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David:
This is the BiggerPockets Podcast, show 585. When you want to BRRRR, start with knowing what’s going to affect the value. The lender who’s going to be doing the refinance is going to be the one who understands how that works. So you want to talk to your representative, whether it’s a direct lender or it’s a broker like us that finds you one. Ask them, “Hey, which way should I go,” and then develop your strategy based off of what they’ve said. If you don’t like what they say, well then look for another loan officer, another lender, another whatever person that’s going to finance this, and create a different strategy.

David:
What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, here with a Seeing Greene episode. On these episodes, we get questions directly from our listener base, you, and we answer them for everybody to hear. So we have several really cool questions that come up today. We talked about financing and what type of loan would be appropriate for the right type of property. We talk about scaling. That’s one of my favorite questions that we get into today, is “How do I scale without burning out, or without making mistakes, or without taking on too much risk, or without leaving meat on the bone? Can I be going faster, and I’m not going fast enough?” We talk about if we should be raising money from people, and what point that actually becomes relevant. And then I threw in my 2 cents about the way that I raise money, and my philosophy behind the responsibility that we have when we’re borrowing people’s money that frankly doesn’t get spoken about enough.

David:
And then we talk a little bit about how real estate… Sometimes when you talk about it, it seems so simple and easy. Should it be harder? Should we be making it harder? Are we overthinking, or are we under-thinking? So we tackle a lot of the really common questions that people ask, many of them when people are getting started, but we also get into some higher-level stuff. Today’s quick tip. We want to do more live shows. So I love being able to answer video questions like this. The problem is sometimes I have to speculate as to what the person really means when they submit their question. I love it when they’re here and I can dive in deeper and find out what they’re really facing before I answer the question. So if you wouldn’t mind, go to biggerpockets.com/david, leave a video question, and in that question say, “I would be willing to be interviewed live on the podcast and get direct coaching from David and his co-host.”

David:
If you do that, my producer will reach out to you. We will let you know when the time is scheduled to do that. You could be here live. You can tell all your friends that you featured on the BiggerPockets podcast, and I’ll get to answer your question. I’ll also be very, very grateful. I’ve had people that have come to work with me because they’ve been on these shows and I’ve got to talk to them. I’ve had people that I partnered up with to do different things. A lot of relationships are built just by taking that step. So we want to hear from you. Please go to biggerpockets.com/david, submit your question, and let us know if you’d be willing to show up for a live show where we answer it more thoroughly.

David:
All right, last thing I want to say is make sure that you subscribe to this channel, that you like it, and that you’re following me on social media. I’m DavidGreene24. If you’re too shy to ask a question on the podcast, well first off, get over it. But second off, I’ll help you get over it. Send me a DM. Tell me what your question is. I want to be able to help. If you live near me in California, I definitely want to be able to meet you, because I do meetups out here. I want to get you plugged in, and I’d like to hear more about what you got going on. So submit me questions, DM me with anything that you are embarrassed to ask about in a public forum, and without further ado, let’s get on to today’s show.

Chad:
Hey, David. My name’s Chad, and I live in the upstate of South Carolina. We are trying to scale into real estate as we have been taking advantage of the tax-free capital gains that we’ve made on our primary home by moving every two years for the past several years. We tried our hand at flipping a house without living in it while we were in an apartment, and that went really well except for the tax implications from those capital gains. So we decided that wasn’t a way to build wealth or to scale into real estate for us, so now we are trying to get into it quickly. My question for you is: What is the best route for us to take going forward? And are we on the right path? We kind of have an idea based on our knowledge and understanding of real estate and investing from the BiggerPockets community. Where we are at right now is that this summer, we had purchased a property with two houses on it in the Smoky Mountains of North Carolina.

Chad:
We just finished one of the studio houses on the property and have launched it on Airbnb, and the other house we are seller financing and selling to one of our contractors there. We decided that project was too big to take on from out of state. So now that we have that one launched, we just bought our neighbor’s house and are about to launch that on Airbnb and other STR platforms in the next week or so. We decided to go into the STR route, because even though it’s somewhat risky with that endeavor, it does seem to scale faster as far as capital and cash flow there, and I thought this could be a good way to pivot into long-term and commercial real estate once we refinance and consolidate debts. So our current plan is that in the next few months, once we’ve been six months on title on the North Carolina property, we’ll be cash out refinancing that one and hopefully pulling the new equity, if not just consolidating the debt that we have.

Chad:
We used a HELOC from our primary home and a small personal loan to finish and furnish up that property, and we’ll also be getting all of our funds out of the property once the seller financing contract is complete, hopefully sometime early next year. The other home that we just purchased, we used a private money loan, and that’ll be sometime in the beginning of next year that we should be able to cash out refinance once we connect with another local lender. We’re still getting quotes on the rates and things like that for that. So that’s kind of my question, is: Are we on the right path? Because we do want to do this long-term. My W-2 kind of seems to be getting in the way, and we’re very tired at this point after renovating one property and switching right over to the next one. I’m on that lookout for another deal, but I don’t see a way to continue acquiring real estate at the end of this year until we finish consolidating those debts and hopefully have new equity to work with.

Chad:
I know that one thing that will be in the way when we do go and refinance is how much I get paid on my W-2, because the STR income won’t be counted towards our debt-to-income ratio. That’s what I’ve been told by the lenders. So using our own equity from these properties, we’re hoping to get into multifamily 10 or 12 units, or commercial property. I guess I’m a little vague with exactly specific what I’m asking, but does this sound like a good path? Are there other nuances that I don’t see that we could be acquiring other deals during this time? And as far as my own job, I am trying to pivot within my own industry of IT to increase my income to make that debt-to-income look better. And thanks for all your time, and you’ve been great to listen to on the podcast. I appreciate it.

David:
All right. Thank you, Chad. I appreciate the kind words there. Glad that you’re liking the podcast. There’s a little less beard, but there’s a little more bald. All right. So that was a little bit of a long-winded question, but I think I have an idea what you’re getting after. You’re trying to figure out… You’re saying, “How do I scale,” but then you’re also telling me what your current plan is. And I think what you’re looking for is for me to break it apart and tell you if it is sustainable, if it will work, and what you would do different, which is kind of what I do. As a consultant, I look at all the different pieces that my clients have with what they’re trying to accomplish. I run it through the weird matrix of my brain after seeing as much real estate deals as I’ve seen in the time that I’ve been doing it, and I come up with a plan that will maximize efficiency for the person according to their goals.

David:
So you’ve got several things you’re doing well, and it sounds like you’re willing to do whatever it takes to make it. So right off the bat, Chad, I think you’re going to hit your goals, which is great. So let’s talk about how we could do it the fastest way. When it comes to scaling, a lot of people ask this question: How do I scale quickly? Now, I’m going to paint a picture, or an analogy, if you will. Imagine that you’re trying to run a race, and the further you can run, the more money that you’re going to make. That’s sort of what we’re talking about here. The more properties you can buy, the further can get into growing your wealth, the more money that you’re going to make. The question to ask is: What will stop me from doing that?

David:
Now, some people lack ambition, they lack drive, or they’re afraid. Those are people that we make mindset episodes for. You’re not going to run very far in the race if you’re afraid to get started, or if you’re lazy, or if you feel like you don’t know how to run, or you’re in terrible shape. Those are people that need to learn how to analyze deals, listen to podcasts, educate themselves, because that’s what’s going to stop them from running. The goal is to get as far as you can. There’s other things that slow people down though. Other than that, maybe you’re carrying weights around. Maybe you don’t have enough energy to keep going. So what we’re going to talk about right now are the four things that I think slow most people down. Now, we are assuming that mindset is not a part of this, because from what you’re telling me, it’s not an issue for you.

David:
The four things I wrote down when I was listening to you that will slow someone down from running the race are going to be: running out of capital, that’s a finite resource, running out of time, that’s a finite resource, running out of opportunities like deals to get, that’s a finite resource, and then running out of the ability to finance, because you’re probably not going to pay cash for everything. That can be a finite resource. And you sort of touched on all of those at some point in your question. We’re going to start with capital. Most people will struggle with real estate investing because they don’t have enough money. I’m just being completely honest with you. Brandon Turner wrote The Book on Investing in Real Estate with No (and Low) Money Down. Fantastic book, lots of strategies. Do them. But I will also say those strategies work. They take more time and they are harder than if you just have a lot of money.

David:
I can run further and faster with the resources I have than someone can getting started, even with those techniques. Now, that does not mean they should not do it. I’m just saying if I’m in really good shape and I can run for four hours without getting tired, you can’t keep up with me if you’re new to running. You have to use these strategies to make it work, but you have to stop and take breaks. It’s harder for you to run. What I’m saying is don’t compare yourself to somebody who’s got a lot of capital, because they’re going to run further than you. Just let that inspire you, that someday you will have that capital and you can run that way. The two strategies that I recommend more than anything for people that are capital restricted, which is most new people, which is why I’m starting there, is house hacking and the BRRRR method.

David:
The BRRRR method is a way of buying a property, fixing it up similar to what I think you said you’re trying to do in the Smoky Mountains, and then refinancing afterwards to get your money out of the deal. That gets you your capital back. It can be reinvested. You eliminate the problem of running out of money. That’s why I wrote the BRRRR book. The second is house hacking. Now, I didn’t write the house hacking book, but I could write a book on that because I’ve helped hundreds and hundreds and hundreds of clients as well as doing this myself. It is an amazing strategy. What I tell people is you should always house hack one deal a year before you even try the BRRRR method. If you can get a primary residence loan and put 3.5% down, 5% down, you don’t need to do the BRRRR method.

David:
You don’t need to do all the work to get your capital out of the deal, because you barely put any capital into the deal. So the first thing I would say to you, Chad, is you and your wife should be house hacking one property a year. Find the best neighborhood that you can get pre-approved to afford. Find the right floor plan, get that house, split it up however you do it, whether you do a triplex, duplex, a place with a basement, an ADU, you add an ADU, you switch the floor plan. Whatever you’re doing, figure out a way to do that first. That will be the biggest thing. If you just buy one house a year like that, and then every year or maybe every two years you also do a BRRRR thing, you’ll be good. You won’t have capital restrictions.

David:
Then you’ll have enough equity like what you’re seeing in your primary residence, that you can pull it out and you can just run faster. The next thing I’ll say is time. It doesn’t sound like you’re time-restricted, but if you’re taking this new job on, that is going to become at a certain point a restriction for you. So continue to buy real estate, continue to work, like you are, to save money and to help your debt-to-income ratio so you can keep buying, but know at a certain point you’re going to need to quit that job. The next would be opportunity. Make sure you’re investing, that you have a strategy where you’re investing in an area or in an asset class that will allow your time to be fruitful. If you’re chasing after the same deals that other people are chasing after and you just can’t get anything under contract, you need a change of strategy.

David:
If you’re looking for deals that are just way too good, like there’s someone else that would buy it for much more than the price you want it for, you need a new strategy. You’re limited in your opportunity, and it doesn’t sound like that’s your problem right now. It actually sounds like you’re making some pretty good headway when it comes to finding deals. And the last is your financing, and here’s what I want to say about that. It’s good you’re getting a job to improve your debt-to-income, but you don’t have to do it that way. Companies like mine get people pre-approved based off income that the property is going to make, not the person. So you could switch right now. Now, the trade-off is you might have a slightly higher rate. It’s usually around half a percent or more to do those loans, but those are the ones that I use.

David:
I don’t use my own debt-to-income ratio, frankly, because I don’t want to have to show all of the taxes that I have, the businesses I own. My situation becomes more complicated. I don’t have a W-2 job in the sense where an employer pays me. I own businesses and pay myself out of those businesses, so I have to sort of show this really long paper trail of why I paid myself the amount I did, why I didn’t have to pay taxes because it was sheltered by real estate. It’s just a hassle, so I use loans where we take the income from the property to qualify me. And you can do that same thing. You can reach out to me, and I’m happy to look into that. If you don’t want to reach out to me, just find a lender and ask them about a loan like that so you don’t have to stay work in that job to keep buying real estate.

David:
I don’t know that these loans will be around for forever. They’re good loans. They’re 30-year, fixed rate. They’re not shady subprime-type stuff, like what we saw before, but I’m taking advantage of them while they’re here. Right now, there’s so much money that’s flowing around because we printed so much of it that lenders have a lot of it, and they need to get rid of it, and so they’re looking to make loans based off the income of the property. That’s a way that you could remove your time restrictions. So the four restrictions are capital, time, opportunity, and financing, and I believe I gave you a strategy to help with all of those. The next thing or maybe the last thing that I’ll say when it comes to the situation is we all want to sprint and get as far as we can, and that’s why I like this running analogy.

David:
Because if you’re trying to go as far as you can, you don’t necessarily start off going as fast as you can. Sometimes, trying to run as fast as you can will burn you out, and you’ll end up getting passed up in the race, or you won’t go as far as what you could have. When I go running, I start off very slow and I get warmed up, and I actually speed up as I go until I start to get tired, and then I slowly wind back down again. I think that strategy would be better for someone who wants to scale a portfolio. Don’t go buy 17 houses all at once and then try to figure out what to do. We’ve had people on this show… We’ve had them on different versions of this where they say, “Hey, I just bought six properties and I don’t have enough capital to rehab all of them. What do I do?”

David:
Well, you have a capital restriction. There’s not really a lot you can do. You’re in a bad spot. You got to sell it off, similar to what you have going on in the Smoky Mountains. That was a really good example. You’re having to sell a property to have enough capital to fix up the other one. So don’t try to go fast, but what you want to go is far. You want to do this at a pace that you can handle. Just buying a house a year in a good area puts you in a really good position for your future. BRRRRing another one after that puts you in a really good position for your future. Saving the short-term rental income that you’re making and putting that towards buying more properties puts you in a better position for the future. You’re not going to start off running as fast as you will be running in five years. The important thing is that you don’t too fast too quickly, and never make it to five years to where you can step up your game then.

Lourdes:
Hi, David. My name is [Lourdes 00:16:00]. I’m in Denver, Colorado. Today is January 10th, and my question is how to tell if an area is A, B, C, or D. And what if it’s mixed? What if you have really nice single-family homes, and around the corner, there’s some low-income duplexes? That’s it. Thank you.

David:
Hey, thanks, Lourdes. I really like this question, because we rarely ever get to go into the why of things. Most people just look at the what, but true experience and truism is gained from chasing the why. Why do we call them A, B, C, and D-level properties? Well, if you think about when we bring it up, it’s only when we’re describing a neighborhood to somebody else. I just bought a house in a B-class area. I look for houses in a C-plus area. I only want to buy A-class real estate. The letter doesn’t really matter, doesn’t make sense. That’s why we don’t have F. Why does it stop at D? It doesn’t go to F. That doesn’t make sense. Just the way it is. What we’re really communicating when we convey that is the personality of the real estate, and this is something I’ve been saying more often. Real estate has personalities.

David:
A-class properties are probably not going to cash flow when you first buy them. They might break even, but you may actually lose money on them. But over a long period of time, they’re going to go up in value a lot. The rents are going to increase a lot. You’re going to get equity probably faster than you get cash flow, and they’re going to be a joy to own. You’re not going to have a lot of problems with those properties. Those are good properties for a long-term perspective and for people that make really good money and need a place to park it, but they don’t need cash flow right off the bat. That’s the personality of that deal. A B-class property is also pretty good to own, not a joy to own, but it’s really fun to own it. You’re not getting a ton of issues.

David:
You are going to get still appreciation, but not as much as an A-class property. And you’re also going to get a little bit more cash flow, but not as much as a C-class property, but more than an A-class property. That’s kind of where I end up falling. I’m getting into some A-class stuff now. I used to not touch it very often. Now, I’d say maybe 40 to 50% of what I’m buying is A-class. Before, it would’ve been maybe 10%. But I still buy more B-class property than anything else, I would say. The personality of a C-class property is going to be heavy on cash flow, easier entry, probably a property that’s going to need some work. If you’re selling an A-class property on the market, you probably fixed it up before you sold it because you had the resources to do it.

David:
If you came to me and said, “David, help me sell my house. It’s an A-class property,” I’m going to talk to you about what we can fix up to get you top dollar, and you’re going to be able to do it because you have the money. C-Class properties, the owner might not have the capital to do that, so you’re more likely to be stepping into meat on the bone, and this is why most investors start there. It’s kind of like training wheels. You can add value to it, you’re not competing with the really wealthy people because they don’t want to own it as much, and it’s going to be stronger on cash flow than it is going to be on appreciation, which probably matters to the newer people that don’t have as much capital.

David:
D-class properties are going to be very little appreciation, if anything, compared to the other ones, a lot of headache. They’re not going to be a joy to own. Your cash flow potential is the highest, but the real benefit of a D-class property is going to be how easy it is to own it. There’s not a lot of competition to get it. You can get all these cool tricks, like seller financing and subject to. The people who own those properties are trying to get rid of them, so they’re going to play the game you want to play. You’re going to probably dictate the terms on a lot of those deals because the seller’s motivated, but they’re motivated for a reason. They don’t want to own that property. A-class property is the same owner might have it for 10 or 20 years. D-class properties tend to change hands every couple years, because people get worn out. So understanding the personality of the property will help you know where you want to get into it.

David:
But what I’m doing is I’m break down how I see A, B, C, and D-class so that instead of saying, “Is this an a A, a B, a C, or a D,” you say, “What is the personality of this? Well, this would be a great deal to get into because I wouldn’t have any competition, but man, it would be really hard to own it. There’s a lot of crime. There’s not a lot of tenants that want to live there. The school scores are low. It’s not going to go up in value.” We typically call that a D-class property, but who cares what we call it? What you need to know is how would this property work once I own it. What would it be like to operate it? And does that fit for my goals? Okay, to the second part of your question, what about neighborhoods that are both? They’re not really both, but what you described is what if you have a really nice single-family home, and then a low-income duplex that’s right next to it.

David:
It’s probably not a low-income duplex if it’s in a neighborhood right next to a nice single-family home. It’s probably just being rented to lower-income tenants. But that doesn’t mean that it’s a bad neighborhood, or it’s bad tenants, or it’s actually a problem. It just is that specific landlord might have chosen tenants that could be causing problems. Or maybe they’re not causing problems at all, they’re great, but they can’t afford to own in a neighborhood that nice, and that’s why they’re renting there. I don’t know this specific property. Now, keep in mind that’s how I’m answering this question, is I haven’t seen the house. So if this is just a haunted house, just something terrible, don’t hear me saying that you should go buy it, but what you’re describing to me is what I look for.

David:
I want to buy the duplex in the great single-family home neighborhood. It’s very rare to find that. And the reason is that most cities, when they do their zoning, they clump it up. They go, “Here’s where all the single-family homes go. Here’s where all the multifamily homes go.” And the multifamily tends to be buried in the corner, and it’s never looked at, and that’s where all the mildew grows, because it doesn’t get enough sunlight. And then you get nothing but all the tenants, and then more and more tenants start moving in there. There’s no pride of ownership. The income goes down, the neighborhood goes down. The police presence goes up, the crime goes up. That’s what you’re trying to avoid. What I like are the benefits of multifamily property, higher cash flow and less risk, mixed in with a great neighborhood of single-family homes where I’m not going to get all those issues that I described when the zoning is separating multifamily from single family.

David:
It’s better if you mix it all in together and you have a nice ratio of both. So what you described, Lourdes, would actually be what I would be pursuing. I want to find multifamily property in a neighborhood that’s B or A-class, because I’m going to have more appreciation from that property. And just imagine that it’s a duplex there, and I can rent it out and get twice as much cash flow as a regular house because it’s a duplex, or maybe three times as much because it’s a triplex. And then five years later, I want to sell it. Well, if I bought it in the section of the neighborhood that is zoned for multifamily, I’m not selling it for much. I’m going to sell it to another investor. They’re going to be looking at like it’s a D-class neighborhood, and they don’t want it. I’m stuck. But if I’m going to sell it and it’s in a nice single-family neighborhood, maybe someone buys it who wants to house hack.

David:
Maybe the David Greene team is representing a buyer, and we find that house for our client. We say, “This is the one you want to buy. You’re going to be in the best neighborhood, and you’re going to rent out the other unit to someone else to reduce your income.” Now that person’s willing to pay extra to have that property. It’s worth more to them because of the income it brings in. That’s the way that I’m looking at it. I’m actually looking for deals just like you described, so I would highly encourage you to chase after those ones with more vigor than if it was a multifamily property that was not in a single-family neighborhood.

John:
Hi, David. I appreciate your haircut. Thank you for representing. My name’s [John Mark Burely 00:23:35]. I am currently running a roofing company with my brothers. My wife and I have a barn wedding venue, and we had a two-unit rental, first purchased back when I was 18 or 19. Had the option to buy it on land contract here in Michigan. Bought that thing, had it paid off pretty quickly. Recently got news that my job… Over a year ago, a year and a half ago, my job was going away. I managed 11 apartment complexes for a company, and they were selling the whole portfolio. So plan B came on the horizon. Got my two-unit with a wholesaler. Sold that thing, took all the cash, and bought a 12-unit complex. So I have this 12-unit complex. Lose the job, take on this roofing company with my brothers.

