, it’s still on an upward trajectory. 

But why is this happening?

The correct answers relate to COVID-19 and the Great Recession itself. But let’s start with what’s not causing the housing boom despite the endless proclamations from various pundits.

Non-Cause #1: Wall Street

Wall Street always makes for a good villain, and they certainly have had their share of scandals. For one, CEO of Gravity Payments, Dan Price, stated that Wall Street firms owned over 15% of all single-family residences. 

Fortunately, he was off by a factor of about 30. If Wall Street is trying to make “a nation of renters,” they’re doing it at a snail’s pace.

In 2018, there were about 83.3 million single-family homes in the United States. As Gary Beasley notes in Forbes,

“Researchers at my company, Roofstock, estimate that large-scale landlords today own approximately 450,000 of the roughly 20 million single-family rentals in the U.S. While this represents considerable growth over the past decade, it represents less than 2.5% of all single-family rentals and less than 0.5% of all single-family homes (including owner-occupied).”

While the added competition Wall Street brings will technically affect prices, the margin is negligible. Furthermore, the share of single-family properties being bought by investors of all kinds has actually been declining since 2013.

Wall Street’s effect on housing prices is tiny. So if it’s not Wall Street, what’s another popular villain to blame? 

Non-Cause #2: The War in Ukraine

Russia’s invasion of Ukraine has certainly exacerbated supply chain issues globally. Still, it is not the cause of inflation in general and certainly not the cause of price increases in housing. Indeed, inflation was already 7.5 percent in January and 7.9 percent in February. The invasion of Ukraine started on February 24.

This excuse seems bizarre to me. While the timing is off with inflation, it’s wildly off with housing prices. 

Like Wall Street, it may be fun to blame Putin for everything, but this one isn’t on him.

So let us turn to what is really driving home prices through the roof.

Cause 1: More Money, More Inflation

“Inflation is always and everywhere a monetary phenomenon,” the famous economist Milton Friedman once said. I think this is a little simplistic, but it’s certainly true that all things being equal, more money will equal more inflation. 

And there is undoubtedly a lot more money in the economy these days. According to Tech Startups, about 80% of all dollars in circulation were printed since the beginning of 2020! While these numbers have been challenged to varying degrees, there is no question that a lot of money was pumped into the economy as Covid threw the entire world into a tailspin. 

For example, here is the Fed’s chart for the money supply:

Milton Friedman, as mentioned earlier, also introduced us to the Quantitative Theory of Money. The equation looks like this:

M (money supply) x V (velocity) = P (price level) x T (Volume of Transactions)

In other words, the amount of money multiplied by how fast it’s spent equals the prices multiplied by the amount of stuff being bought.

During the height of Covid, the money supply dramatically increased at the same time the economy took a nosedive. In many ways, these two things counteracted each other as the economy’s slowdown in 2020 reduced the “velocity” of money. To put it simply, the number of times each dollar was spent decreased. This is what kept inflation in check during 2020 and for most of 2021. 

So, for example, if I have one dollar and buy a widget from you, and then you turn around and buy a piece of candy from John, that dollar has been used in two transactions. The velocity of that dollar stands at two, and there might as well have been $2 in the economy. On the other hand, if I had two dollars and then bought a widget from you and a piece of candy from John and both of you held that dollar, the velocity of each dollar is one. 

In the second scenario, the money supply is twice as large, but the inflationary effect is the same as in the first scenario since each dollar is spent only once.

Whenever there is a recession, velocity is reduced. But now that the economy has picked up again as COVID has waned, velocity is accelerating, but with many more dollars in circulation. Thus, we have a higher money supply (M) and higher velocity (V).

Thus, inflation. 

In the end, what we call “appreciation” in real estate is really just housing inflation. But that doesn’t sound as nice, so we made up a different word for it.

Of course, housing inflation is particularly spurred on by interest rates, which despite recent increases, are still at historic lows.

The discount rate is the rate that the Federal Reserve lends to other banks. Historically speaking, it has mostly hovered between 2%-6% but has climbed as high as 13% when Paul Volcker decided to “break the back of inflation” in the early 1980s.   