John:
It’s going good. I want to keep building the portfolio, the rental thing. I think that’s where to be. I have the opportunity right now to make offers. They’re both off market, but I’m in touch with the owners for a 32-unit apartment complex and then a 235-unit storage unit complex. Both looked like really good deals. One of them I used to manage for the prior company, and it was out of their geographic zone, so I contacted the owner. I said, “Hey, man, you guys want to offload that?” So I’m going to be paying more per door than what we sold it to them for likely. It’s 2021, the beginning of 2022, so market’s hot right now.

John:
I’m curious. Do I try to raise money from other folks to buy these new complexes and hold onto the 12-unit? Or should I sell the 12-unit and try to milk it for everything I can, and use that cash as down payment for these bigger-sized complexes? I don’t like being over-leveraged. I don’t like owing people who I know. That’s a nerve-racking feeling. I’ve just never been in that world, so I’m not familiar with it. And I’ve heard of and seen relationships go sour over money, so I don’t like to get money between friends. So I’m curious what your counsel would be. Is this something where, “Hey, man, leverage the happy investor culture that you’re in, and use other people’s money to make these purchases and then pay them back over time and be over-leveraged”? Or sell and move on, and kind of do it the slow, steady way? So I’m curious what your thoughts are. I appreciate your feedback. Thank you.

David:
All right, John. Your hair’s looking great as well. Soon as I saw your video, I thought, “Oh, looks like I’m looking into mirror.” Let’s see if I can break down the question you’ve got here. You mentioned that you left a job as a property manager, so I’m assuming that means you are capable of managing and analyzing a property. You started a business, a roofing company, so you have some income coming in from that. And that tells me that you are a problem solver, and you don’t need someone else to lay a path out for you, so I’m going to give you advice based on those things. That’s what I can tell from listening to your video. Your question is: Should I raise money from other people to buy the bigger unit that I want to buy? And you gave two examples of self-storage or an apartment. Or should I sell what I have and use that money to buy the bigger property?

David:
And then you mentioned some of the concerns you had, some of the emotions you were feeling, like you don’t want to raise money from other people. You don’t want relationships to go bad. Let me give you my perspective on capital raising. So I do it as well. I have the website investwithdavidgreene.com. People can go there if they want. They can invest with me. I take a different approach than most people do. The average… [inaudible 00:27:27] the average, but just the more common person that I see, much more common, is they say, “Hey, if you want to invest in real estate, you can invest in this deal. I’m going to buy this apartment complex, this self-storage. Look at the prospectus, look at the proforma. If you think it looks good, you make the decision to invest in it. And if it works out, you’re expected to get this return. But if it doesn’t work out, you’re going to lose your money.”

David:
And that has gotten along pretty well, because most real estate has been going up in value. So even if they make mistakes, it’s sort of covered by all the appreciation we’ve seen. This has been a good time to be lending money. I don’t love that, because it should be the operator’s skill that determines how well the investment goes, not the market just helping them because we’re seeing so much appreciation. When I let people lend money to me, when I borrow money, I’m not doing it by saying, “Look at the deal and see if you want to invest. Lender beware. You’re doing this at your own risk,” type of a thing. I understand most people that are investing with me don’t understand how real estate works. Otherwise, they’d probably be doing it themselves.

David:
They want the benefits of real estate. They see the strength of it. They like the safety of it, but they don’t know how to do it themselves. So they’re really not invest investing in the deal, they’re investing in David. So I have mine structured to where they get paid independent of how well the deal does. If somebody lends me money, they get their interest payment, and it’s not quarterly like most syndicators do. It’s every month. It just goes right into their bank account, as if they were getting direct deposit from a bank or interest from a bank, and it doesn’t matter how the deal does. And I do it like that because I don’t think that they’re investing in the deal.

David:
I think they’re investing in me and my word, and my word matters more to me than if a deal goes bad and I go, “Hey, sorry. I lost all your money.” You’re exactly right the relationship goes poorly, because in their mind, their expectation was they were investing in you, John. They weren’t investing in that deal. They don’t know how real estate works. So if you lose their money, they’re mad at you. They were trusting you. And I think this is important to recognize. Most people investing in real estate, I don’t think you’re investing in the deal. That’s the cop out the syndicator uses to be like, “Hey, don’t blame me. You knew what you were doing,” and that’s why I just don’t do that. My word matters too much. The platform I have here on BiggerPockets matters too much. I can’t default on debt. I just wouldn’t be able to sleep at night, and people would lose trust in me, which matters more to me than whatever wealth I could build by borrowing money and doing what other syndicators do.

David:
So this is my perspective on the advice that I am going to give you. That’s why I wanted to kind of put that out there. That’s also a bit of a pet peeve of mine that I think just raising money is so easy that people are doing it fast and loose. They’re not very good at what they do, they’re not very careful, and they’ve been getting away with it. But musical chairs is going to end at some point, and all those people that put their money in real estate are going to lose it, and then they’re going to blame real estate. And I hate that. I hate when people blame real estate, rather than blame the operator who screwed up or the decision they made that was unwise. For you, I would say there’s a way we can do this where you can do both.

David:
If your gut is telling you you don’t want to raise money, it sounds like you haven’t done it before, don’t do it on your first deal. Sell your 12-unit, then go buy the storage facility or the apartment, whatever you’re going to buy. Use your own money. Put a lot down, more than you normally would. That’s going to give you quite a bit of equity in that deal. After you’ve done that and it’s been stabilized, you’ve improved the rents, you’ve made more money with it, then go raise capital and say, “Hey, I’m not raising money to buy a deal. I’m raising money for a deal that I already bought. So I can secure your money with a lien on this property in second position,” which is probably the same thing they were going to get if you used it to buy it. But you’re not making them take all the risk of what if you screw up managing and operating the property. You’ve already shown, “I’m managing and operating it well.”

David:
So it’s less risky for them to give you the money after you’ve stabilized it. Now, many people hear this and go, “I never thought of that.” It’s because most people that are borrowing money and raising money to buy real estate don’t have any of their own, and it’s because they don’t have enough experience. They can’t do what I’m describing, because they don’t have the resources to do it, because they don’t have the track record. They’re trying to learn on the person’s dime who’s giving them the money, and that’s what I don’t like. It’s better if you do it the way that I’m saying. Once you raise the money, after it’s been stabilized, you’ve effectively paid yourself back. And this may sound unconventional, but it’s not shady. It’s not shifty. There’s nothing wrong with this. People do the same thing with the BRRRR strategy.

David:
They go, “What do you mean you’re going to refinance it after you already bought it? I thought you use a loan to buy?” Well, you do, but you could also use a loan after you buy it. It’s kind of the same process. This is the same thing that I’m describing. When you raise that money on the property you’ve already bought, so it’s safer for these people, then go buy another 12-unit or comparable to what you sold with the money that you’ve raised. Now you’ve got both. You didn’t have to give anything up. You also eliminated the risk for your investors, and you forced yourself to prove that you know what you’re doing before you raised money. That’s the way that I look at problems like this. I usually put the onus on myself to take risk off of other people’s plates instead of saying, “Well, here’s the risk. Make up your own mind if you want to do it.”

David:
So I’m hoping more people will raise money the way that I’m doing it, so that there’s less bad of a reputation that gets out in the real estate investing community. We haven’t had a lot of that right now, but I promise you if you were raising money in 2005, there’s a lot of people that lost money letting people borrow it in 2005. And they blame real estate, they don’t blame the operator. So let’s not do that. Let’s keep a solid relationship with real estate. Let’s invest our money with the right operators who have experience doing it, and let’s make sure that we’re not chasing after the highest returns ever, which is also exposing us to more and more risk.

Andrew:
Hey there, David Greene. Andrew Cushman here. I don’t have a question, but I just wanted to say great job on the Seeing Greene episodes. They’re awesome. I listen to every one of them, even though most of the questions don’t apply to me, simply because you do such a good job explaining things to people that by me listening to you do it, it helps me answer questions better when I get asked similar questions. So anyway, just want to let you know you’re doing an awesome job with those episodes. They’re great, and keep it up.

David:
Well, Andrew, I don’t know what to say other than thank you. That’s very sweet of you. It actually means quite a bit, because this is a nervous and scary position to be in. I don’t know what questions are coming at me. They could be anything related to real estate. I could look like a fool. It is a little nerve-racking, so the fact that you’re saying that means quite a bit. And that just goes to show Andrew’s character. He’s such a cool guy. Andrew’s a very good friend of mine, and I would encourage you guys to follow him as well as check out some of the episodes that he and I have done together. So Andrew is my multifamily investing partner. We’ve created a system of how we underwrite, analyze deals, and then pursue them, so the LAPS funnel. How we find leads, we analyze them, we pursue them, and then we have success.

David:
And if you would like to learn more about that, check out the show that we did with Andrew featured here. All right, we’ve had some great questions so far, and I want to thank everyone for submitting them. You can submit your question at biggerpockets.com/david, because we need them so we can make awesome shows like this. I wanted to play some feedback that we had from YouTube comments so that you guys can hear what some of the people have been saying on YouTube, and I also want to encourage you to head to YouTube and leave me some comments that I can see there. My producer wanted me to let you know that we’ll be seeing Andrew Cushman on the next episode of 586. Make sure you check out 571, episode number 571 on phase one of multifamily underwriting, and then tune in for phase two, which is where we go into it deeper.

David:
So Andrew is basically my partner, like how we just heard from John and he was describing how he wants to raise money. Well, Andrew and I do the same thing. We raise money from people, we go invest it into real estate and multifamily, and we have a screening process that we use to make sure we’re not buying the wrong properties. And Andrew’s my really, really good friend, and I trust him quite a bit. And we basically break down for you all: This is what our underwriting process looks like. These are the exact steps that we do. We actually, now at this stage, leverage those steps to other people that come work for us. They started as interns, and now they’re employees of the company, and that’s how systemized we are that other people can do this work. So if they were able to learn it, you are absolutely able to learn it yourself.

David:
So make sure you check out that episode. It’s going to be 586. And before you listen to episode 586, listen to episode 571, where we get into phase one. 586 is going to be phase two. All right, next comment comes from Dave H. “You asked for comments and feedback, and here it is. This series of detailed Q&A has been some of the best content for a newbie like me. Some of the questions are exactly what I would’ve asked. Other questions from more experienced investors got me thinking about things I hadn’t considered. Keep it coming.” Well, Dave H., thank you from Dave G. I will do my best to do that. Now, if I’m being fair, while I appreciate your compliment how good the show is, the show is only as good as the questions I get asked. If people don’t ask questions or they ask lame ones, I can’t really make a good answer out of that.

David:
So I want to give the attention here to the people who have been submitting their questions. Please keep doing that. Go to biggerpockets.com/david. Submit your question there. Make it as good as you can. I really love these consulting-type questions where you say, “I’ve got this asset and I’ve got this goal, and I’ve got these things working for me and these things working against me, and I can come up with a strategy.” It’s sort of like how Brandon and I would talk about how you got to have tools in your tool belt so that when different problems come along, you know what to do. I feel like the contractor with a tool belt full of tools, and I get to show you guys which tool that I take out based on what problems are being presented to me, and then everyone gets to learn. So please keep those coming, and also thank you for the kind words, Dave.

David:
Next comment, “I would like you guys to cover getting financing in an LLC and keeping away from your personal credit for investors looking to scale, but coming with that strategy, making your personal credit and your business credit worthy to get mortgages in your LLC’s name.” Okay, this comes from New Image Properties LLC. Please, come on here and ask us a question about what you’re trying to do. I would’ve to speculate to get into this now. I’d rather be able to have you on maybe on a live show, where you could tell us what you’re thinking. Based on what you’re saying here, my understanding is you look at it like an LLC has its own credit, and then you have your own credit, but most lenders don’t see it that way. They see an LLC as an entity.

David:
But you are the manager of that LLC, and as the one making decisions for that LLC, they’re going to look at your credit. Now, if you want to get a corporation, doesn’t have to be an LLC, but a corporation and use that business to buy property, you can, but you need to usually show a track record of that corporation making real estate payments. So we can talk about that more. If you want to submit your question, I’ll get into how that works. It’s something that I do myself. So I own C corporations and S corporations, and I can buy real estate in the name of the corporation, but only when I can show a track record that those corporations have owned real estate have been making the payments. That’s sort of how you develop credit for a corporation. But it doesn’t work the same as a FICO score, which is what most of us are used to when it comes to understanding how a company looks at credit, because that’s how they do it personally.

David:
Thank you for that, though. All right. Are these questions resonating with you? Have you also thought, “Man, I wish I could avoid having to use my own credit,” or, “I want to buy more properties in the name of an LLC, because it’s safer”? Have you wondered what you should do to scale faster? Well, if you have questions that are similar, please go to the comments and tell me what you’re thinking. Leave a comment below and let me know what you need to think about, and don’t forget to subscribe to this channel. So take a quick second while you’re listening, get your finger out, stretch it a little bit. Hit the like button and hit the share button, and tell somebody about this podcast, and then subscribe to it, because we want you to get notified every time one of these Seeing Greene episodes comes out.

Pedro:
Hi David, this is Pedro. It was great meeting you at the BPCON2021. I have a question regarding the BRRRR strategy. So currently I have a house hack in Long Beach, California, and I also have single-family BRRRR rental in the Kansas City market. I’m now looking to buy a fiveplex in Kansas City as well. For the single-family BRRRR, I did the rehab in a way that would put my property in a higher set of comps so I could get a higher ARV, therefore getting more money during the cash out refi process. However, I know that as I’m getting to the fiveplex space, I’m going to be relying on commercial lending, and therefore they’re going to be looking at the net operating income. Therefore, I know that in order to get a better appraisal, I need to either increase my rental income or decrease my expenses or do a combination of both. Therefore, I wanted to get your thoughts on what’s the best way to BRRRR a property that relies on commercial lending for the refi process. Thank you, and have a great day.

David:
All right, Pedro, thank you for that. I totally remember meeting you at BPCON. I believe we spoke a couple times, and you’re one of those people that has the “Whatever it takes, I’m going to get it done” attitude. So I love that. You also brought up a great point that I want to highlight here. When you’re using the BRRRR method, what you’re really doing is starting at the end and working backwards. What you’re trying to do is make a property worth as much as you can so that you can refinance it so that you can put a renter in there. And in order to do that, you have to rehab it. And in order to have that, you have to buy it. So even though we describe BRRRR and the steps you take, you actually start with the end in mind and develop a strategy backwards from there.

David:
Now, the common way we describe BRRRR is for residential property based on comparable sales, and the fastest way to improve the value of a residential property is to improve its condition, so the rehab is typically where that happens. But you bring up a very good point. If it’s a commercial property, they may be looking at comps, but they may be looking at the NOI, the net operating income, and they may be looking at some combination of the two. So what I would say is you need to talk to your lender before you do this. If it’s us, talk to us, if it’s another lender, talk to them. But guys, everybody who’s hearing this, please hear me say this. Pedro, I love that you’re asking the question. You’re just asking it to the wrong person.

David:
All you have to do is go to the bank or the lender or the broker or whoever that’s going to refinance it and say, “David, I want to refinance my five-unit property. How can I increase the value of it?” And then we’re going to look at the different people that we’re going to broker your loan to, and we’re going to say, “Well, this one’s going to use comparable sales, and this one’s going to use net operating income. Which one of those do you have the most control over?” And you would say, “Well, it’s already pretty nice. I don’t think I can improve the condition. And there’s no comps around that are actually going to be much higher than this one, so I could probably improve the net operating income by jacking up the rents.” We’d say, “Okay. If you could get the rents up to this amount, this is how much they borrow,” and then you have your strategy.

David:
And it might work the other way, where you can’t move up rents, but there’s a lot of comparables that are priced higher because you got to at a good price. Then you know how to move forward. So I’m using this as an example for everyone. When you want to BRRRR, start with knowing what’s going to affect the value. The lender who’s going to be doing the refinance is going to be the one who understands how that works. So you want to talk to your representative, whether it’s a direct lender or it’s a broker like us that finds you one. Ask them, “Hey, which way should I go,” and then develop your strategy based off of what they’ve said. If you don’t like what they say, well then look for another loan officer, another lender, another whatever person that’s going to finance this, and create a different strategy. But someone like you, Pedro, who’s got the attitude you have, I have zero doubts you’re going to make it work. Just find the right lender, talk to them, and they’ll set you straight.

Dominic:
Hey, David. Thank you so much for taking my question. I currently do not have any rental properties and I’m looking to get my first unit, which is going to be a two to four-unit small multifamily. I want to use either a NACA loan, which Tony Robinson talked about on the recent Rookie Reply podcast, or an FHA loan. And from there, what I want to do is add value to it, kind of BRRRR, but I don’t want to take my money back out. I always want to transfer the loan from either a NACO or an FHA to a conventional, so that way I don’t have to have the owner occupancy restrictions of those loans over my head, and have a little bit more flexibility with it.

Dominic:
So I guess my question for you is this. I know what I just said, it’s simple in nature, but it’s not going to be easy. But because it seems so simple, I feel like I’m missing something. My specific question is am I off-base here? Am I missing something? And I guess my follow-up question would be how do you navigate real estate knowing that there’s a lot of simple concepts that are very powerful, even though they’re not going to be easy in practicality? How do you know that you’re still on the right track and not oversimplifying something? Hopefully that makes sense. Thank you so much, David.

David:
All right. Thank you, Dominic. I really like this question. Here’s where I want to start. Most of the strategies that you hear described on how to scale with real estate, if you really think about it, almost all of them are based on the financing of real estate. The BRRRR strategy and everything that’s involved is all about how you get your capital back out based on the fact that financing is in your benefit. If the property’s worth more, you can refinance it. You’re just capitalizing on the power of a refinance. House hacking is capitalizing on the power of a primary residence loan to buy property that will still generate income. Most strategies you hear about are based on financing. So you’re asking the right question, because you’re talking about financing.

David:
Now, what you said was “I want to use an FHA loan,” or I believe you said a NACA loan, “to get into a house, but then I want to refinance it into a different loan so that I can use that FHA loan again to buy the next property.” So let’s start with that. There’s several kinds of loans, but I just want to give a broad overview of what you’re looking at. You’ve got government loans and then you’ve got non-government loans. Government loans are typically VA, USDA, FHA, and then just conventional. And when you hear us say Fannie Mae or Freddie Mac, what we’re describing when we say that are companies that sort of ensure loans that… These companies have partnered with the government so that once they give you the loan, Fannie Mae or Freddie Mac will buy it from whoever gave it to you so that that company gets more money. They can go give another loan out. That’s how that works.

David:
And they have tighter guidelines for those loans than they do for non-government loans, but you typically get a benefit. An FHA loan is a very low down payment with the very low credit score. A VA loan available to veterans could be no down payment and no PMI. The Fannie Mae Freddie Mac loans typically have the best interest rates. That’s the benefit of those loans. But then you get into the space where you don’t qualify those anymore, and you’ve got jumbo loans, you have nonconforming loans, you have debt-service coverage ratio. You’ve got all these different types of options. And then I guess the third one could be credit unions and savings and loans institutions, typically what we call portfolio loans. So that’s banks or lending institutions that lend and keep the deal on their own books. They don’t go sell it to anyone else. So when it comes to your specific situation, you’re asking, “If it’s that simple, why isn’t it easy?”

David:
It could be easy. If you bought a house with an FHA loan, you put 3.5% down, and you wanted to refinance out of that so that you could use another FHA loan, that wouldn’t be too hard. There’s conventional loans that you could refinance into where you put 5% down. So let’s say you buy a $500,000 house, and you put down 3.5%. So that would be $17,500, and then you want to refinance into a conventional loan that needs 5% down. Well, that would be 25,000. As long as you have $25,000 of equity in that deal, plus enough to cover your closing costs, you can do that. So you walked in with 17,500. If you gain another 20 or 30,000 in the year, you would have enough at that point to refinance into a conventional loan. You could buy another house with an FHA loan. But you might not have to.

David:
FHA loans are not the only loans you can use to buy a primary residence. There are conventional loans with 5% down. Now, right now, they’re not able to used for multifamily, in most cases. Those are for single-family residentials, because the government guidelines shift a little bit, but still, you can just buy another single-family house with another 5% down loan the next year and not even have to worry about refinancing. Then the year after that, you can do the same thing again. That strategy is simple and easy. And that is why I say every single listener of this podcast, every single real estate investor, assuming they can manage a property or pay someone else to do it and have the funds to do it, should buy a primary residence every year and house hack it.

David:
You should go in for 3.5% to 5% down. You buy in the best neighborhood, the best area that you can. You live there. You rent out parts of the home to other people. There’s tons of ways to do it. You do it with a duplex and a triplex and a fourplex. You do it with a basement. You do it with an ADU. You do it with two houses on one lot. You rent out the rooms of the house. You buy the house, you put up some walls, and you make it into separate spaces. There’s lots of ways you can do that, but it is simple and it is relatively easy. It’s just not convenient to have to share your house or share your space or whatever, but there’s ways of doing it that you don’t have to share the space. I house hack, and I don’t have to share the space.

David:
I just take a portion of the property, I wall it off. I make sure it has its own bathroom and its own little kitchen area and its own bedroom and that it has a separate entrance, and I never would ever have to see those tenants. And I can do that any time I want, so I know everybody else can do it too. Everything in addition to that is what gets a little more complicated. That’s when you’re chasing after really good deals with tons of equity where there’s a big rehab. That’s where it becomes a little more complicated and not easy. But Dominic, just start with what I said. Buy a house every year and house hack it. And then in addition to that, if you want to buy out of state, if you want to do the BRRRR method, if you want to buy commercial property, you have all these options that will become known to you that you don’t have to jump into right away.

David:
Just do those in addition to the meat and potatoes that I described. And if you do it the way I’m saying, it won’t be hard. It won’t be complicated. It won’t be as risky. You’ll be paying yourself instead of a landlord. You’ll benefit in so many ways. This the best strategy. Everyone should be doing it, and everything else in my opinion should just be considered supplemental. All right, I want to thank all of the people who called in or who left a video message for me today. I appreciate you. We got some really good stuff. We got to hear from Dominic there, who had a question about “This real estate thing seems like it should be harder than a really is. Am I missing something?” We had John, who’s trying to figure out if he should raise money or if he should sell a property and buy something else.

David:
We had several other people that came in here, and they had questions that I thought were really, really good that I hope as you listen to it, you both learned something and you had your eyes opened to how you can make a strategy work. The goal of this is not to overwhelm you with information. It’s to equip you with the information that you need to take action, start buying real estate, and start building wealth. I am really, really glad I get to be the person who walks through this with you, who gets to experience this with you, and who gets to teach you, a lot of the time from my mistakes, in what I think you should do. If you’d like to reach out to me, I’m @DavidGreene24 on all social media. Send me a DM. We can talk about loans. We can talk about real estate representation. We can talk about consulting. We can talk about a lot of the other stuff that I have going on that might be able help you.

David:
And if you’re not on social media, just send me a message through BiggerPockets. I check that. I have one of my team members check that sometimes. We want to make sure that we get in touch with you, because helping you build wealth is what BiggerPockets is all about. Please consider sharing this show with anybody else that you know that’s into real estate and might have fears about it. The more that they know, the less that they will worry. And make sure you leave me a comment on YouTube, and tell me what do you think about this show and what would you like to see more of. And then lastly, I want to talk to you, so go to biggerpockets.com/david and submit your video questions so you can be on the podcast. I can help you, and all of our other listeners can benefit as well. Thank you very much for listening. If you’ve got some time, please check out another one of our videos or podcasts, and I will see you on the next one.

Question: What would you say is the latest craze in real estate investing?  The thing that everyone is talking about and wanting to learn more about?

If you ask me, the term “short-term rentals” comes to mind. At the most recent BPCon, the short-term rental breakout session was not just a full house. It was standing room only. People were packed wall to wall, even with investors standing outside the conference room listening in. 

So why are so many people interested in short-term rentals? Well, odds are that even if you do not own a short-term rental, you have likely stayed at one before. Whether listed through Airbnb, VRBO, or other similar sites, many investors see significantly higher cash flow by turning a traditional property into a short-term rental.  Also, there can be an added perk if the investor can get some personal enjoyment out of the short-term rental property as well.  

It is not uncommon for us to see a property make two to three times the cash flow when changing from a long-term rental to a short-term rental. With the higher cash flow comes the need for good tax planning. Why? Because how much of it you get to keep is more important than how much money you make! So let’s go over how to minimize taxes from your short-term rental investments. 

Short-term rentals and taxes

To start, we need to first define what a short-term rental is when it comes to taxes.  Many investors are under the impression that just because they list their properties on a platform like VRBO or Airbnb, they are considered short-term rentals. That is a mistake.

For tax purposes, a rental is not defined by where it is listed but by the number of days that a property is available for rent, as well as what type of services are offered alongside the rental. Generally speaking, if the average number of rental days per guest is seven days or less for the year, then the property is considered a short-term rental for tax purposes.

If the average guest stay is longer than seven days, that property will still likely be treated the same way as a long-term rental even though it might be advertised as a short-term property. Rentals, where hotel-type services are offered (like a bed & breakfast), are generally treated as short-term rentals. 

One important thing to remember is that short-term rentals, like long-term rentals, are typically taxed at the investor’s highest ordinary income tax rate. So if you are an investor who is in the 35% tax bracket for your W-2 and other income, any taxable rental income is added on top and also subject to this tax rate.

Strategies for reducing taxes on short term rentals

Since short-term rentals often create high cash flow, it is essential to make sure that you are using the appropriate short-term rental strategies throughout the year to reduce taxes on this source of income.

Maximize your tax deductions

 Maximizing your tax deductions is the first step in reducing your taxes on your short-term rentals. As an investor, you may have frequent trips to your short-term rental to set up, stage, or even manage the properties. Make sure to document your trips so that you can write those off against your rental income at tax time. Travel to short-term rentals is tax deductible against rental income, just like travel for any other type of real estate investing. The key is to make sure you have documentation to prove the reason for those trips. Let’s go over an example of just how powerful this can be.

Let’s say James owns a few short-term rentals in a lakefront community just two hours away from his home. He purchased a large truck that he used primarily to rehab, stage, and manage the short-term rentals. 

Since the car was primarily for business use and weighed more than 6, 000 lbs, James was able to deduct the entire purchase price of the truck. By writing off close to $30k on that truck, James was able to lower the taxes on his short-term rentals and save close to $10k in taxes. Depreciation is based on the truck’s purchase price, so James was able to create a significant write-off even though he financed part of that truck purchase.

Shift your income

Income shifting is another way to maximize tax savings on short-term rental income. Consider paying family or friends who are helping you out with your short-term rentals to shift income and save on taxes.

James had a nephew who was still in college that was interested in getting into real estate. James hired his nephew to help with the rehab and repairs to get the short-term rentals ready. The $8,000 James paid his nephew was tax deductible and saved James another $2,400 in taxes.  Most of the tax-saving short-term rental strategies traditionally used for long-term rentals are the same ones available to short-term rental investors. 

Take advantage of depreciation

An investor may often have higher start-up costs with short-term rentals. Sometimes you may need to purchase furniture, fixtures, and appliances. Whether buying these as brand-new items or buying used items, most of these items may currently be eligible for bonus depreciation. This means that instead of depreciating the cost of these items over multiple years, you may be able to take the full depreciation in the first year.

For example, if James spent $6,000 on appliances, furniture, and a kayak for his short-term rental on the lake, that can result in a $6,000 deduction immediately in the first year.  It is important to keep itemized listings of the items you spend money on. Supplies like towels, bedding, and toilet paper are all tax-deductible expenses. Those small amounts can add up to some substantial tax savings.

Track your expenses

Tracking expenses for short-term rentals is just like any other rental property. If you have multiple short-term rentals, track the income and expenses by property. We have already touched on travel, furnishings, and income shifting.

Don’t forget the other potential tax deductions such as business meals, eligible home office, or related educational expenses. Since short-term rentals can be very profitable, it is extremely important to make sure you capture all of your expenses to offset the taxes associated with that income.  

Know the tax benefits

Investing in short-term rentals can also come with some great tax benefits. Some of those tax benefits may even be better than those from investments in regular long-term rental properties. 

For those in the long-term rental space, you probably already know some of the restrictions concerning the passive activity loss rules for higher-income investors. In short, if your adjusted gross income is over $150,000, then any rental losses from long-term rental properties typically can only offset income from other passive activities. When there is an excess loss, those losses are not used to offset taxes from your W-2 income. The losses are instead carried forward into future years to offset future passive income.

However, an investor who can claim real estate professional status would then be able to use the net losses from the long-term rentals to reduce taxes from W-2 and other income. For investors who work full-time, obtaining real estate professional status is often tough to achieve. One of the main hurdles is that the investor must spend more time in real estate than their job.

So for someone working 2,000 hours a year at a job, they would need to spend more than 2,000 hours that year in real estate as well. Real estate professional status is often difficult for investors who are still working full time. This means the excess rental losses are not as helpful to offset taxes from W-2 or other non-passive income. When it comes to short-term rentals, though, the good news is that it is treated differently than long-term rentals for tax purposes.

One of the perks of investing in short-term rentals is that the investor’s ability to use excess rental losses from the short-term rentals to offset taxes from W-2 and other income is a little easier to achieve. This means that if you’re operating in the short-term rental space, you do not need to be a real estate professional to be able to potentially use rental losses from those properties to offset taxes from W-2 and other income. 

However, you will still need to show that you are materially participating in your short-term rentals. So what exactly does it mean to materially participate in your short-term rentals? There are seven tests, and you only need to meet one of them.

Tax benefit qualifications to know

Out of the seven possible qualifications, here are the top three that are most commonly used:

1. Participate for more than 500 hours during the year on the short-term rentals
2. Participate for more than 100 hours in the short-term rentals, and no one else incurred more time than you
3. Participate in substantially all of the activities in the short-term rentals where your participation exceeds the combined time of all other individuals

Material participation time can include tasks such as staging and managing the property, dealing with guests, repairing, cleaning, restocking the property, to name a few. 

Once you meet one of the material participation tests for your short-term rental, then any net tax losses may be deductible in the current tax year and thus help offset taxes from W-2 income. If you are an investor who owns multiple short-term rentals, you may be able to combine your hours across all of your short-term rentals as well. 

Let’s go over a quick example of how this strategy works: Ashley works full-time at a tech company. She decides to buy a property in a nearby ski area and rent it out as a short-term rental. Even though she had to pay a slight premium for the property and incur some start-up costs to get the property ready, it had phenomenal cash flow in the first year.

Ashley loves connecting with her guests and sharing her insights to make their stay a memorable experience. By working proactively with her tax advisor, she decided to be very involved in managing her short-term rentals. She documents her hours during the year to ensure she meets one of the material participation tests. Her tax advisors assisted her with maximizing her tax deductions by writing off the business use of her car, computer, and home office.

The first year she owned the property, she decided to obtain a cost segregation study to accelerate the depreciation deduction for her short-term rental. With proactive tax planning, not only did Ashley not have to pay taxes on all of that cash flow she received from the property, but she also created a significant net loss of $20,000 for tax purposes.

Since she worked during the year to ensure that she met the martial participation hours with respect to this property, Ashley was able to use the $20,000 loss from the short-term rental to reduce some of her taxes from her W-2 income at the tech company. Not only did Ashley receive significant cash flow from the property, but she also paid no current taxes on that cash flow and instead used additional losses to reduce taxes from her W-2 income.  

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

Final thoughts on tax benefits for short-term rental investors

As you can see, there can be some significant tax benefits to investing in short-term rentals. It is important to remember that rules and regulations can change quickly regarding short-term real estate investing.

Before investing in a short-term rental, it can make sense to analyze the deal to see how it would otherwise perform as a long-term or mid-term rental. If the city were to enact new short-term rental restrictions or changes, you want to ensure that you have alternative investment strategies to keep the property performing well. 

Once you have decided that short-term rental investing is for you, make sure to work with your tax advisor and plan proactively during the year so that you can keep more of that excellent cash flow! 

Ashley:
This is Real Estate Rookie, episode 166.

James:
Yeah. There’s all these signs that you can do as you’re working with your team members. If a contractor is trying to charge you for that or they won’t give you pricing breakdown, probably not your guys. That’s a sign, stay clear from that person. You need to work off facts.

Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the stories, the motivation, the inspiration to get you started as a real estate investor, or keep you going if you feel like stopping. Ash, what is going on today?

Ashley:
Today, we are doing part two of rehab and construction cost series with James Dainard. If you guys haven’t listened to that, go and listen to that episode released on Wednesday. We are here now for part two. Tony, do you want to recap what part one was about?

Tony:
Yeah. Part one was one of my favorite episodes we’ve done so far. We’ve had some amazing guests, but James really gave a master class on estimating your rehab costs, on building your team, how to find contractors, how to find general contractors, how to vet them, how to put your scope of work together, how to give pricing estimates. Just everything you need to know about the first step of getting your rehab done.
There’s actually three phases that we’re going to talk about. Phase one was everything you do before you get to the property, so that’s like the prep work that we just talked about. In today’s episode, we’re going to talk about steps two and three, which is what you do when you’re doing your first initial walkthrough, and then what happens after you actually close on the deal.

Ashley:
James, welcome back to the show.

James:
Thanks again for having me. I’m surprised I got invited back.

Ashley:
We tried to get somebody else to fill in to cover the second part of the series, but no one would do it.

James:
That’s usually my role. I’m the backup plan.

Ashley:
Yeah. Okay, well, let’s jump right into it. What are the things that … You’re going to a property. You had said in the previous episode, you want to be 99% sure that this is a property you would like to put an offer in. What do you bring? Who do you bring with you when you’re going to look at a property?

James:
Yeah. Especially right now with the market as hot as it is, you have to be prepared and be able to write a very strong offer to secure that good deal. Anytime that we’re going to these initial walkthroughs, we want to make sure we’re prepared. We can write a no inspection offer and then really get aggressive to lock it down.
The things that we bring to every walkthrough that I go to is, the first thing is a camera. Document what you’re seeing because that’s going to really … You can go through a house, and as you look through photos, you can revisit your floor plans you might need to fix. You can notate, as you’re doing your budget, what materials you can keep and what you need to get rid of for plans. We always bring a camera. We bring a walkthrough sheet that we created internally for our company and for our project managers, and that just really lists out, itemize every little piece that needs to be done in that project. It starts with roof, windows, front door, interior, so it’s all documented out.
The reason I still, even to this day, use that sheet is because it’s really easy to miss something as you’re walking through a house. Even when we did our walkthrough, Ashley, I went through this whole house with you. I went right by something and then luckily, you go, “Hey, “What’s inside the closet?” Oh my god. I didn’t check. I open the closet and sure enough, there was ducting and it was going to cost us two grand more in moving things.
By having that sheet, if I would have gone through my sheet properly, I can say, “HVAC and layout. Do I need to change any of my HVAC route?” and lay it down. We have a walkthrough sheet that takes you from A to Z. We get to count out how many windows, how much square footage we need to replace, and it gives us a template to give that a good format. In addition to, by writing in all these items, like if I’m writing down 14 windows, exterior door, a front door, and a slider, I know what those costs are.
As I’m getting my bids back from the contractor, I could be very specific with him, saying, “Hey, you quoted these windows at this,” and I can break down the price per window because I know exactly what the count is. It’s harder to do that if I go, “Wait. Did I have 10 windows or 14 windows? I can’t remember.” A lot of times, the contractor’s not going to notate that, so it gives me a good blueprint, as I’m not only just creating my budget, but double-checking the contractor’s bids down the road.
I also bring a flashlight everywhere because you need to stick your head in areas that are dark. You need to check your crawlspaces. You need to check your attics. I like to bring a tape measure as well because if you do have to create value and reconfigure plans, you don’t want to just say, “Well, I’m going to stick a bathroom here,” and not really take a step back and look at the space to see if it actually even fits, so all these things you want to bring with you.
If you’re a newer investor, and this is your first purchase, and you haven’t done this before, what I used to do when I was brand new in the business is I would bring a home inspector with me just to notate. You don’t have to pay for a full inspection report. Basically, it’s like a walkthrough inspection where it’s just a bullet list rather than a full report because they’re going to help you catch other things that you may miss.
What I think you should always bring with you is your broker, who’s going to be selling the house for you down the road, so they can give you feedback on what makes it more marketable and also, a general contractor to come through to get your estimate on the house. Once you’ve been doing this for a while … Again, we’ve done like over 3,000 homes, we can walk through, and notate, and know our costs pretty well, so we don’t bring a general every time.
My first probably 30 homes I bought, I always brought my general with me to get a quote because he was educating me as I’m doing my walkthrough going, “Hey, we can’t take this wall out.” Or, “We can take this wall out, and here’s why,” so be prepared on your walkthroughs because the way the market’s ripping, you have to give them a solid, no BS offer at that point.

Tony:
James, I want to dig in a little bit. You said you have this walkthrough sheet. Is the walkthrough sheet separate from your scope of work or are those two documents one and the same? If they are different, what exactly is that walkthrough sheet, if you can give us more insight?

James:
That’s a great question. Our budget sheet, how we created it, it’s on Excel format to where we have to input. We have it broken down, like we talked about in the last episode, by labor and material costs, and so we can narrow our budget way down. The walkthrough sheet, because if we are doing our walkthrough with, let’s say it’s an off-market deal, private sale and I’m walking around with my laptop trying to fill this whole thing in, it can take a while and it gets a little awkward. Plus, your deal finder might not like it because you’re in the house too long.
What the purpose of the walkthrough sheet, is actually just to take your notes so then, when we get it back to the office, I can input it into my budget sheet and refine everything. Also, what I like to do is it gives me a general … It’s basically my bullet point list with different types of items we need to do. As I’m trying to make the deal work or invent that return by putting the right plan in play, I have the counts, I have the photos. I have all my details of what I need to do, maybe how old the furnace is, how many doors I need to put in. Then I can go to my comps when I’m at my office and use that sheet to reference what the materials are in the comps, and then start playing around with that plan.
The purpose of the walkthrough sheet is to be efficient. You can be quick. It helps you not miss anything and also, it gives you the physical counts of everything. We’re writing down door counts, window counts, large kitchen, small kitchen. We’re making all these notes on that sheet.

Ashley:
Yeah. I actually just ran and disappeared for a minute to actually get the sheet that I have from when I did the walkthrough of James’ and I flip. On it, it goes, I’ll give you guys an example. For windows, how many? Are they vinyl, metal, wood? What is the estimated age of the windows? Then, what condition are they? You just circle one, two, three, four, or five. That goes through the whole thing. It goes for the plumbing. Is it galvanized, copper, PEX, approximate age? Then, condition of that too.
James, while we’re talking about this, I have like a million notes on to here, on to this sheet, but there were some things that you knew from learning and doing different walkthroughs that helped you actually go and do the walkthrough accurately and help with your budgeting. For example, one of those things was telling if the electrical outlets were grounded or not. Just like this little thing that you don’t need to be an electrician to know, but there’s things you can learn on YouTube or from contractors that will help you even fine-tune your budget more.

James:
Yeah. There’s all sorts of little cheap, and tricks you can do. Actually I did a video for BiggerPockets called Red Flags for Flips. It’s on the YouTube channel, and I talk about … You can visually see those a little bit more in the video, but yeah, there’s all these little tricks and tips that we’ve learned over the years. Then part of how we’ve learned them is by me losing money. I learned a lot of this stuff early. Our goal is to make sure that people don’t go through those same hard lessons as us. I’m just kind of thickheaded though. “Yeah, I’m going to go buy that,” and then I learn later. By having it on that sheet, going, checking electrical, that reminds me to go, “Hey, what kind of outlets do I have in there?”
There’s different things you can do. As we’re walking through a house, I might pop a plate off an outlet if it’s a house built in a certain era. That’s also why I bring the tax record to the walkthrough. I also have my tax record because it’s telling me square footage, it’s telling me year built. Based on the year built, that’s going to tell me what the mechanicals are in the house, which are going to tell me a big part of my budget. If it’s in the Pacific Northwest, the homes of the 1960s are in the middle, so they can have old wiring or good wiring, so trips that we’re doing is we’re looking at the outlets. If there’s only two prongs in there, that means it’s typically not grounded, which is going to also typically mean we need a full rewire.
We’re looking for, does it have two prongs or three prongs? Are the outlets upside down? If they’re upside down, that’s a way for them to self-ground or get the reverse polarity out of there. That’s usually a sign going, “Hey, we’re probably going to have to rewire this house.” We’re going to look at the panel to see if there’s a shutoff. There’s all these little things that you can see that will tell you whether your mechanicals are old, or if you go to your plumbing. If you have three valves, a lot of times in your plumbing, that’s the setup for an old galvanized system. Whereas, if I have one that’s typically going to be copper or PEX from there on, because that’s a new type of plumbing kind of install. There’s all these little hints and signs that you can notate.
That’s also why you want to bring your camera. Because as you’re shooting camera pictures, you can go, “Wait. Did I need a full replumb? Let me go back and look at that valve. Let me go back and look at where that toilet location is, or where that electrical switch is.” If I’m walking into a house, and typically the outlets are every eight inches off the ground, or all my switches are normal, then usually the wiring’s going to be of new code.
If I go into a kitchen and there’s no outlets in the kitchen backsplash, that means it was built in old code, at that point. It’s not grounded, there’s no GFCI. As you do your list, it reminds you to look at those things. Then as you’re looking at them, you want to look for those little signs of … Not signs of neglect, but signs of datedness in mechanicals. See if there’s an oil tank on the property. That means your HVAC and ducting system’s probably going to need to be updated if you’re not converting or changing out to oil. There’s all these things that you can look for.