The discount rate has been below 3% since the Great Recession of 2008 and has remained around one. It dropped to zero after COVID, and the Fed only raised it again in March 2022. 

Even the Fed’s announced plan of raising the discount rate to 1.9% by the end of 2022 and to 2.8% by the end of 2023 would keep the discount rate below the historical average.

Interest rates are also low in real terms (versus nominal). Given that inflation is at 8.5% around late April 2022 and the average 30-year mortgage is just over 5%, that still means the cost of borrowing is less than inflation, which really shouldn’t be a thing. And, of course, interest rates a year ago were even lower, with some people getting mortgages under 3%, somehow.

Low-interest rates obviously encourage home purchases. In addition to that, there are still a ton of government incentives to purchase a home. For example, FHA loans allow buyers to get in for as little as 3.5% down. 

According to Economics 101: More money chasing fewer goods (fewer houses, in this case) means prices go up.

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Cause #2: A Historic Housing Shortage

While some of the housing price explosion has its roots in 2020, much of it goes back to 2008. As is typical, we over-corrected for the real estate-driven financial crisis of 2008.

I remember driving through empty subdivisions that littered the country in the years following the Great Recession. It was surreal. 

Those days, however, are long gone. The shell shock of that crisis caused the government, banks, and developers to all, implicitly at least, stop building.

But the population of the United States didn’t stop growing.

From 2000 to 2007, there were at least a million housing starts each year. From 2005 to 2007, there were over two million. Then the crisis hit, and housing starts fell through the floor. They didn’t break one million again until 2020, and then Covid happened, and the lockdowns shut down and delayed every new construction project. 

Virtually everyone predicted the real estate market would collapse when COVID hit. Weirdly, no one seemed to realize it would simply exacerbate the housing shortage that was already acute. 

Freddie Mac released a study purporting to show a 3.8-million-unit housing shortage in the United States in 2020. This is up from 2.5 million just two years earlier. 

Supply and demand are undefeated. When demand outpaces supply by that much, you can expect a few upper-end homes in coastal cities to go for a million over asking. Furthermore, houses and apartments take time to build, especially since strict permitting and zoning regulations often impede development. This is not a shortfall that can be quickly resolved.

Supplemental Causes

While increases in the money supply and a nationwide housing shortage are the main drivers of housing prices, a few other supplemental causes could be thrown in with Wall Street and the war in Ukraine as minor accelerants. 

For one, there have been a lot of supply chain issues of late that have caused all sorts of costs to increase. The most noteworthy in the real estate world has been lumber, but it’s also a systemic problem. 

Supply chain issues have exacerbated inflation, caused development and rehab projects to be delayed, and forced housing suppliers to pass prices onto consumers. But to believe that everything will return to normal when these issues are resolved is, unfortunately, wishful thinking.

In addition, Airbnb has been accused of choking supply as well. Presumably, as more homeowners decided to use their house as a short-term rental, this should have hurt the hotel industry and caused a boon in home construction to fill the gap. But, there was no boon to development, so the housing shortage was exacerbated. 

One study, for example, found “that a 1% increase in Airbnb listings leads to a 0.018% increase in rents and a 0.026% increase in house prices.” While that does count as an effect, like Wall Street, it’s negligible. There are some 660,000 Airbnb listings in the United States. Some of these are for a spare bedroom or only used as a short-term rental part of the time. But even if you assumed all 660,000 were single-family residences, it would be less than 1% of the total housing stock.  

Conclusion

There are many reasons housing prices are skyrocketing. By far, the two most significant have been low-interest rates and the corresponding increase in the money supply along with a historic nationwide housing shortage.

Furthermore, while interest rates are increasing, they’re still well behind inflation, and the housing shortage isn’t going away any time soon. Overall, we can expect prices to continue to rise, although probably at a slower rate, as interest rates climb and we reach affordability limits.

We can expect housing prices to remain high for the foreseeable future.