Tony:
James, your wealth of knowledge when it comes to what to look for … I can tell that you’ve done this. I mean, you do anything because mentioned in the first episode that you’ve been involved in 3,000 different transactions. When you do anything 3,000 times, you’re going to know it like the back of your hand. I want to remind everyone that’s listening that just because you’re not as well-versed as James in everything that he just outlined, that doesn’t mean you still can’t go out there and make some things happen.
Like he said, a lot of this knowledge he gained was through trial and error. It’s not necessarily that you have to be able to look at piping and know whether it’s galvanized, some other material. What James is trying to communicate to the listeners, to all of you, is that there are just certain things to look out for, but don’t feel overwhelmed if you don’t have the same level of knowledge and information James has.
I just want to recap, just like really quickly, James, some of the things you said to bring with you. You said a camera, your walkthrough sheet, flashlight, tape measure. Then from a people side, if you can, maybe bring a home inspector, a broker, and then a GC. One last question on the GC piece, James. You said you had a GC come along for your first 30 flips or so. Were you paying that GC for his time? Or what kind of agreements did you guys have for him or her to follow along with you on those first few flips?

James:
No. I never paid the general because that’s part of business. If someone asked me, I’d be like, “Well, are you a home inspector?” Because as a broker, if a client wants to go look at a property and I take them and they don’t like it, we leave, I’m not going to bill them for my time. That’s just a potential for me to earn a sale at that. Same with the general. You’re going to have to estimate because you’re trying to get the work.
If some guy asked me for $200 to go walk it, A, I would look at what’s going on in my own business practices, or am I driving people nuts at that point? Then maybe I need to fix that. Or B, that guy’s going to nickel and dime me over everything. If he wants $200 to do a walkthrough, what’s he going to want when he has to move a door an inch because he didn’t really calculate it right? He’s just not the right person that would fit inside my demographic.
Everybody on my team, I want us to all be together with the same mindset, that we’re all here to help each other and the angle was to get the project done, but I definitely wouldn’t pay. A lot of reasons I know a lot of this stuff, again, is I did a lot of things wrong in my early 20s. I would go out and find the deal first, buy it, and then try to figure it out, and by being very, very inefficient … Actually, the best thing I ever learned in construction was losing a lot of money on a house. Because I was there a lot and I got to see.
At the very end, I was like, “Okay. Well, that was a very expensive college for flipping homes.” I did everything wrong on that house that I could have possibly done wrong, and I had to create my system off of that. Like, “Okay. Don’t do it this way. Don’t do it this way. Don’t do it this way,” and that’s how you learn. If you don’t know these things, just hire the right team members. Hire the right contractor, work with the right broker that really understands your business. They can help you facilitate your plan, and then that’s where you can feel a lot more comfortable at your walkthroughs.

Ashley:
James, going back to the piece about paying a contractor to come out for a walkthrough, do you think because you are experienced and you have that credibility that you are going there 99% sure you’re going to make an offer on this property, that it may be different for a rookie investor who’s never purchased a property and is maybe going out and looking at their first few houses and they don’t have that experience? Do you think it’s a different scenario then that they should be offering or could be offering to pay a contractor?

James:
If one of my clients asks if they should do that, I would tell them a hard no on that. I just might be going out there to make 200 bucks for an hour or $300. I think you’re talking to the wrong people if they’re asking for that. You don’t need pull to have someone come out. Honestly, if I put myself in the contractor’s shoes and someone called me and says, “Hey, I don’t know what I’m doing. Will you come look at this house for me?” I’m going to go, “Okay. I got a good margin construction job I can do,” at that point.
They should want to come out there. Like, “Oh, you need a lot of help? That’s okay. I can help you.” I would think that’s a good for the contractor. If they’re working for someone that doesn’t know what they’re doing, they have a lot more opportunity to create margins there. Most guys should want to come do the scope of work.
Again, as an investor, you are also providing income for people. It’s not just about the contractor. If you’re working with a broker … This is why you should always pay your brokers. Don’t try to get the best deal on your commission. Pay them what they’re supposed to get paid, but set expectations for them to help you. As part of our brokerage, we will bring them out generals if they need it because we want to make sure that they’re doing well, and that’s provided in our service.
If you have the right team behind you, you’re not going to need to pay that guy. Anybody that’s creating revenue off of your business, make them work, make them help you, and they’ll bring out additional people. If one of my clients called me and says, “I know this is no inspection, but I want to do an inspection for buyer purposes only,” I’m going to refer him three to four home inspectors. Or he says, “I really want this deal, but I don’t have a general,” we’re going to refer on people to go out, and they’ll get an estimate, and they’re not going to charge.
You don’t need to pay the contractor, but the people that you are paying or that are making money off you, put them to work. They’ll be able to help you get the people out there as well. That’s a problem that the broker, a lot of times, has to solve. The client wants to buy this, but they don’t know how to do it, so they can help them do it. You can earn your commission at that point. Use your team, and then you should be able to get them out. Don’t let people charge you for that stuff.
I would say, instead of paying a contractor to come out and go to your job, give up your time and go offer to intern for a developer, or a builder, or a flipper to where you can help them by just going to the site and seeing what’s going on. You’ll end up learning way more that way, not spending your money, and actually getting hands-on experience than giving some guy money to go look at a house.

Ashley:
Thank you for sharing your viewpoint on that. Because we do talk a lot on here about how, if you are a new investor, you can’t get a contractor to come out because you’re going to look at so many different properties, to offer them some money and incentive, but I think you give a very valid point that maybe they’re not the right contractor if they’re not going to come out and look at projects for you for free.

James:
Yeah. There’s all these signs that you can do as you’re working with your team members. If a contractor is trying to charge you for that or they won’t give you pricing breakdown, probably not your guys. That’s a sign, stay clear from that person. You need to work off facts. If a broker can’t tell you where the value-add is, probably not the right broker. It doesn’t mean they’re a bad broker, but they’re not an investor broker. As you’re interviewing your team, look for these signs to make sure they fit on your bench. If it doesn’t, move on to the next person. Keep calling, keep checking for those people.

Tony:
James, you’ve given us some amazing information through these first two phases. Again, the first phase is what to do when you’re initially looking at the property before you get onsite. We just talked about what to do when you’re actually walking through the property. The last and final phase here is, what happens after you do your analysis, you walk the property, everything looks good? Now you got it under contract. Now it’s yours. Now you own this property. I’m curious what your thoughts are, but Ashley, I want to hear your reaction to that piece first.

Ashley:
Well, first I just wanted to say, James we’re out of time, so we’re actually going to bring you back for a third episode. No, I’m just kidding. I’m joking

Tony:
Two episodes back for every guest.

Ashley:
Yeah. Let’s go into getting the deal. When I came out,

James:
I feel like I’m slowly becoming your intern.

Ashley:
What you’re slowly doing … When I came out and we looked at the first property, we got the property under contract. What happens from there? That’s the piece that you and I are working on right now for our flip is okay, scheduling the contractors, putting together the contracts, the final scope of work. Can you walk us through that process?

James:
After we secure the deal and we get ready for closing, the next steps that we always take is we’re doing one last final revision of our budget before estimating, because the first thing is we don’t want to have a contractor go out there with an unprepared budget. That’s how they beat us up on our numbers, and then we’re going to have a bunch of change orders, and we’re starting on the wrong foot.
The second thing that’s important about making sure your budget’s revised correctly is, at least when I do it and I know a lot of investors do, is they’re getting the construction loan with their hard money or soft money lenders. If your budget’s incorrect, it can cause liquidity problems. If you’re 20% off on your budget and you had that rolled into your loan, that means you’re going to have to come up with that additional capital out-of-pocket, which can mess up your returns down the road, so you want to make sure budget is finalized and prepared that way.
Then from there, we always end up getting at least two quotes from generals. We secure the deal. We have our finalized budget. We have our finalized specs then selected because inside of the final budgeting, we’re going through the comps, figuring out what kind of allowances we need to put in to get the maximum value. Then we start bringing out contractors to estimate and confirm our budgeting.
If we get the numbers we like, and before we hire them, we end up checking their license and bond again, because you want to check that every time you hire a general. It’s not just the first time. Those things can expire, so before we hire them again, we always make sure their status is active and ready to go. We make sure they have a bond because if they don’t and we don’t investigate that, that’s going to be our problem with L&I in the city later. Then from there, we then have the contractor sign a construction contract, or the subcontractor as well. That is very fundamentally important for any investor to do that. I learned that the hard way, again. Most of this stuff that I preach is because I lost money doing it the other way.
A contractor estimate is an estimate. You can sign that and yes, it is a contract, but what it doesn’t do is outline general policies, procedures, and how things need to be completed, and inside timeframes, which is that’s, the construction contract needs to be attached to your construction quote. The reason being is because if you just sign that construction contract or quote, you’re locked into that guy, so he can lien you for properties. You’ve bought out that job with them, so the bid is to outline costs for what’s being done. The contract is set up to how you facilitate that.
Inside your construction contract when we have him them sign that, and we do not flex on that, they have to sign it. It talks about start dates, completion dates. It talks about change orders, how the change orders are handled. For example, you cannot do verbal change orders with us because that always goes bad. A contractor will say, “Hey, we opened this wall. It’s going to be about 1,000 bucks to fix the framing inside.” You get the bill, it’s 1,800 and they’re going, “Well, I said it was about 1,000,” and then you get hit for the 1,800.
In our construction contract, it says, “You have to email it with a broken down bid. It has to be signed by us,” and give it back to them. The contract really protects you and your investment against a third party that can mess it up at that point. Also, it tells them how they’re going to get paid, so it’s not all just to protect you. It also protects them. Like, “Hey, if you get this done in this timeframe, we’re going to close you out within 24 hours, and that you’ll be paid in full.” It clearly defines everything, and it allows for your project, when it’s going forward, not to get spun out of control.
We estimate it two to three times. We then review our bid. We identify which items are heavy, or not heavy, or that are maybe outside of our budget. We then talk to the contractor, see what items we can pull out for our bundle method. Then we agree to the price, we sign the construction contract from there, and then we give them their deposit.
Typically, we’re giving the general contractor different payment schedules to where … It’s referenced on the construction contract too. We’re going to give them 10% at first, 25% after demo, and then 25% from here on, and it lists out their draw schedule from there. That’s really our core process. You buy it, or you contract it, you estimate it. You go through the estimates. You figure out what you’re over on and what you’re not on. We then plug in our own bundle guys. We have them sign a construction contract, and then we put the plan in play at that point.

Tony:
You’ve got this thing down to, it’s like a science, James. I want to circle back to one thing that you mentioned because we didn’t touch on this in the first episode either. Why is it that you prefer licensed contractors over maybe just like a really skilled handyman? I know some flippers where they almost exclusively use handymen and things like that to run all of their projects and avoid general contractors. What’s your take on why one might be better than the other?

James:
Well, A, the first thing is I lost all my money when I was 24 years old because I did a flip on time and materials that turned … It went triple over and those were skilled labor guys. I learned a lot, but I lost all my money. It was the most expensive college I ever went to. There’s nothing wrong with hiring a skilled laborer, but the skilled laborer or carpenter should still be licensed. They need to be licensed and bonded.
The reason that I’d don’t hire non-licensed and bonded people is because that’s the rules and regulations in our state. I have had people … When L&I drops by a job site, and if they check their license and they’re not licensed, not only is the contractor going to get a fine, but you’re going to get a fine as well as the building owner, so you need to check with your local state and regulations at that point to figure out what the process is.
The other reason is I like to know my cost. If I’m doing time and materials for a skilled laborer, if he’s having a bad day or a slow day, or let’s say he kept running out of materials and he’s got to drive to Home Depot 10 times, that could be a problem. I’m going to have to pay for that on my hourly rate and it can cause me not really to know my numbers. As investors, it’s our responsibility to hedge against the investment, and the only way for me to do that is off fixed pricing, saying, “Hey, you’re agreeing to do it for this amount.” Then I can put it in my budget and I can move things around, so we like to fix costs.
There’s nothing else wrong with having a handyman come out or a carpenter to come do some additional items too. You can actually save a lot of money that way, rather than doing it the piecemeal. I personally only use fixed bids. I don’t like time and materials, but it also does come down to what kind of project you’re also doing. If it’s a rental property and you’re just doing a cosmetic where you’re changing out door handles, light fixtures, plumbing fixtures, maybe doing some trim repair, that’s a handyman type of job. Whereas, a lot of ones, we’re taking these things all the way down to studs and I can’t have one to two guys putting that whole house together. It will take forever and my debt costs will get out of control.

Tony:
Yeah. Well thank you for adding that clarification, James. I love the caveat you put at the end that it depends on the scope of the job that you’re doing because that definitely does play a major role.
One other follow-up question for me is, so you have this contract, do you ever find, or have you ever had an experience where maybe a contractor refused to sign or maybe ghosted you after you gave him his contract? I ask this question because it happened to me a few months ago, where I found this contractor that I liked. I gave him the contract and in there, there was one line that said if he missed the deadline more than two weeks, I would charge him, I don’t know, $50 a day or something like that. He was like, “Hey, I’m not really sure about this,” and whatever we were talking. He just stopped responding to me all together. Have you ever had that? If so, how do you handle those kind of situations?

James:
Well, I would say you dodged a bullet because if the guy was … That means he was already telling you he was going to be late.

Tony:
Yeah. Fair enough.

James:
What I always do is I do have a penalty clause in there, and then we have, hey, that you are going to … We charge a lot more. It’s 150 to $200 a day because our loan … I mean, it depends on the size of the project and the loan balance. What we also do is put a bonus in there for them. If they’re completed early, they’re getting that same credit back. If I’m saying, “You have four months to do this project, and $200 a day if you’re late,” but if they get it done early, every day they’re done early, they get the $200 bonus too.
I typically like to set up my daily rate charge is what my per diem loan basis is because then I’m just giving … It’s no extra cost to me. I’m saving on the hard money because it’s debt cost. It’s going to my contractor, which is great. He’s getting a bonus. At the same time, what’s fair is fair, and if I’m going to bonus him early, he needs to chip in from his penalties too.
Also in there, we have a clause that does state what they’re not at fault for, and that’s very important. I explain that paragraph to them. If it’s a permit issue, they get no days credited against them. We have a bullet point of things that say, “These will not be counted in the days or delays.” We had to add in a pandemic part too. If they’re out of materials and they provide us with the receipt but it’s backordered two months, that’s not their fault. We’re not going to penalize them for it.
You just have to make sure that your contract is written very clearly. Typically, from my experience, contractors don’t really read it, so I like to read it back to them, saying, “Hey, this is what this is set up for.” Majority of the time, by you offering that bonus, they’re so excited that they’re not going to care about the delays either. Also too, you guys, if you find a good general contractor and they’re doing a good job and they’re a little bit late but they did everything right and they were working their tails off the whole time, don’t charge them that late fee. Take care of those people.
I don’t nickel and dime them on those late fees, but where it does come into play is if they’re not showing up at all and if you have a conflict, that becomes a bill for them. You’re saying, “Hey, you’re 30 days late at $200 a day. That’s $6,000. What are we going to do about this?” It’s actually a way to separate from the contractor too. If they’re pushing back on that … It’s a very reasonable request. Don’t bend. Just be logical and figure out what’s a common ground to get to an agreement to have that in there.

Ashley:
This reminds me of a rental lease, going by the lease agreement and what you have in there and sticking to it, because you both signed the agreement, and using that so that there isn’t any controversy down the road. Like your clause, I love that you have things that they’re not responsible for, those what ifs. If there’s a permit issue, you’re not going to charge them, so that there’s not an issue going forward, things like that.
Once the project is complete, do you do a final walkthrough with the contractors? Do you go through and blue tape? What does that look like?

James:
Yeah. After we’ve scheduled everything out and we go through, we get the project done, the steps that we always take is … We’re really big on this because, especially on a flip, the last thing you want to do is spend time working on this project for three, four, or five months, and then rush the end to where there’s a bunch of little, small detail. You’ve already spent 99.9% of the money, and because you didn’t spend that last 1 to 2%, the house isn’t that marketable or it just has a weird feeling to it.
We spend a lot of time on that last two weeks, punching out the house and checking for quality items. What we always do is, within two weeks of being done, we start blue taping it. We do our first prelim blue tape, where it’s just getting on the bigger things that we’re seeing through. Then once it gets to almost the completion date, we have a construction clean done because if you’re also blue taping when the house is dirty, it’s still not quite as good. You’re missing things. It feels weird. We have a construction team done and then we do another blue tape.
At the same time, we use an app that’s super handy on the Apple Store. It’s called Punchlists with an S the end. It makes it very, very easy that we go through, and not only blue taping it, because contractors sometimes will just straight take your blue tape off and throw it on the ground. They’re like, “Well, maybe they won’t notice it later.” We take a photo. It goes into this report on this app, and then you can write what needs to be done next to it. Then it prints a PDF at the end that we leave on the counter for our contractors saying, “Hey, here’s all the items. Here’s a picture of it. This is what needs to be done. Initial it when you’re done,” and then we have a clean report. We do our walkthrough, go through that report and make sure everything’s been done.
At the same time as that’s going on, we always do pre-inspections before we go to sell or lease. The reason we also do it before leasing is once a tenant moves in, if something breaks right away that was maybe something easily fixable, it makes it really hard to schedule and get back there, and so it’s just not very efficient. The pre-inspection, we do our own punch list, but then the pre-inspection then punches out even more items to where we can give to the contractor. We want to have both these lists because we don’t issue final payment until all are done and all permits are signed off.

Ashley:
Who is doing that pre-inspection? Are you actually hiring a licensed inspector, or is that somebody in-house, or is that you that’s going through and doing that?

James:
No. You always want to hire a third party for that because, especially if you’re selling a flip or any property, you got to do a Form 17, you got to disclose. What I like to do is have, have a third party come in, because especially if you’re selling too, a lot of buyers are going to think, “Well, you flipped it, so everything’s right on the house.” That’s not true. Sometimes, you’re not doing things certain ways on a flip because that’s what you don’t need … You don’t technically have to do that to sell the house. You’re just going with a different plan.
Having a third party’s going to reduce your liability. It’s also going to put a new, fresh pair of eyes on it. Then also, you can provide that to your next buyer or tenant, say, “Hey, we did have a third party inspect this property.” It shows that you, as an investor, has taken time and care and that you actually care about your project, rather than just winging it. Not only does it give you a really good punch list, it also makes your end buyer or tenant feel better about you as a person too,

Ashley:
And holds your contractors accountable, so if there’s something that was in the scope of work that maybe an outlet isn’t working or something even small like that, you can go back to them and have them fix that before you actually list it.

James:
Yeah. That’s a great point because a contractor’s relationship’s like any relationship. If you’re dating somebody or you’re married to somebody, you could tell that person, all day long, the same thing and just because of how long you’ve been together, you’re like, “No. No, you’re wrong. You’re wrong.”
Then this random person goes, “Oh, here’s this fact. Look. See, this is right.” It places a mediator between you and your contractor. After some time, you can tell them until you’re blue in the face, and they’ll argue with you and do all these things, but then when you have the third party come in, they’re like, “Okay, fine. I’ll fix it,” so it helps things move forward too. They’re kind of like a counselor for the relationship with your contractor as well.

Ashley:
Or if you’re like someone like Tony that doesn’t know anything about construction, you don’t even know how to check if things are done right or wrong, then you have the inspector come in.

Tony:
Seriously. Yeah.

Ashley:
Well, James, is there anything else you wanted to add on to finalizing the walkthrough with the contractor and just closing up the property with the rehab?

James:
No. I think it’s just the best thing you can do … Because all these processes are great in theory. It’s intimidating when you’re a newer investor and people are telling you all these things. You’re like, “Okay. I’m going to do all these processes.” They’re really good steps to implement in, but still not knowing, the unknown’s the scary part. Really, what I wish I would have done, it would have saved me a lot of money, is really go find that investor in your market that you can shadow, that you can work with. Offer them services.
I have people reach out to me all the time, say, “Hey …” I had somebody that worked for me for a year and they were really good at making CAD and as-builts. They’re like, “Hey, we want to learn about construction. We want to buy our first rental property. We want to learn about apartment buildings.” We made a deal to where she got to go check on all of our sites. She would go around, take photos of all of our projects once a week for us. She would get to learn and see things as she was doing that. Also, she would do as-builts for us so she could see about floor plans and things moving around.
She did this for free for us, as long as we gave her access to information, and now she owns like … She doesn’t do this for free anymore for us. She now has it figured it out. We actually hired her now to do them. She offered service and she got to learn so much. It’s one thing, like you could read a book and go, “Okay. That’s a great concept,” but it’s about doing, and putting that motion in play.
If you’re really new and you really want to learn, I would say shadow an investor. Shadow a general contractor and really learn what they’re doing because the more you understand, the less you’re going to get taken advantage of. The more you’re going to understand your margins. You’re going to also understand how to get things done, or the cost of implementing the right plan. Like we talked about in that last show, is inventing that margin. When the market’s hard and it’s not easy to find a deal, you’ve got to put the right plan in there to make a return. By knowing these costs, the more you know, the more you can dictate, the more you can control, and the better plan you can put in play.

Ashley:
James, I think when I was out there in the fall, you had somebody that had been doing some virtual work for you for free. They were actually moving to Seattle to come work for you.

James:
Yeah. That was for wholesaling. He reached out to me. This guy, I was hyper-impressed by him because he not only reached out to me five times on social media, and I didn’t respond, he then called my office four times. Then he’s like, “I just want to learn how to wholesale. I just started doing it. I’ll make phone calls for you if you teach us.” Then he ended up moving out to Washington and yesterday, we inked his first deal.

Ashley:
That’s awesome.

James:
His first deal got done.

Tony:
That’s amazing.

Ashley:
Yeah. I was actually worried about bringing it up. You were going to be like, “Oh, actually, that didn’t work out,” so I’m glad it is working out. That’s good.

James:
His first deal. We just signed and rented a house in Lynnwood, and it’s a good one too. It’s a really good buy. Yeah, offer yourself of service. Don’t underrate … Everyone wants to get coffee. Like, “Oh, can I buy you a cup of coffee?” Or, “Can I take you to lunch?” People are busy. There’s entrepreneurs … The people you want to follow will be busy because they’re doing work. Offer them something that helps alleviate pressure points for them, and they will give it right back. They got to pick and choose who they can spend time with, and if you’re on a team, you can learn a lot of information for free if you’re working with the right investors.
Also, watch BiggerPockets. There’s a lot of really good information on there. The more you watch, the more you hear, the more repetition, the more you hear people implementing, and then not only just hearing about how they’re doing it right, but find out how they’re doing it wrong. I have thousands of nightmare remodel stories. Those are the stories you want to listen to because you want to not step in that thing or do that thing, and it will save you a lot of time down the road.

Tony:
James, maybe we’ll bring you back for a third time and just have you talk about all the things that have gone wrong for you. That might make for a good episode.

James:
Oh, it will blow your minds on the stuff I’ve seen. Everybody thinks, they’re like, “Oh, well, you’re just this investor that does all these projects so you can do whatever you want. You get the pricing.” It is the complete opposite. That just means I’m exposed to way more types of projects, which means way more problems and way more people. I’ve seen the weirdest, craziest stuff. I’ve hired contractors that had fake identities and fake businesses, like legitimate fake people and they disappear with your money. Be careful. It’s a crazy business.

Tony:
Well, James, thanks so much for bringing so much value today, brother. This was, honestly, one of my most favorite episodes. Partially because you obviously provided a ton of value, but secondarily, because I’m trying to learn how to flip more efficiently myself, so I very selfishly asked a lot of questions that I’ve been thinking of. James, if people want to get in touch with you, they want to learn more about you and what’s going on, where can they get in touch with you?

James:
Come find us. My Instagram is probably the best way for you guys to find free construction, see what we’re doing, see the crazy things we do. That is jdainflips. Then also, on our YouTube channel, ProjectRE, we release a ton of really deep dive, specific things on construction to help you guys out and keep your plans going forward.

Ashley:
Well, James, thank you so much for coming on. You guys, follow James and I on Instagram, and check out his YouTube channel to follow my first flip, as I’m flipping my first property in Seattle. Thank you guys so much for listening. I’m Ashley @wealthfromrentals. He’s Tony @tonyjrobinson on Instagram. We’ll be back on Saturday with another guest. We are all done with James Dainard. Check out what’s new on biggerpockets.com.

Ashley:
This is Real Estate Rookie episode 165.

James:
I always tell people there’s two ways you can learn construction. You’re either going to lose a lot of money and you’re going to buy that thing and you’ll figure it out the hard way. Or you can take baby steps and start interviewing people, talking to people, but also go out and start shadowing with investment companies.

Ashley:
My name is Ashley Care, and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, which is in my opinion, the best podcast on the planet for new real estate investors, because every week, twice a week, we give you the stories, the inspiration and motivation to kickstart your real estate investing career. And if you’re already investing, hopefully we’re giving you the motivation to keep going and build an even bigger, better real estate business for yourself. So what’s going on today Ashley?

Ashley:
Not much. We just got a ton of snow in Buffalo. It was a holiday yesterday, so if it wasn’t a holiday, all the kids probably would’ve had a snow, but all my friends and their kids went out skiing and snowboarding in the fresh powder and I just sat at home and powdered because of my bump knee. So I do, I am having surgery February 10th. So I think this episode will have already aired by then or won’t air or the surgery would’ve already happened by the time in this airs. So I’ll probably hopefully be in rehab and recovering and have a complete ACL and MCL again.

Tony:
There you go. Back to old Ashley. So just no more snowboarding for Ashley, right?. You can just at walk from the side.

Ashley:
AT least not for the next six months, but next season, oh yeah, I’ll be back up there.

Tony:
You’ll be back out there. Okay. Are there like training wheels for boards. Like how can we get you like on a… or we’ll just keep you on like the bunny slopes next season?

Ashley:
No, actually Tony, I’ve been snowboarding since I was like 10 or 12. I’ve snowboarded it for a very long time. I just thought that I was-

Tony:
You were feeling a little gray that day.

Ashley:
It was like my first time on a super big hill and I went way too fast. It was definitely user error. Like me just thinking that I was… my body was still 17.

Tony:
Yeah, you got humbled is what it was.

Ashley:
Yeah. So and then I went into a woods trail and I hit some roots and they just flung me and ping pong me off trees, but…

Tony:
Well, hopefully this is the last time. I don’t have any torn MCLs or ACLs, my life isn’t as exciting, but…

Ashley:
Yeah, you’re actually getting a better shape.

Tony:
I’m trying to.

Ashley:
You have your fitness competition-

Tony:
Yeah. The fitness competition is coming up.

Ashley:
… you haven’t talked about that in a while.

Tony:
Yeah, it’s actually a little less than 10 weeks away. So it’s nine weeks and like five days away. I’m honestly really excited mostly because I’m kind of over the diet and waking up at the crack of dawn to do cardio and just eating every three hours. Like it’s starting to weigh on me. So I’m praying for the end competition, but it’s always fun. It’s always a good challenge. So I’m looking forward to it.

Ashley:
Yeah. When I went to Tennessee to visit Tony and record a podcast live there, he had all his meals that he had brought with him from California. And it’s like, I don’t know, 11:00 at night, everybody’s having a drink playing pool and there he is sitting at the kitchen table eating one of his meal.

Tony:
Eating some ground Turkey meatballs. Good times. Good times. Well, we got a crazy good episode today. And for the rookies that are listening, this might be my most favorite episode that we’ve done so far are only because our guest goes so deep into flipping and specifically on like how to estimate your rehab costs and there’s so many pieces. But today we have James Dainard on the podcast. So Ashley, you know James pretty well, just give like a really quick why we brought him on for this episode.

Ashley:
Yeah. So James Dainard and I probably met like a year and a half ago. He’s an investor out of Seattle, Washington. And every time I am with him, I’m mentally taking notes or I’m physically taking notes and scribbling down as much information as I can about what he is saying. So I finally found a way to get him onto the Rookie Podcast because he is not a rookie, but Tony and I have decided that we want to kind of incorporate and add into our series, having some experienced investors on where they just go down into a niche.
So today’s niche is going to be construction cost and doing a rehab. So this could be, if you’re doing a flip, this could be, if you’re doing a BRRRR for rental property, we are going to break down exactly how James process works and what his system is for getting a property, estimating the budget, getting contractors, how to find contractors, putting together the contract, putting together the scope of the work. So a ton of great information. And we actually had to, I get into two episodes. So on Saturday, instead of our usual Rookie reply with questions, it will be a part two series with James Dainard. So let’s get to it and let’s bring James onto the show.

Tony:
James, welcome to the Real Estate Rookie Podcast, where they’re super excited to have you on. I’ve heard so many amazing things out you from Ashley. So I’m glad to have you here, glad to share your story with our audience, well, welcome board, man.

James:
Yeah. Thanks for having me on. I’m excited to be here. I had many late night conversations with Ashley, so now we got to do a formal interview.

Ashley:
It’s only taken two years of knowing me to finally get on the podcast.

James:
I know, I’m starting to feel a little rejected at this point.

Tony:
Yeah. So James, for those who or for those that don’t know you, if they want your full backstory and all kind of how you got started in real estate, if they go back to the Real Estate Podcast, episode 338, you were interviewed there, you gave your whole backstory, but if you can just give us like a 30,000 foot view quick snippet of kind of who you are, what you do, what’s your businesses and what you’re going to talk to us about today.

James:
I’m James Dainard, I’m an investor out in the Pacific Northwest. I’ve been an active real estate investor since I was 22 years old, when I was a senior in college. We since kind of starting our company in college, I went from door knocking to buy my first deal. And then since then, we kind of expanded out and created a multilevel real estate investment company to where we own a brokerage, this source is on and off, market properties, we have a lending arm that finances investors in Washington State with hard money, short term construction financing. And then we are very active investors in general. We’ve been involved about 3,000 homes and 3,000 transactions with investors in the last 15 years. So we’re just an active shop.
We’re known for value add construction. A lot of the deals that we do with our clients and ourselves are heavy value add where we’re buying something that where the numbers may not look good on paper at first, but the right construction plan then allows us to kind of maximize it out. So currently right now, we’re working on about 30 flips ourselves, fix and flip. And then we have about 400 apartment doors under construction. So we do a lot of heavy lifting, a lot of construction plans. And then we like to get our hands dirty. We’re not really carpet and paint guys. We want to see the potential in the structure and kind of rip it apart. So done a lot of constructions, seen a lot of different things, probably crazier things than what people can ever imagine, but we’re just very active investors in the Pacific Northwest.

Ashley:
So I’m actually doing one of those flips with James. I’m doing my first flip and we are actually documenting the whole thing. But I flew out there for my first time to look at the property that were flipping and I got to see James process as to, “Okay, this is how we analyze a property that needs rehab. This is how we build the scope of work.” And I wanted to have him on today to kind of talk about the process of doing a rehab.
So kind of, you get a deal, you get a lead in, what do you do with the property to kind of estimate your rehab is? And then once you get to go look at the property, what are the things you should be taking with you? What should you be looking at? What do you need to know when you’re looking at the property? And then lastly, once you get that property, bringing in contractors, scheduling them, how that all works. And then most importantly, like building your budget, what are the construction costs going to be? So James you want to kind of like kick us off here as to what’s the first step when you get a lead that you want to analyze for a rehab.

James:
Yeah. The first step that we do before we bought any property, and we’re active investors so we buy all sorts of different types of things. Some are even new projects for us where we’re maybe buying something that we’ve never done before, we have to build a new process. But it always comes back to before you buy that first rehab, and I did learn this the hard way, is you want to build your team right, because everybody is out there and is chasing the deal right now. There’s no inventory. It’s hard to get that next goodbye. But you know, I hear it all the time, there’s no deals out there. Well, there is deals as long as you can put the right plan together. And the right plan together, it means that you have the right bench and the right resources to kind of make the margin.
A lot of times when you’re, Pacific Northwest, we have a very expensive market, it’s hard to get a deal. What we say is we have to vent the return. The right plan will create the right profit margin. But that comes down to building your bench. And before you jump into your first rehab, you want to make sure, one thing that we always do, is we have three active general contractors that we’re currently working with. The reason why we always have three is because sometimes they’re busy and their pricing might go up at that specific timeframe, so we always want to get three quotes and we also have two to three subcontractor trades for every line item in the house. So we have two to three plumbers, two to three electricians, two to three framers, two to three roofers and on from there, because as the market gets more expensive, it’s more competitive, the margins also get more compressed.
And so you always want to make sure you have that bench to where you’re not getting stuck with the same guy that’s giving you one price that you have to go to that price commitment. So go out there, build your bench, find your contractors, you want to go out and talk to investors, go to meet up groups and start talking to people and then kind of getting qualified from there. Or start talking to them about pricing and find out if they work with investors and kind of build that bench to where, when you go out to that project, you’re bringing out people that are, A, used to working on your type of business plan and then also that you can make a quick decision because if there is a good deal on the table, you can’t sit around and wait for it. You got to pull the trigger quick. The biggest thing is, go out and find those contractors that work with flippers or BRRRR people or investors. They can’t be the contractors that are working on your mom’s house. That’s a different type of contractor.
And so you want to go find those people and then start kind of getting them in the door. And then also at the same time, before you get going and you buy your next project, you want to make sure that you have an understanding of construction. And if you don’t, you want to take baby steps and start looking for different types of projects are smaller ones. I had to get a crash course on… I mean, I always tell people, there’s two ways you can learn construction. You’re either going to lose a lot of money and you’re going to buy that thing and you’ll figure it out the hard way. Or you can take baby steps and start interviewing people, talking to people, but also go out and start shadowing with investment companies, see how you can be of service to other big investors. And they’re going to teach you the ropes for free because you’re being of service to them.

Tony:
James, so much good information. Like my head’s spinning already and we’re like five minutes into this conversation, but I want to circle back about the team building, but before I do, I just want to highlight one thing that you said, you said you have to invent the return. And I’ve never put that way before, but what are great phrase. People, especially in today’s climate, feel that there are no good deals out there, but to your point, if you can find the property and develop the right business plan around the property, that’s how you find a good deal. I didn’t want that to kind of go over peoples head, but what a cool phrase you said there.
I want to go back to the team building James, because I think for of our listeners, these are first time investors, people who are aspiring to do a deal, but really haven’t done them before. So if I’m that new guy or girl that wants to get started, where am I going to find these contractors? Even for me, I was doing a flip out here in Southern California, I was looking for another contractor and no one wants to share who their contractor is because they want to keep their contractor for themselves. So where am I going? Who can I reach out to? What resources do I have as a new investor to find that contractor and start building that team?

James:
Yeah. And that’s a question we’re all having right now because since the pandemic, there’s been all sorts of things that have happened. Material cost has spiked, there’s labor shortages, and it’s harder and harder to find guys. I mean, even for me who’s been doing this for almost 20 years in the Pacific Northwest, I know a lot of people, it can be tough right now. And so the ways that we have found additional contractors, there’s a couple different things that we’ve been doing. We had to, A, we had to invent the return again. We had to create different are types of ways outside the box to find these resources. Our favorite way right now is to find actual contractors that are used to working on our model. There’s two things we do, we track permits. So I go around and I look on the Pacific Northwest, there in general, you can go through and look at what investment properties were sold, whether it was at a foreclosure auction, it could be a bank on property, it could be a fixer.
And then in the Pacific Northwest and almost every different state, you can actually pull in and reverse engineer and find out if that property address, like I can go on City of Seattle Permit Center, put an address and that’s going to give me every permit that’s been pulled on that project. If it’s a flip project and I know an investor bought it, that means most likely those trades are already going to kind of be in my wheelhouse for what I’m trying to accomplish. They’re used to working for fix and flip people, they’re working for investors in general. And so what it does is it actually gives me a call list as to where I’m not going on the internet and searching out plumbers and looking for 100, I’m now looking at 10 and out of the 10, I kind of shrunk my box into people that have already working for people like me. That’s our favorite way to do it.
In addition to, people talk about driving for dollars for deals, I drive for dollars for contractors. If I have an open day, or if I’m out looking at projects and I see a house that’s being flipped, I stop in, I introduce myself to the contractor, I explain who we are and that we need more kind of work and then we start interviewing them right there. In addition to, I can kind of see those people working on site. If I pull up to a flip house and the site is completely messy and there’s doors falling apart, windows, there’s garbage everywhere, I don’t want to hire that guy anyways. And so it’s actually the best kind of interview process because I got to see them working. And then also kind of see what they’re doing, I can ask them what they’re charging the people on site. And so I can visual kind of look at that.
So A, I track permits, I drive for dollars. And then the best thing too is just working with other investors for new people like in the Pacific Northwest, find the right brokerage and the right team, you know it goes back to building your team, for our investors, we have a resource list for them. So when they buy a property through us, we’re not just your traditional real estate brokerage, we’re here to service the client all the way through, not just find them a deal, we want to make sure that they can execute on the deal. Part of executing is giving them resources. So we are constantly filling up our electricians, plumbers, flooring and all our trades to where we know that we can refer them out to our client and that they can be successful. We don’t want them overspending their budget because we want them to maximize out that deal.
So work with maybe a right brokerage. If you find the right broker, there are brokers that focus on just investors. They typically are going to have referrals for you too. Another good way that I’ve been finding tradesmen too is I actually talk to my suppliers. I recently called my cabinet shop who we refer a lot of people to them, well, probably 100 to 200 jobs a year, and I called them and said, “Hey look, we’re giving you all these cabinet orders, you sell flooring. I’ll tell you what, I will buy all of my flooring and refer all of my flooring to you if you can give me six installers.” Because the flooring company I was working with was starting to get busy, they were starting to get expensive. And so I asked my vendor for help. And then he referred me five good contractor or flooring installers that work for investors.
And so just anytime you’re out talking to anybody, just ask the question, “Hey, who do you know that does this?” If you’re giving someone business, ask them for some favors back. If one of my clients calls me and says, “I’m jammed, I need an electrician for my house.” We’re going to go help them find that because as a broker and being a team member, we want to make sure they can get through that project, so then I can list that project down the road too. So as you’re trying to find contractors, drive for dollars, look for permits, work with the right type of team members, the right broker, the right hard money company. We finance people too in the Pacific Northwest. We also would refer them contractors too if they’re in trouble because it’s in our best interest for them to get that house done, because we lent them the money. So really build that good team and that team can give you tons of different types of resources.

Ashley:
James, once you get these referrals or you get these people, a list of contractors to use or vendors, what’s the next step after that? How are you actually vetting them? Or are you’re just taking someone’s word for it that this contractor will work?

James:
That’s a great question, it’s… because that is tough, right? People will tell you whatever you want to hear. Especially in real estate, you have mortgage guys that will always be able to get your loan done when it might be more complex. You have contractors that, “I can do a great job for an amazing price,” but you don’t know who they are. And depending on your state too, like in Washington State, it is not complex to become a contractor. You fill out a form, you send in a check, you get a bond and you are magically able to rip a house apart, which is kind of crazy because construction is complex in general. But the things that you always want to check before you hire those people, so what I do on every referral or every generalist referred to me is, A, I want to check the source. Who referred them to me? How many projects have they done? Have these people worked for those people before? If it’s just like, “Oh, my buddy told me about this guy,” then it’s not that good of a referral.
And then when I get these people on the phone, the first thing I ask for is what’s their license number. I will not hire unlicensed people. We pull a lot of permits, there’s a lot of liability in not doing so, you can get fined. So we want to make sure that they have a license. The other reason I like to hire and make sure they’re licensed and bonded is because that means they can run a actual professional company. You’re not just hiring some random guy that’s going to tear your house apart that can cause a lot more damage for you down the road. So you want to make sure that they’re licensed, that they’re bonded. I actually check to see how long they’ve been in business too on their license. Like if they just got their contractor license four months ago, I’m going to ask them where they worked prior before that. Like did you work for someone before? Or if they said, “I had a different company,” I want to know what happened to that company. I want to know the name of that company.
I’m going to pull up to see if they had any claims, because you can also check online to see if they have any claims against their bonds. The other thing I want to do is I always make sure I get addresses of three recent jobs they did for investors. Not for a homeowner, they need to be the same… Remodeling for homeowner is different than remodeling for an investor. So you want to make sure that you get the addresses of the projects they worked on. I like to pull up those addresses, see what they sold for. I want to see what the pictures look like. I want to see how long it took for it to sell too. Because if it took 90 days for it to sell in a market that usually takes five, was it a pricing issue or was it a quality issue?
And so those are things that I’m always going to check. And then I always get the name and can refer to. The name of someone that can get me actual references. I want to talk to them on the phone. And this is all a lot of work and it can be quite invasive. A lot of my clients are like, “Well, the contractors get a little annoyed when I ask these questions,” and I’m like, “Well, if they’re getting annoyed by you… these are all valid questions, probably not the right person to be hiring.” And so if someone pushes back on these questions, I instantly cross them off my list because nothing’s worse than hiring the wrong guy. And so those are always my first set of questions. And then I go into my pricing questions from there because I want to make sure, A, that they’re qualified, but then also they can actually do what I need them to do.

Ashley:
James, before we go in to the pricing, why do you prefer contractors that have worked for investors and don’t care if they’ve done work for homeowners? What’s the difference there?

James:
The reason being, like if you’re working for a homeowner, and this is why I would never do a renovation for a homeowner it’s, it is a different business. Construction is not all the same. Commercial construction is not the same as residential construction. Multifamily construction’s a lot different than actually fix and flip construction a lot of times, like how you do it, how you… what kind of materials you’re putting in. Custom and homeowner construction is also completely different, because they’re usually pricing things up higher because to be perfectly honest, investors are a lot of times easier to work with than a homeowner because you’re not building your dream house, you’re building a home that can create revenue and can create a return or maybe it’s a rental property that you’re trying to keep your cost down and you’re trying to make it more bulletproof rather than visually appealing.
A homeowner changes their mind a lot. And so contractors build that into their pricing. They got to have way more conversations with the people, they got to get a lot more feedback, the people will be moving things a lot more. Just like when I’m doing construction on my own personal house, I have a lot more opinion on it than I do a flip a lot of times. And so those guys, they’re used to dealing with that, like a custom build, there’s a lot more expectation, there’s a lot more personal opinion. And so you should charge more for that. It’s no different than if I’m buying a fix and flip property and it has a lot more hair on it, I’m expecting to make more money because it’s more complicated. If you’re a contractor and you’re working for a homeowner, it’s going to be more complicated most times.
The other thing is too, it’s about the subcontractors that they’re actually trying to go find. If it’s a custom home builder, they’re going to usually get their supplies from a very consumer friendly shop where they can send their customer down to a design center. They’re going to work with a designer, they’re going to pick out all their materials and then they’re going to put the plan in play, whereas we don’t do that. We pick the materials first, we pick the budgets and then give it to the contractors, so then we can control the budget. So it’s just a different format and it’s a different end product at the end of the day as well.

Tony:
Yeah. Thanks for clarifying that, James. I think that distinction is really good to know. I just want to go back to the event, the return point you made. Really quickly one more time. I think that I understand at a high level what you mean by that, but I think some of them are listeners might be wondering, what does that look like in real life? So when you find a property, how are you finding that undiscovered potential that maybe other investors are passing out? What is it that you’re looking for? How do you know if it has the opportunity to have that in turn or that return invented? Give us some insights into what that looks like.

James:
That’s a great question. And that always comes down to, are you creating the right plan and are you able to control the costs? Because fix and flip or BRRRR properties, they’re all the same. We’re buying something at a certain price with a certain margin in it. The middle is going to dictate how good of a deal that is. If you buy something at 60 cents on the dollar, like you can buy it for 60 cents, it’s worth a dollar. That sounds like a goodbye, unless you’re are spending 45 cents on your renovation, then you’re over market at that point. And so it comes down to what’s the middle number. And so what we do is we’ll look at it a lot… Every deal I look at, we cut it up three different ways. We’re going to look at it, “Hey, what’s it going to look like as a cosmetic turn?” If we just do carpet, paint and a quick turn, that’s usually going to be a lower profit, lower renovation by a higher cash on cash return on an annual basis.
That’s where most people are going to look, right? Most investors, especially right now, there’s a lot of newer investors in the market, they’re going for the normal plan that everybody’s looking at. You know, I got a four bedroom, two bath house, a comp is a four bedroom, two bath house, I got to replace the cabinets, countertops, windows and then that’s going to get me at this price. Whereas we might go in and say, and they’re going to spend $80,000 to do that, we’ll go in and go, “Well, instead of spending the $80,000, because that’s usually investors’ first question is, “How can I get this renovated for as cheap as possible?” Sometimes renovating it for the cheapest possible thing is not the right plan. Where we’ll go in and say, “Well, instead of having a four bedroom, two bath house, we’re going to rip this all the way down to studs and spend $150,000 on it instead and it’s going to take us three times longer, but we’re going to create $200,000 more in additional value.
And we’re not afraid to go for that higher… we always want to know what highest and best use is for the property. And it doesn’t matter how complex the plan is, as long as the return’s higher at that point. And in Seattle, there’s a lot of really old homes, 1900 and 1920s with old basements, they need a lot of structural work, a lot of reconfiguring. The more reconfiguring you do, the more complex and harder that it is at that point. We’re just not afraid of the hard work. And then part of that is we know the cost that it’s going to take to get it through the hard work. If you don’t know the cost, you can’t estimate it correctly. So if I’m doing a studs down house in Seattle, and I think it’s going to be… I’m saying it’s going to be $200,000, I’m going to break down how I’m going to get there.
If I bring a contractor out and I can’t control that contractor and the construction to keep it at $200,000, I can’t invent the return then at that point if every other contractor’s coming out and saying it’s $250,000. So what we do is we look at the total budget and we don’t just go to the normal route of hiring a general, putting the plan in play. We hire a general, look at where he’s expensive, take those items off, plug in our own guys to take our costs down and that’s how can create that margin at that point. So we’re not creating the margin on the buy, we’re creating it by reducing cost and putting the right plan in play. And that’s why we say, we invent it because it’s really on us moving the pieces around rather than just going A, B, C make your profit at that point.

Ashley:
Can you give us an example of that? Like a project you’ve worked on recently, what were some of the things that you took out that you put your own people on just to save some money?

James:
Yeah, so they’re… I like to call it the bundle method in construction. I like to get a full scope of work for a contractor, and I get all their… and when I get my scope of works, I always make sure that they’re broken down for material costs and install costs. I don’t get lump sums. I want every line item broken down at that point. That’s how I can kind of invent that return, because I can pull out the expensive parts.

Ashley:
And that’s another thing too that you should expect from your contractors. How you said, if they’re like getting annoyed or mad that you’re asking so many questions, they shouldn’t be annoyed or getting mad that you’re asking for this breakdown. Because if they’re actually taking the time to actually put together a valid budget for you or an estimate for you on the cost of this, that shouldn’t be a problem to get that breakdown.

James:
Yeah. And you don’t want to burn out your construction team. I mean, if you’re a difficult client, no one’s going to want to work for you. And so it’s about having really good communication with your construction guys is, if I have a general come out and he bids electrical for… he has his own electrician. That’s his guy or his two guys. He is also dictated on their pricing at the time. We don’t know if his two electricians are really booked out and maybe they’re charging a little bit more because he’s charging their cost plus 10% to 15%. And so I’ll just ask the question, say, “Hey, your electrical is really high, what’s going on?” And he might say, “Well, our guys are busy, costs have gone up.” So what I offer him, so then it still makes it worth his time, because if I have a really good general, that’s going to show up and do his job and has good communication and works with me, I want to keep him on my team and on my bench.
I’ll give him an offer. I’ll say, “Hey look, what I can do is I have three more electricians. Let me price this out.” And if they come in lower than his, he’s at $20,000 and let’s say my guys are bidding at $15,000. And that’s where it goes back to that bench, always have three people on your bench so you can plug this in. So I’ll get three quotes and then I’ll take my lowest quote and say, “Hey, I’m going to use this guy instead, let’s pull this off your scope of work.” If he has to manage them at all, I’ll still pay him his 10% on top of my bid, because he’s still doing the work. So I’m just saying, “Hey look, I’m still paying you, I still want you to do the work, but I just want to plug this guy in because it ends up going back in my pocket.” And typically, people are going to go, “Yeah, that’s a good way,” because you’re still taking care of your general, he’s still going to help run your site and at the same time you can reduce your cost down.
Typically, in the bundle method, I like to have my general do the framing, the plumbing, the electrical, the windows, the gutters, the roofing at that point. But if any of those line items are high, I will pull them off, let the contractor kind of help me put it in play, pay him for it. Or maybe the guy that wants nothing to do with it. A lot of time generals are bidding stuff high because they don’t actually know how to bid it. They’re going to say, “Well, I don’t want to get burned by my electrical quote because there’s so many variables in this house. You got to take down studs, we got to run new 200-amp service, we got to bring the meter in, whatever it could be.” And because they don’t know they’re throwing a real high number at it. Whereas, I like to know my number’s going in and so you’re almost doing them a favor at that point because you’re taking off the unknown and you’re plugging in an actual at that point.

Tony:
So James, you clarified a question that I had earlier, but I just want to make sure that I’m understanding it the right way, because you said up front that you like to use GCs. And you said you have about three general contractors that you rotate through, but you also said you keep two to three subcontractors. So the reason that you also keep the subs on your team is for this like substitution method that you just talked about?

James:
Yes, correct. Yeah. So we can always… So it really makes us and our general as a team. It’s better for them if I’m making money and I can go buy another house and they can keep working. I’m still paying them, but I’m giving them additional resources at that time. It helps them out, it keeps their cost down. And I always want that option because as a house, it’s not different than any business.
If I’m a manufacturer selling this pen, I got to sell this pen, I need to buy these. I sell 10,000 of these a month. I’m always going to have a backup supplier because if I can’t hit my… for some reason, this pen company goes out of business, I need to make sure I can still sell them to my customer or if this pen suppliers telling me that one cent today could be one and a half cent tomorrow, back down to one cent and then that’s messing up my margins, I need to be able to plug in that backup and kind of help keep your margins the same. And it is just, you have to have those people in line because just like anything, if you call that person and they’re busy, it’s going to cost more. And so you have to be able to outlay out.

Ashley:
So now that we know how to find a contractor, how to use a general contractor, how to bundle, use the plug and play. Let’s talk about actually getting together a pricing, a budget sheet before you even go and see the property to help you accurately analyze the deal. So you talked about how you get pricing from contractors before you even hire them. How does that incorporate with your budget sheet?

James:
That’s in a very important question. Because we budget, it’s all based on logic. Budgeting should be treated the same way as the analysis for the sale or the rental, the lease up. If you want to know how much it’s going to lease for you, pull comps. You want to know how much it’s worth, you pull or you pull rental comps. If you want to know how much it’s worth, you pull actual comps. So with contractors, we want to be able to break it down the same way. So what we do, the best thing that we did and this, we started doing this about five years ago, is instead of going lump sum, when we were first brand new investors is it would be like, “Hey, we need a kitchen, we’re going to put $10,000. We need a roof, it’s going to be $10,000. We need to rewire, it’s going to be $12,000.” It was always those lump sums and it was just a rough ballpark.
And that’s not a terrible way of doing it, it will kind of give you like a ballpark. And it also worked a lot better when there was tons of contractors around. That worked well in 2012 to ’15, because there wasn’t as much work for guys. And so they would do more to make that deal work. Now there’s too much work and there’s less guys and so what we want to do is how we break down our budgets so we can do the plug and play is we take all of our line items. If I’m calling an electrician, I write down what scope of work do they typically do. Well, I know they’re going to do a panel. I know that they’re going to knee a meter. I know that they’re going to do a mask. They’re going to possibly fully rewire house. They got to trim the house out and then they need to install fixtures. Those are the core things that I need to know in a house.
And so when I’m talking to an electrician, the first thing I do is I qualify myself and say, “Hey, we’re Active Investor, we are a flipping company. We do volumes so we can give you numerous jobs.” So as I’m telling them, I’m telling him I’m going to give him more than one job down the road. I also tell him my payment structure. I’m touching on this before I ask them the questions. And the reason being is contractors can be a little bit of a prima-donna right now because they’re so busy. They’re being very selective on who they work for them. And I don’t blame them, they should. That’s their business to do it. But qualify yourself so then they also kind of get off the edge a little bit. They don’t want someone just drilling them with questions.
I tell them who I am and then I also tell them how fast I pay. “Hey, once you’re done, we will cut you a check within 24 hours of it being done.” People like hearing that. We’re not saying we’re going to pay you in 30 day from when you’re completed, we’re going to get you paid right away. So you qualify yourself and then I start asking them questions. So now they’re less on defensive side. They know who I am, they know how I pay, they know I have experience, I’m going to take care of them. And then I just say, “Hey look, before…” The other thing I do is I value your time. I don’t want to take you out to a bunch of houses because they don’t want to do it either. Go bid them, just not to get at the work. And so the next question is I’ll say is, “Hey, can we just run through a couple different pricings?” And based on my prior jobs or what other investors have told me in the market or other electricians, I just ask the questions. “Hey, can we go through some core costs?”
“On an electric panel, typically, we pay 2…” And I don’t ask them for a number, I give them a range. I say, “A typically, I pay $2,000 to $2,500 for a panel. Is that about right?” And they’ll say, “Yes, that’s in there,” or, “No, I’m at $3,500.” And then I actually document, we actually database these people and write what they’ll do them for. Because they could be a really good electrician and I really like them, but they might be costing too much. And if I’m in a jam, I’ll still call them out but I’ll know their pricing. So be for a panel, I go $2,000, $2,500 to $3,500. For a meter, they usually cost me $500 to $700. So I just kind of throw out ranges and see where they bite on. And I go through and I ask them those same core questions. How much do you charge to rewire on a per square foot basis? Just roughly. You say $3 a square foot. And then lastly, I’m going to say, “Well, how much do you charge to put each light fixture in?”
Typically, that’s going to be $25 to $50 depending on the type of electrician per fixture. Based on asking five questions, I can get 95% of the way there with my quote with my electrician. Because is I’m going, “All right, if I need to rewire a house, I know what my panel costs, I know what my meter costs, I know what my mask is going to cost. He said roughly $3 to $4 a square foot to rewire just for Romex, my house is 2,000 square feet, so that’s going to be $6,000 to $8,000. Trim out is a dollar square foot, so that’s going to be another $2,000.” And then I can count out my own light fixtures and go, “Okay, he’s charging me $50 a fixture, it is going to be this.” And then at that point, it’s just up to me to pick the right spec.
If I’m going over budget, I’m going to look at my comps and go, “Well, I got to hire this guy that’s charging me $50 a light fixture, whereas usually it’s $30 from this other guy. Well, maybe I cut down my material cost by $10 by sourcing the right thing and I’m still going to fall right about the same budget. I can hire two different guys with two different pricings and still get to the same pricing as long as I’m picking the right specs at that point.” And so it’s about kind of logically breaking down every little section.
If it’s a flooring guy, I don’t ask him how much it costs to install hardwoods because that’s a… laminate floor, because that’s a open ended question. What kind of floor? Where are you getting it from? What’s the price for the allowance? I’m only asking them, what do you charge to install it? After that, it’s up to me to pick the right material that fits inside my budget. And so it’s just ask the direct question and they’ll appreciate it too, because you always want to go back to, “I don’t want to waste your time, contractor. I value your time. So if we can just answer these questions, I’ll know when I can call you out.”

Tony:
I was just going to say that. That was like a master class in estimating rehab costs right there. And for all of our rookies that are listening, almost every episode has like that two to three minute segment that’s worth just like putting on repeat and that was it right there. I think so many new investors, they feel, and this is how I felt too when I first got started, it was like we’re in it. It just feels so overwhelming to try and identify what I might potentially spend on a rehab, but if you just call any trades person and ask, “What do you charged to put in a light fixture? What are you charged to put in a new panel? A plumber, what do you charge to put in a toilet? What do you charge to re…” Like you just start slowly piece by piece, getting all the information that you need and once you’ve got everything, it’s just a matter of putting it all together. So man, it’s so eloquently put, I love that approach and I’m sure all the Rookies listening will as well.

Ashley:
Yeah. And James, you have the Excel spreadsheet that you actually put those figures in. So it’s really just plugging in the square footage or the number of light fixtures and boom, you have your budget estimate.

James:
Yeah. And it makes it very easy to get your budget really close. I mean, me and Ashley, we actually mocked up a budget for a flip and I ballparked it. And I was like, it’s going to be about 115, right? Because I’d memorized my budget sheet. And we were within 1% of that number once we cranked out all the numbers. So by having a sheet, so we take all these install rates and then I have four different budget sheets. Each budget sheet has a different allowance in there based on the quality of renovation. So if I’m doing a rental property, I have my rental budget sheet which is calling for like bulletproof items but also very in the expensive fixtures to where it’s going to fit inside my kind of model. Like I’m not going to put a $50 light fixture in a rental a lot of times, I’m going to go with a $10.
And then from a high end renovation, my light fixture allowances will maybe be at like $200 rather than $10, but it’s the same install rate that’s in there. So the budget sheet’s only changing based on the specs that I’m putting in. And it allows me to crank through budgets very quickly and when I’m underwriting and make a decision fast to where I can bring people out. In addition to, the best thing about asking these people these questions and putting into a sheet, it happens constantly where you are going, “All right, I have my budget,” let’s say my plumbing’s $12,000, “I bring my out there, he comes back with a quote of $15,000.” And I’m going, “Okay, I’m $3,000 over. Why?” I then bring him into my office and I don’t do the whole, “Hey, you’re over budget, can you help me out here, thing.” I go, “Hey, I just got some questions for you.”
I don’t even talk to him about the quote, I go through. I go, “Hey, how much do you charge for a tub to install? It was $500, right? Okay. How much do you charge per fixture? It was $50, right? How much do you charge per roughing?” I literally ask him the same interview questions I asked them prior to having them estimate. And then I get to the end, I go, “Okay, so that’s what was inside my budget. Why are we $3,000 high? What am I missing here?” And 95% of the time, they don’t have an explanation. And they go, “Okay, I will do it for $12.” And then you can also kind of guilt them later. Be like, “well hey, I asked you all these questions,” and I always check with them every two months, are these numbers still right? And I go, “If you’re going to raise your pricing, you got to tell me before I buy the house. Isn’t that fair, right?” Because it only comes down to fairness.
And so you can almost guilt them and instead of going back and forth over $1500 or $3,000, they’re just like, “Okay. Yeah, you’re right.” I’m like, “So next time I’ll pay you more if the pricing goes up, but this time, why don’t we stay committed to what we agreed to?” And it works 95% of the time. Or they’re going to say, “Hey James, you missed the mark on A, B and C and here’s why,” and then I can go, “Okay, I need to make sure I pay attention to that on my next project.” Yes. There’s a good learning lesson in there as well. So organizing the pricing, having it in a sheet, will help you negotiate as well. But it also teaches you lessons on how to have less variance on your next project.

Ashley:
So before we move on to the actual property, let’s kind of recap how you can do everything that you just mentioned before even going and looking at a property. So you can build your team, calling contractors, getting referrals, you can find all of your contracts before you even see a deal or analyze a deal. Then you can go on to building your budget, your scope of work by looking at the property tax records. What’s the square footage, how many bedrooms, how many bathrooms you have. And then also going and looking at the pictures. So whether you’re buying the property off the MLS or you have a wholesaler that sends you pictures, look at the pictures of the property. And James, you use, I think the first step that you actually do is, you enter the address and pull it up on Google maps, right? And just look at the area and look at even the exterior of the house to what that looks like.

James:
Yeah. When I’m prelim underwriting before, again, you also don’t want to become the investor that calls everybody on a fire drill and sends everybody out just for you to get there and go, “Never mind. It’s not a good deal.” And then the contractor’s annoyed. He’s going to start charging you more for the waste of gas trips at that point. And they also think you don’t know what you’re doing. If a contractor thinks you don’t know what they’re doing, that means it’s a more pain on them, which also means they’re going to charge you more. So yes, the first thing we always do is wholesaler sends me a deal and says, “Hey James, what do you think?” I go through the photos, or first thing I do is I take it, I go on Google Street View. The reason I do that is because that gives me a very actual look of what it looks like right now.
If there’s trash everywhere, but there’s overgrown sticker bushes, that means there’s going to be a ton of deferred maintenance, which is going to lead for unexpected issues throughout the project or a weekend warrior house. If I see like a bunch of weird roof lines on a house, I’m going to go, “Okay, this is going to be a weekend warrior nightmare house where someone did this, not logically. It’s probably going to cost a little bit more these way.” So that’s the reason I use the Street View at that point. Also, I like to see the yard because whether I need to put fences and stuff like that in. So I can get a lot just off the visual. The second thing I do then is pull the tax record because the tax record’s going to give me the general square footage for the house, the unconditioned space, a remodeled house may be $50,000 a foot on the upstairs, but if I’m finishing the downstairs and it’s raw, it can be a $100 to square foot. So I got to blend that out.
It’s going to give me a very good kind of baseline of where the square footages are. It’s going to tell me how many bedrooms and bathrooms I have. And then if I need to add bathrooms, that’s going to tell me whether I need to re-plumb the house or not. And then from the tax record, I also can see the lot size. Like how much do I need to allocate for the landscaping? Then I go into the photos and by having the square footage and the photos visually of what I can see, I then can go through my spreadsheet that’s already built out with pricing and just start ballparking it through. And as long as I’m within 10% of where I need to be to make that deal work, I’d say actually almost 20%, I’m going to go look at that house.
If I’m 30% off, I mean, I’m an honest conversation with the seller, the wholesalers, saying, “Hey look, this is just not going to work for me. I’m going to need to be this low on price and here’s why,” because having a prepared budget also helps me clarify the wholesalers to give me like the actual right price with logic. But you can really reduce wasted time. Like if you stop what you’re doing to go look at every different deal, you’re going to miss a good one over here. So by doing this, by going through the photos, going through the tax record, I can get my budget to 90%. It’s going to tell me whether I need to go out there or move on to the next thing or get the price down. And if I need to move on, I’ll just move on to the next one at that point.

Ashley:
And one last thing to add to that too, is that you showed me that you pulled the comps. And not only just to see what the sale price is, but also to see what the finishes are in the property so that you’re not budgeting for super high end finishes like granite countertop when everything else in the area has laminate or something like that. So using the comps to kind of help yourself budget too and pulling what other flippers or what other property owners have in that area and what is actually worth going for for that expense.

James:
Yeah. The comps are going to dictate the scope of work and the most important thing that you can get any contractor or that you need to implement into this business is a clear scope of work. Where I made a lot of mistakes as a bit new flipper or new renovator was always like, I want to do the cabinets, the millwork, the roof, the windows and the flooring. There’s a lot of ambiguity in there, there’s a lot of different… that can go 100 different ways at that point, you could put the wrong type of flooring in, the wrong type of materials, and so the comps are going to dictate. And so we spend a lot of time looking through every photo of those comps. What kind of materials does it have in it? Are these path inch laminate floors or are they hardwoods? That’s 100% difference in material costs.
Are they hollow core doors? Are they solid wood doors? Are they cheap cabinets from maybe a builder or affordable builder shop or are they custom cabinets? That could be a difference in $20,000 on your cabinets. Same with appliances. So we’re not only just looking at the materials, but then also we’re looking at what’s the comp’s going to dictate the scope of work. If I have a four bedroom, two bath house with one bath up and one bath down, and the comp has a formal suite bathroom with a formal master that has a walk-in closet and a five piece bath, I know I’m going to have to do a lot of framing on the house to reconfigure it. I’m most likely going to have to rewire most of the house because I’m going to have to run all new plum lines. I’m going to have to re-plumb the whole house. And I’m also have to do a lot of wiring because I got to move fans around, move different lighting fixtures, new floor plan.
So that’s going to already tell me based on the comps and what I currently have and to what the build out is, how much I need to actually budget in for electrical plumbing in the mechanicals. A lot of times it doesn’t really come down to the finishes is where you blow your budget, it’s how well you can control your mechanicals. How much are your core costs that are going on the inside guts, which a lot of times people aren’t going to pay for because it’s not visually, they want to know it’s new, but it’s not going to make them fall in love with it by making sure that you can kind of budget up accordingly. If I’m adding bedrooms and bathrooms, that usually means a full rewire and re-plumb at that point. And so again, it kind of tells me based on the comp, the scope of work it’s going to require all these different triggers for my mechanicals.

Tony:
Yeah. So James man, like so much value provided, and that’s just like the first step, right? We’ve covered what you’re supposed to do before you actually get to the project. So we talked about building your team, how to do that. We talked about putting your scope of work together, getting pricing from all your subcontractors, and then just kind of doing like a pre-mock up of what that potential budget might put collect for that property. So you’ve got all this pre-work done. What happens when you actually get onsite at the property? And then just one question to add onto that as well, are you doing this onsite visit after you have the property under contract or are you doing this before as part of your analysis of the property?

James:
It kind of depends on the deal structure. I mean, typically I prefer to at least walk a house. Every house that I write, I do wave inspections on. That’s part of the reason we get a lot of deal flow and also the market that we’re in right now, it’s very hot. There’s no inventory. These sellers get what they want at this point. And so we have to move quickly. And a lot of times we can get a deal because we’re giving better terms. Someone may say, we can come in and go, “Hey, we can close this in as little as five days, no inspection give you a $50,000 earnest money, release it to you on mutual. Get that deal locked down.” But it does come back to what’s the term.
So if it’s a wholesaler, I want to run all my prelim info first, because if I say I’m really interested in this deal and I go out and look at it and I don’t buy it and I do that twice to that wholesaler, he’s not going to call me again. I’m a waste of time. And so I’m typically doing this all beforehand because I want to A, make sure my reputation’s good to where I’m easy to work with on people’s first phone call. And so that’s just important for me in general, but then also I’m doing this prelim work so I have a jump start because after I do my walkthrough with that wholesaler, they’re going to say, “Do you want this? Yes or no? You got to tell me now.” And typically, a wholesaler is not going to have… they’re trying to place that deal inside their feasibility or inspection timeline. So they’re not going to allow me to do an inspection either.
So I need to be fully prepared to walk out there. I mean, I need to be 99% by the time I’m walking that house. Typically, we’re always doing a walkthrough and if I’m not doing a walkthrough on it, I am a going to add a 10% to 20% contingency to the house. Because it is just a variance in there to where… I’ve been involved in almost 3000 of these things, but that doesn’t mean that there’s… unexpected things can’t come up. And so if I can’t get inside, which I have bought a lot of homes at like foreclosure auctions, those kind of things, I always add a contingency buffer in there. But most of the time I’m not going to get an inspection, but I can do a walkthrough.

Ashley:
Well James, thank you so much for coming on. We have a surprise for everyone because we have gone a lot longer than we planned to. And this is just on part one of the episode. So we are actually going to have James back on again on Saturday for our Rookie Reply to cover a part two and three, where we talk about actually going into the property, what to bring, who to bring with you and what happens while you’re doing that showing of the property. And then after you’re close, scheduling the contractors and everything like that. So James real quick, why don’t you tell everyone where they can find out some more information about you and where they can reach out to you. If they have questions up to this point, if not, they will hear you again on Saturday.

James:
I’m excited. This is a surprise. Coming back for… So is that the key if I just keep talking, do you have to bring me back on as much as…

Tony:
Only if it’s good stuff.

James:
So to reach out to us and find us online, you can check us out on my Instagram, jdainflips. We do a ton of construction updates and actually free construction coaching on there. And that’s actually primarily what I do is our goal is to really get back to the community and just say, “Hey, before you go spend this money, check these things out first.” So check us out, jdainflips Instagram and then ProjectRE on YouTube. We release a ton of construction videos, deep dives on kind of how to implement that right construction plan. So check us out.

Ashley:
Thank you so much for joining us and we will be back on Saturday. I’m Ashley at welcomerentals and he’s Tony at tonyjrobinson on Instagram. But before you guys go check out what’s new at biggerpockets.com.

David:
This is the BiggerPockets Podcast Show 583.

Johnny:
If you want to get to X amount of income a year, we’re going to need to do these things within your savings rate, we’re going to need to do these things with your assets. Whether it’s selling it, whether it’s doing a cashout refinance, and then we’re going to come up with a plan where you can acquire one every single year for the next five years to hit this milestone of yours.

David:
What’s going on everyone. It is David Greene, your host of the BiggerPockets Real Estate podcast. The show where we teach you to find financial freedom through real estate. Now, if you are looking to have a better life and real estate is the way you want to get there, you, my friend, are in the right place. At BiggerPockets, we are a community of over 2 million members that are all committed to the same goal as you, to find real estate to hit financial freedom.
We do that by bringing in experts in the field, subject matter experts, people who have walked the path you’re trying to walk and are looking back at showing you what they did to get there, as well as people that made mistakes so you can avoid them. Today’s guest is actually a close friend of mine. It is Johnny Hoang, an agent on the David Greene team, here to talk about what to look for in a realtor to have success.
Joining me is going to be my co-host, Rob Abasolo, who helps me to take on this incredibly important topic of picking the right agent to represent you. And it’s fitting because Rob and I recently had to go through this exact same process ourselves for the houses that we are buying. Rob, welcome to the show.

Rob:
Howdy, howdy, man. I’m excited because we’re really unpacking a lot here. One of the things that Johnny talks about that really I don’t think a lot of people give enough thought to is that working with a good realtor is a two way street, right? It’s a partnership in that both parties are expected to give effort. And when one party doesn’t give effort, then the other party moves on. So, we talk about things like, what’s a kiss of death when you’re a realtor? What are some things that a potential client can say to you that may deprioritize them on the list?
We also talk about things that you can tell your realtor in the making that’s music to their ears? It was really nice to talk to Johnny, because clearly, he is one of the best at what he does, and that’s always an exciting thing to get to talk to someone that is so good at their craft.

David:
Yeah. So, you’re going to hear about this, but Johnny owns real estate himself, he’s also an investor, he is a house hacker, and then he helps clients do the same thing. And when I buy property in the Bay Area in California, Johnny is actually the person that I have represent me. He just put me under contract on a $2.2 million place in Moraga that he negotiated all himself. It was a deal he found me that had actually expired. It was not on the market. So, we were able to negotiate directly with the seller’s family.
There was a couple other people that were sniffing around it too, and Johnny got so many compliments from the seller that I said, “Man, he’s just doing so good. We got to bring him on here so he can share what he’s doing well.” Then that gives everyone a blueprint of what they should be looking for when they find their agent. I’m excited to let you guys hear about this. I think this was full of a ton of really good, actionable practical steps.
Before we get to the show, let’s take a quick word for today’s quick tip. Today’s quick tip is go to biggerpockets.com/agentconnect, A-G-E-NT-C-O-N-N-E-C-T. There, you can type in the name of an area that you are interested in investing in and get a list of agents that you can sort of do your research on to see if they might be the right person to help you with your deal. BiggerPockets provides them. If you’re using a BiggerPockets agent, you are much more are likely to find somebody who invests in real estate themselves, understands what you’re trying to do, and listens to the same annoying voice that you are right now on this podcast, me, and Rob with a slightly less annoying voice, teaching how to get this done.
Now, it’s not a guarantee that they’re going to be a Johnny or a Rob or a David, but you have a great place to start. And in today’s show, we are actually going to tell you what questions you should ask them and what answers you should expect to receive. Rob, is there anything you want to add on that before we bring in Johnny?

Rob:
I want people to just pay extra special attention because Johnny does give us some of those secrets for finding these unicorn realtors as well. I think it’s really great to hear it straight from the source.

David:
That’s awesome. All right. Let me tell you guys a little bit of about our guest today. All right. BiggerPockets, I have a special treat for you today. Joining us on this podcast is a real estate agent on my team, The David Greene Team, Johnny Hoang. Johnny is my top agent. He sold $67 million worth of real estate in 2021 in only his second full-time year in resale real estate. Johnny has done 20 deals and currently owns 10 properties across three different states. He also invests in virtual real estate, cryptocurrency, NFT, stuff like that. Like he’s one of my coach when it comes to that side. And he is joining us today to share with us what to look for in a really good agent,.Johnny, welcome to the show.

Johnny:
Thanks, David. And thank you for such an elaborate introduction. I feel honored to be here.

David:
That’s basically the only reason that I’m on this show.

Rob:
Yeah. His introductions are always the best, man. Quite the accolade list. $67 million on your second year. I mean, I got to imagine that’s a very small percentage of people out in the realtor world that are actually doing that. Right?

Johnny:
I would think so. Based on the data I’ve looked up, we’re one of the top producing teams. So, yeah, I would think so.

David:
Well, where did you rank in Keller Williams overall?

Johnny:
I believe it was, in NorCal, it was 11 I believe, if I’m not mistaken. Our team hit top five from my understanding as well, but me personally, it was 11.

David:
But you were in the top 100 agents of all Keller Williams, right?

Johnny:
Yes, I was.

David:
Okay. That’s pretty impressive for the second year. Johnny’s definitely doing something right. You also invest in real estate. So, we are here to pick your brain about what to look for in an agent. Here with me is Rob, who is not a real estate agent. I love that we’re getting to come at this from two different angles, right? Someone that sees behind the curtain and somebody that doesn’t know what the heck is going on, on the other side of the curtain, because our listeners sort of straddle both sides. Rob, if you don’t mind, what’s like the first pressing issue that you’ve always wanted to know about what happens in the world of real estate agents that you’ve always been afraid to ask.

Rob:
Mm, I guess, for me, it’s, I’m always very curious for a realtor. How do you prioritize which phone calls to take and which phone calls to decline? Because I got to imagine, at your level, you’re selling a lot of houses. $67 million, that’s a lot of houses. I got to imagine you get a lot of phone calls every single day. Is your phone just blowing up every single moment of the day?

Johnny:
That’s a great question. We do have a system in place in terms of how we prioritize people that need to buy a house now versus the one that have to buy a house later. The main way we prioritize that in my opinion is just understanding what their goals and their timelines look like and seeing how we can help them and how we can create a plan to help them. We would never shy away from anyone. There’s always going to be a place for someone that comes to us.
We just have to figure out a game plan and a timeline of what that looks like. But to answer your question, Rob, our main priority is to help the people that need a house ASAP. These are going to be the people that are renting a home, their lease is ending, and they need a transition into a new home as soon as possible. These are going to be the ones that are looking to sell their homes, and again, need to relocate for a job opening they just had that is requiring them to work a month later.
Versus the ones that are still playing with the idea of investing in the market and just want some information about how to get started, when to get started, how much capital they need to build up. We also have a plan for them as well. To answer your question, it’s really just, what does the overall timeline look like and what type of expectations do we need to set to see if we can come to those terms?

Rob:
Yep. Very fair question. I’m kind of curious, I mean you’re 28, so obviously millennial. I think you’re a millennial. You’re a millennial, right?

Johnny:
Yeah. I just hit the cusp.

Rob:
Okay. Yeah. I’m on the opposite side of that cusp, but do you prefer if someone is contacting you out of the blue, are you a phone call guy or a text message guy? Is a text message a bit of a breath of fresh air?

Johnny:
I don’t like text messages that much, to be honest. I like to pick up the phone. I like to hear someone’s voice. I like to hear the tone. I like to hear the energy. I just like those conversations to be completely honest. I feel like there’s so much that can be misconstrued in a text message and there’s not enough information for me to really understand how to help someone through a text message. I’m a phone guy. I love Zoom meetings as well, of course. And most importantly, I like to meet them in person. But to answer your question, phone guy all the way.

Rob:
And David, obviously you’re a millennial yourself. What are your thoughts on the matter? Are you a text message guy or a phone call guy whenever you’re talking to clients?

David:
That’s funny because I’m a millennial barely on the other side. Like, I’m one year within before I would’ve been like gen X or whatever it was. I, believe it or not, I’m the opposite of Johnny. My voicemail full because I don’t like people leaving voicemails. I probably get 30 phone calls a day. 15 of them are from spam. So, if I get a number that I don’t recognize, I just don’t answer it because it’s almost always some kind of a fraudulent call.
What I tee each people on our team to do is, if you call someone and they don’t answer, you send a text message saying who you are, because that’s what I need. You need to text me and say, “I’m so and so, I’m calling for this purpose.” And then I can either schedule a call or kick them to the right person, or call them back. But I think, Rob, you’re asking a very good question because this is one obvious problem people have when connecting with an agent is, if you’re calling and they’re a text person, you’re going to be really frustrated they’re not getting back to you.
And if you’re texting and they want a phone call, you’re going to be frustrated that they’re not communicating the information that you’re looking for. I mean, kudos to you. You’re already starting this thing off with some really good questions.

Rob:
Well, I’m really just diving into my pain points here because I think that’s a very fair bit of advice here. I always call my realtor first because I get a lot of people that send me emails and text messages and direct messages. If I’ve never met them before, there’s really no reason for me to respond if I don’t know them. But if I talk to someone via Zoom or via phone call, I can at least … There’s a human element there. It’s like, oh, that’s a real person. Here’s their tone. So, what I do is I typically will call my realtor. Hopefully they’ll answer.
I can’t expect that from super, super busy realtors, but if they do, we have a conversation and I’ll say, all right, I’m going to summarize what we talked about in a text message. Here’s what I’m looking for. If you could get me on a list, here’s what I’m looking for. Let’s say that someone contacts you Johnny and they’re like, “Okay, hey.” They got you to answer the phone. Can you sort of give me two directions here on how this phone call can go? If you write someone off immediately, for example, what is like the kiss of death that someone can say to you in that first phone call that sort of deprioritizes them amongst kind of that group of people?

Johnny:
Sure. In a broad statement, I would say someone that doesn’t have the right expectations. So, it’s going to be someone that calls me and says, “Hey, I just listened to the podcast and I want to buy in San Jose. I currently have 5K, but I’m talking to 10 other people to raise some capital. I want to do a bird deal where I can get 150% cash on cash. Don’t tell me I can’t do it because a lot of people have told me I can do it.” In a situation like that, of course, I would take on to unpack it, to really understand where they got this information, and figure out if I can come up with a plan to adjust their expectations to match the market that they’re giving.
If it’s a battle between the two of us and I just feel like everything I’m saying to them is just going one ear out of the other, they’re giving me just a lot of retaliation as to why it would work, that’s a relationship that I don’t want to get involved in. Because I can just tell that our expectations aren’t going to be aligned. I won’t be able to serve them correctly. It just won’t be a good relationship. Typically, when people are really out of line with their expectations and they’re not listening to someone that’s been in this market for quite some time and has done quite a few deals, that’s my sign to just say, “I’m not the right fit to help you. Maybe I can give you some information to better educate yourself about this market, but at this time, I’m just not the right one to help you.” That’s essentially what would be a red flag for me and the ones that I can’t help.

Rob:
What about you, Dave? I’m sure you got a couple of kiss of death statements here that you’re like, “Oh man, I can’t believe I have to unpack this.” Can you give us an example of that similar to Johnny’s?

David:
Yeah. There’s two kinds of people. The first is someone who says, “I need help buying a property and I want someone to represent me.” And they’re checking to see, can I trust you? Are you good? Are you competent? Are you skilled? And then there’s the other person who just wants information from you. They’re saying, “Hey, what can you educate me on in this area?” And they haven’t really decided if they actually want to buy or if they want you to be the one representing them.
When you get a client that’s telling you, “Here’s what I’m going to do in this market.” And, as the expert, you’re explaining to them why that might not be a good idea. You’re just basically checking to see like, is this person open-minded or are they stubborn? Because everybody eventually comes to the same conclusion. It just matters how fast you get there.
Do you get there because you willingly took this advice that made sense or do you have to go the hard way and you have to bang your head against that brick wall over and over and over? And meanwhile, prices go up $50,000 to $100,000 while you’re waiting. Part of what I think a good realtor’s doing is they’re not letting their client have unrealistic expectations. They’re not telling them what they want to hear, just so that they can get them signed up.
If a realtor doesn’t have a lot a business, if they’re not that good, if they’re not making that much money, they’re going to say whatever they have to say to get that client signed up, knowing eventually the client’s expectations are going to shift, but I want to lock them up now. I think what Johnny is describing is a more honest way to do business, but it will often lose you a lot of clients. Everybody wants to hear what they want to hear. They don’t want to hear what the reality is.
I was going to ask you Johnny, when someone’s looking for an agent, or when you’re looking for an agent, because you, like me, invest out of state, do you look for someone that tells you what you want to hear or do you look for someone that tells you what it is, and how do you gauge how honest they’re being?

Johnny:
I would say it’d be the second scenario. The first scenario I would want to speak to real estate agents and clients here, just to give you some tips. Someone that is being very agreeable, for example, if you have an intro call with an agent and you’re throwing all these grand ideas to them and they’re saying, “Yes, Johnny, I can do it. Yeah, that’s no problem. I can do that 60% cash on cash. We do those all the time.” You really have to pay attention to how agreeable they are and if they even have experience in doing these things.
Because I’ve noticed the top agents are super direct. They tell you how it is, and they give you examples of what can actually be done in the market, and they give you data points, right? They’re just not the yes, man. Typically, what I’ll look for an agent when I’m buying houses is someone that likes to explore ideas with me, but also puts me in my place.
Someone that can tell me, “No, Johnny. You can do this in this neighborhood. But you advise me that you don’t want to be in a bad neighborhood. So, if you want to be in a good neighborhood, you’re going to have to pay a premium in exchange for cashflow if you want to be in this type of neighborhood.” I’d rather have someone tell me that I have to pay more to be in a better neighborhood and lose out on profits than someone to tell me that, “No, you can buy in this neighborhood. It’s a great neighborhood. You’ll still get the cashflow.”
And then down the line I find out it’s a horrible neighborhood and my house is just not performing the way I want it to perform. So, to answer your question, David, I would say pay attention to someone that’s super agreeable, because that’s for me at least, always a red flag. For me, I would always want to check the information that they’re confirming with me, right? If I’ve done these analyses, but I’m not quite sure if it’s going to hit these numbers, but they keep telling me it’s going to hit these numbers, again, that would be kind of a red flag for me.
Sometimes I’ll even test the agents and I’ll tell them, “Can I do a 40% cash on cash here? This is what I’m seeing.” And if they tell me a little fib just to try to push me along, that’s probably not someone I want to work with. I want someone to assess my situation and really understand where I’m coming from and tell me what I can and cannot do in this market.

Rob:
That’s really great, man. I test my realtors with caution, right? I don’t necessarily expect them to know the nitty-gritty of what I’m looking for, because honestly I expect myself to really be analyzing all of these different things. Really what I want to stress check for is if there’s something that I’m missing. I’m really more looking for a realtor to point out flaws in my plan versus helping me formulate the plan.
If I come out at them and I say, “Hey, I’m looking for a 40% cash on cash in this neighborhood,” it’s exactly what you said, I want them to say, “Well, theoretically, what you’re saying is correct, but I wouldn’t do it in that neighborhood for this reason, this reason, this reason.” I definitely think that there’s a little bit of compromise that needs to come from both sides. Setting those expectations at the very beginning, I think, is something that I’ve learned over the years, is a lot easier to maintain the status quo when you can have that conversation at the very forefront of your conversation.
Kind of want to shift the gears here a little bit. I mean, we’ve touched on this a bit, but Johnny, can you give me an example of something that a client might call you and say, that’s like music to your ears? What’s something, if it’s the first phone call, client says this to you, what would make you say, “Oh thank goodness, I love these kind of clients?”

Johnny:
Yeah, sure. Music to my ears. If a client were to call me and say, “Hey Johnny, I’m currently paying $2,500 in rent right now. I want to find a way to get into real estate that doesn’t cost me too much and will enhance my living situation. Can you help me?” That type of client, I just love them because it’s very common for us in the Bay Area to pay $2,500 in rent. But if you can find a way to get into the real estate market and reduce those living expenses while reaping the benefits of being a homeowner, depreciation, tax incentives, I feel like that’s a win all day long.
Because that’s essentially what we teach here on The David Greene Team as well is just how to buy houses every single year using these strategies. So, when I hear someone with that type of situation, it’s music to my years, because I know I can help them. I know the expectations are going to be aligned there. As soon as they hit their first deal and then we work on the second deal the next year later, and they start seeing that passive income come in, and the financial burden being lifted off their shoulders after every single deal, that’s what excites me. That’s what fulfills me.
That’s why I got into the resale space, to help other investors realize that this is the path you want to take if you want financial freedom. It’s going to take a little while, but every house you buy is just, I feel like you just buy more time. That’s kind of long-winded but I hope I answered your question.

Rob:
You did great Johnny. You did great. Yeah, so if I’m hearing this correctly, we’re basically, when I’m talking to a realtor, I want someone that can listen to my needs. Hey, I need a house. I’m paying this amount. Set the right expectations. Hey, if I’m paying $2,500 a month, I want to keep it at that. It’s your job as a realtor to come in and say, “Well, in this market, you can spec this.” And then carve out a plan. Is that the process that you take whenever you’re talking to new clients?

Johnny:
Yeah. That’s exactly the process. I mean, I think the successes I found in resale was being able to listen to the consumer and coming up with the game plan for them to allow them to just follow it throughout the following years. Can I give you guys a little antidote in the beginning stages of my investing career?

Rob:
Yeah.

Johnny:
Okay, cool. As a child growing up, I always knew I would be a millionaire. I just didn’t know how I’d do it. I just didn’t know how I was going to get there. And through BiggerPockets, that was when I found that vehicle, and I knew that, okay, this is what’s going to get me to my first million. This is what’s going to get me to 10K of passive income a month. All I have to figure out is, how many homes do I have to buy and how many homes do I have to have in my portfolio to produce me X amount of income every year?
And how many homes do I have to buy in the next five years? And how much equity do I have to have within these homes? And when is the equity going to compile up to where I make my first million? When I found out how to create that blueprint, well, I didn’t create it. It was just from BiggerPockets. It was stuff I put together that I found on the forums, but I don’t want to take credit for anything that I didn’t fully create.
But yeah, when I found out how to come up with the blueprint based on what I’ve learned from BP, I just felt like that financial weight on my shoulders, it was just lifted, right? Because now I know, if I save up X amount of income every single year and I buy X amount of homes in the next six years, that’s when I’m going to net my first million. In the next six years, that’s when I’m going to have 10K in passive revenue if I stay consistent and continue to act and buy a house every year.
That was a very broad way of explaining it. But typically, someone that comes to us, we’ll assess their situation and see how much liquidity they have, see what type of assets they have. Then we’ll tell them, “Okay, if you want to get to X amount of income a year, we’re going to need to do these things within your savings rate. We’re going to need to do these things with your assets, whether it’s selling it, whether it’s doing a cashout refinance, and then we’re going to come up with a plan where you can acquire one every single year for the next five years to hit this milestone of yours.”

Rob:
I guess what I like about that is you aren’t just looking at their situation, but you’re using your experience to sort of help them carve out a plan for themselves. I mean, how often are you finding yourself, sort of in a sense, not financial planning, but how often are you relaying some of this personal anecdote and journey that you’ve had and helping people carve out similar things for themselves?

Johnny:
I would say it’s pretty often. I mean, think it’s at least 70% of the clients that we work with. Because another thing I want to mention too is, when I first started investing, we didn’t really have anyone to walk us through this process, and outside of BP, I mean, I’ve always said I’ve had hundreds of mentors through the podcast and just listening to people’s failures and successes. But to actually have someone physically there and someone you can pick up the phone and call to bounce ideas off of each other, I think that’s invaluable when you first start on your real estate journey.
To be able to cultivate that type of environment and that type of service, I think, is very important. To answer your question, Rob, I feel like yes, 70% of our clients come to us, and that’s basically what we do for them. We help them plan ahead. You can kind of see it how it’s a win-win for both of us, right? As they grow their portfolio, it grows our exposure. I think it’s just a win-win for everyone.

David:
Yeah, Johnny, one thing I want to ask you, of the 67 million in real estate you sold in 2021, what do you think was your most common client’s profile? What were they looking for and how did you help them?

Johnny:
Yeah, sure. So, I would say the most common profile would be the house hackers. Typically, they’ll come to us with about $2,500 that they’re currently paying in rent. They’ll have maybe 100,000 to 150,000 in maybe stocks or just sitting in the bank that they want to deploy. And they’re looking to reduce their living expenses by 30% to 40% through using real estate as that vehicle. I would say that’s a bulk of them. I think what was really cool was, in 2020, when I, towards the end of the 2020, I should say, when I started getting some traction, a lot of the people I helped in the end of 2020 started buying again with us the following year, because they’ve built up enough equity.
They’ve been able to convert their single family homes operate like a multi-family, so they’re cashflowing in most cases. Now, those same people I helped in 2020, I’m helping them again in 2022. Most of these people that we’ve helped in the very beginning, it’s really cool to see that they’re learning a lot and they’re able to grow by just repeating the same process. But yeah, I would say the house hackers, that’s the main bulk of where the volume came from.

David:
So, do you have a deal that one of your clients did you can walk us through, that was a house hacker, and kind of explain what the numbers worked out for that person?

Johnny:
This is a recent deal that we closed on about two months ago. This deal was in Upper West open, which is a very good area in the Bay Area. And purchase price was right around 1.2 million. They did a Jumbo loan at 10% down. So, down payment was about 120K. We were able to get a 25K closing cost credit. So, they basically just had to come in with a down payment, which was again, 120. The rehab amount was 30K. So, the total cashout lay on this deal was 150K.
Before I go on, I’ll back up just a little bit to convey what their situation looked like. This is someone that was paying $2,500 in rent every month, or $30,000 a year. And they wanted to get started in investing in real estate. They told me they’d been paying rent for last five years, which amounts to 150K that they’ve been paying to their landlord, which amounts to the down payment they’re paying now, ironically. They wanted to park it in real estate and figure out a way that made sense to them.
This property, again, was $1.2 million purchase. And what was cool about it is the main house was a three, two. It also came with a two bedroom, two bath detached ADU. It was converted from the garage, which is very common in this area. And the kicker to this is that the basement level also has another two bedroom, one bath that’s partially converted. It has all the rough plumbing in there. Just doesn’t have the dry wall and Sheetrock up, but pretty much partially converted for. Their total PITI in this is $6,000 of paying a month. And total rent they’re getting is $3,500 for the main three, two.
Then for the ADU, that’s a two bedroom, two bath, they’re renting out one bedroom for 1,200 bucks to one of their buddies, and they’re living in the other room. In this scenario, they’re basically paying $1,300 a month to live in a good area of Oakland. So, it was an opportunity to basically reduce your living expenses by half, from 2,500 to 1300 bucks, plus with the tax incentives you get for owning real estate as well, and the value add opportunity with that basement floor that they plan to convert down the road.
I just love these type of situations because it really just takes one or two deals to really change your life. Right? A saying that I really like is you’re always one decision away from changing your life. I felt like this is like these type of decisions that we can help people understand to help them grow.

David:
100% agree. One of the things I get asked a lot is, I live in expensive market. Should I invest out of state or should I stay here? It frequently comes up, because I wrote the book, Long Distance Real Estate Investing, but when your house hacking, you can get away with 3.5% down, 5% down. When you’re investing out of state, you’re probably going to be at 20% to 25% down in almost every scenario. And when you’re investing out of state, you’re not saving in the rent money that you’re paying if you’re currently renting.
One of the things that I tell people all the time is you should house hack a deal every single year. And anything in addition to that, use the bird strategy, use long distance real estate, some combination of the two. But if you could get a house for 5% down, 3.5% down, even 10% down, that you can rent out, and then when you move out of it, you’ll have another unit that can generate more revenue, that’s in no brainer.
I wanted to ask you, Johnny, of the clients that you’ve had, have you had any that just had a hard time going forward with a house hack because they had their heart set on long distance investing or have most of them sort of understood that house hacking is going to make more wealth if you’re in expensive market?

Johnny:
I feel like a lot of them come to us wanting to understand how to invest out of state because they think it’s more beneficial. In some cases, it is. But in most cases for the people that come to us, it’s not. I would say a lot of eventually understand that starting off with a house act is a lot more viable option and a more beneficial one. Because I mean, what I always tell them is, to put things into perspective, if you look at the overall cash outlay that you’re deploying, let’s say you’re looking into a market like Texas, for example.
Let’s say average purchase price is 200K and you’re doing a 20% down. So, you’re basically deploying 40K out of your pocket. Let’s say we look at a house hack here that’s 800,000 with a 5% conventional loan. You’re still deploying that same 40K. Although in one market, you’re assuming more debt. So, essentially that’s a little more risk, versus the other market where it’s a little less debt assumption, so it’s a little less risk some would say.
But if you really put it in perspective, if you look at appreciation gain, 6%, 7% on a house that’s 200K versus 800K, substantial difference. If you look at reducing your living expenses where you can pay less in rent, which is a profit in its own that is not tax, I think when people come to that conclusion, they’re like, “Oh, okay, there’s a light bulb. I can buy something in the high appreciating markets.” It probably does make more sense right now, like buy a couple of these in a high appreciating market, build that equity, whether that’s just letting the market continue to go where it’s at or do a little forced appreciation, have that be my nest egg, take that equity, extract it and move it into a different market. Usually, people see that it’s more beneficial to house hack, but we do have certain situations where they want to go out of state versus house hacking.

David:
It’s just so uncommon to find a realtor who can break down what you’re doing and help them see the value in why it would make more sense to house hack in this case. That brings me to a problem that Rob, you and I were facing when we were looking in Arizona Area to buy a property. We were looking in a couple different cities and we had a couple different agents. I remember saying, “Look, if we’re going to do this, we need to get an agent who specializes in this type of real estate and has background into what we’re trying to do.
And you were like, “Got it, Dave, I’m on it.” I remember thinking, is he really going to be on it? Did he understand what I was saying? And you did. You ended up finding a really, really good agent. I wanted to ask you if you could share what the process that you went through was like to find that person.

Rob:
Yeah, definitely. I knew that we were going to be going into a luxury buy here. It’s not very common for a lot of realtors to necessarily have $2, $3, $4 million listings that they own. It takes an experienced realtor. I didn’t want to just call up anybody. I just went and I looked up most successful brokerages in that city. I found one, I called them, and the receptionist was like, “What are you looking for? Give us some details here.” And I was like, “Well, I’m looking for a very specific realtor. I’m looking for someone that A, specializes in luxury, and B, and this is more important, specializes in short-term rentals.”
Because it’s always really nice to have a realtor that I have some common ground with, just so that they don’t … So I can pull my weight in the relationship if you will. And they were like, “Okay, great.” They set me up with this realtor and I talked to them, and I did the mini interrogation of like, who are you? What do you do? No, but I talked to them for a bit and I started kind of asking, probing for more short-term rental related questions, to the point where they were like, “Okay, yeah. I don’t actually know too much about short term rentals.”
I was like, okay, that’s what I thought, no big deal. And they said, “But I do know one guy, one guy who’s just the short term rental sniper out here in Arizona. He’s the guy you need to talk to. He owns a property management company. He owns five luxury rentals. He is a luxury specialist in the short-term rental market.” And I was like, “Okay, great. That sounds too good to be true. You’re just giving away a $3 million lead? All right. Sure.”
He was buddies with this guy. We connected, I talked to him and he completely wowed me. I finally met somebody that I could go toe to toe with on the short term rental side and actually educate me in the luxury space. I remember I talked to him and I was so fired up, and I called David. I was like, “Dude, I think I found him. I found the guy. He’s smarter than me in short term rentals and he’s going to help us.” And David was like, “Ha-ha, yes. This is exactly what I wanted.”

David:
Well, I think part of why you really liked him was he owns them himself. Right? He owned short-term rentals in the price point we were looking at in that area. I don’t think you could find a better agent than someone who literally is doing what you’re asking them to help you do. And that gets passed up a lot, is if you’re an investor and you’re looking to find a real estate agent to help you, and they are not an investor, you’re going to be frustrated a lot when you’re wanting information that they just can’t provide. So, I kind of wanted to turn that to you, Johnny, and ask, how much do you think your own investing experience played a role in your success representing people that were trying to do the same thing?

Johnny:
I think that played a huge role in my success because I personally wouldn’t want to go to someone for advice if they haven’t done what I’m seeking advice for. It just doesn’t seem productive to my goals. I think being able to convey the mistakes and the successes I’ve had, being able to convey what plans have worked for me and what plans have not worked for me, and being able to just speak with confidence when it comes to that because I have that experience, I think it’s definitely the game changer. I definitely think it’s contributed to 80% of my successes within this space.
I think it’s just a breath of fresh air when you know someone that knows more than you and knows someone that’s been there, done the mistakes so you don’t have to do those mistakes yourself, and really has a plan in place and has executed on that plan. So, I would say it’s a huge percentage of my success in this space, David.

Rob:
I wanted to quickly kind of ask a follow up here because obviously you’re crushing it. You’re crushing it in the realtor game and you are also investing. For you, personally, where are you at right now? Are you want to heavy up in investing? Does the idea of investing fuel your desire to be a realtor? How has that arc really panned out for you personally, Johnny?

Johnny:
Yeah, sure. I feel like they both coincide with each other because I do enjoy helping other investors get started in their journey, but I also do really enjoy buying houses and building my portfolio for sure. But I think both of them coincide with each other. For me personally, I want to have the opportunity to help over a hundred people this year and I also want to have the opportunity to have 50 doors at the same time. To answer your question, Rob, it kind of coincides with each other. Because the more I learn from investing, the more I can then convey to clients as well. It just feel like a full circle in my opinion.

Rob:
Awesome, man. That makes sense. I like to see that you’re still wanting to grow, right? Because this is the same thing that I went through with my Arizona realtor, where he’s got a property management company where he manages 60, 75 luxury properties. He owns six luxury short-term rental properties and he’s a realtor. I was just like, “Why are you doing this to yourself? Just focus on any of those three things and you’re probably going to be fine.” I think he just genuinely love connecting with investors, especially investors in his specific niche because they’re few and far in between.

Johnny:
Yeah. [inaudible 00:35:21] really cool about the resale space is like, through the mentorships that we can provide to people and seeing them grow, it’s like I bought the houses to be honest. We’re bouncing ideas off of each other. We’re coming up with these game plans, and just seeing them actually come to fruition, it’s like, damn, that’s basically like my deal too. I always like that creative side of real estate where you can come up with different plans, whether that’s buying a single family house, chopping it up into three different units and really extracting the cashflow and seeing it all come to fruition. It’s pretty cool to me. That aspect of the business, I enjoy a lot as well. Just kind of the more project management side and kind of the more visionary side, if you will.

Rob:
I’ve got to imagine that, in your journey now, you’re on year two, as we’ve talked about, you’re crushing it. Year one, I have to imagine, was the year that Johnny marketed the heck out of himself. You were just out there marketing and building your reputation and your brand as a realtor. Year two, I got to imagine that maybe it flips a little bit where you don’t have to market as much and people are finding you. So, can you give us an example of how we find our Johnny, how we find this unicorn realtor that is seasoned investor that knows about cash on cash returns and house hacks and appreciation, all that kind of stuff? How do I find a good realtor like you?

Johnny:
Yeah, I would say, first and foremost, BiggerPockets, going through their forums. What I really like about their forums is because you can see how other people are … How helpful they are. I’ve had countless times where people would reach out to me from an old post that did two years ago about house hacking or about one of my flipping posts. And they just reached out because they thought my answer was very constructive and it was very helpful to them. So, I would say, for me personally, I like to scavenge through the BiggerPockets forums and look for agents that are having these good responses and people that convey that they know what they’re talking about within their market.
Agent Finder is a great place to do that. And just reconfirming that again, what the responses they have within the forums. Outside of that, I really like what you did, Rob, because that’s something I’ve done in the past as well. Just call different brokerages, different high producing brokerages, and look for the top producing agent. But I would say nine out of 10 times I did that, they always referred me to someone else. Because the top producing agent is typically pretty busy, and I think coming from a more investment background, they just wanted to refer me out to like another producer.
But to summarize everything, I would say use the forums that … Use it as a resource because it’s a really big one. That’s where I found most of my business and one of realtors, I should say. Then use your technique of just calling different brokerages and trying to find a top producer and interviewing the one that just makes the right fit for you.

Rob:
I do want to touch on the power of a good forum. I mean, just in the past couple years, I’m an online guy, I like being online. I like talking to people on the internet. I’ve posted so many things on Reddit that years later, people will still send me DMs on Reddit and say, “Hey, I really like this tiny house or the shipping container that you’re building,” or whatever, and all that kind of stuff. It’s so crazy, the DMS that I get, exactly the same way on the BiggerPockets forum too, where if you put thought into your post, if you post something or you have an answer that’s just super well thought out, the amount of DMs that just come from that, people that are just wanting to pick your brain on that subject, or work with you, it’s really pretty impressive. I think.

Johnny:
Yeah, it stays there too. Right? I mean, I don’t know what type of backend work BP does, but my post that I get a lot of traction about was almost like from four years ago. Now, I’ve seen some posts date back to like six, seven years ago that I still refer back to, and I’ve screenshotted to put into my syllabus. Those posts are there forever. So, it’s a good way to market yourself without having to really market yourself in my opinion.

Rob:
Yeah. What about you, Dave? I mean, obviously you gave me the secret sauce here.

David:
When I wrote Long Distance Real Estate Investing, I put in there several ways that you can find top producing agents or people that will help you. One of them was using BiggerPockets, and it was just like Johnny said, is you go through the forums, you look for people that are engaged, and when you call them, here are some questions that you ask. A common mistake that I see is people assume all agents are the same and you just grab the first one you see and then you go look for the house. What happens is you end up doing all this time and energy and effort and emotion looking at properties, and then you send them to your agent to say, “Tell me this, tell me that.” And you wear the agent out and then they just stop responding to you.
Then you start calling the listing agent yourself and you start saying, “What about this? What about that?” And the listing agent’s like, “You’re not my client. You have your own agent. They should be finding that out.” And you end up in this agent purgatory where nothing’s getting done and you can’t figure out why. I look at it differently. I look at it like an agent is an asset, just like the real estate is an asset, and I have to go hunting for it. I can’t just assume every deal’s the same.
I can’t treat people like that either. I have to find the agent that will help me. The one you found for us, Rob, is an asset. When we looked at our numbers, we thought, these are too good to be true. There’s no way that it’s going to generate that much revenue. And he came back and said, “No, that’s probably the low end. It’s probably going to do more than that based on these six properties that I own myself.” And the 50 properties that are managed, that he has access to seeing that data.
Johnny is an asset. He owns property in the area that he’s helping people in. He knows what they’re going to rent for. He has contractors that he can refer you to that can do a lot of this work. He can even help you with what the bid would be or what the approximate bid would be to convert a basement or add a bathroom. He’s that knowledgeable because he does this. So, you got to put the same effort into finding your agent that you do into the property. You start with that. You look for the agent first. There’s a lot of frustrated people that are frustrated because they’re going at it the wrong way.
Now, one thing that is available now that wasn’t when I wrote Long Distance Investing is BiggerPockets has actually created a way for you to find an agent faster. Rather than having to just go through the forums and look for someone that might be in that area and might be good, you could go to biggerpockets.com/agentconnect, and then type in the area that you want to invest in. And it will pull up a list of agents that are also BiggerPockets members.
I really like that, because if they’re a BiggerPockets member, they are more likely to understand real estate investing than if they’re just someone that you found on Zillow or another site. You also can then see how many deals they’ve done for other BiggerPockets people. So, if they’ve done zero deals versus my profile, which probably has a hundred or a couple hundred on there, you can see how much action we’re getting and then you can read reviews from the people we had.
You can look and see what properties other clients bought, right? So, if you go look up our profile for The David Greene Team, you’ll see, these are the areas that we helped clients in and these were the houses that were bought. You could do a lot of the research right there because BiggerPockets made it easier. Now, you still have to do the research. You can’t just find any agent on BP and be like, “Well, they’re a BP agent so we’re good.” That would be like just finding any house that’s for sale on any platform and assuming that it’s going to be good.
But when you … I get all the time, people will email me and say, “Hey, David, what am I supposed to do with this? Will the bank approved me for this kind of loan?” The answer is usually, “Well, did you ask your loan officer?” “No, I didn’t ask them. I thought I had to know.” No, their job is to tell you that or tell you how to do it. Why are you asking me a question about title. Your title company is supposed to tell you that. And there’s just this thing with investors that think they have to do it all.
Now, if you’re looking for off market deals and you’re trying to put together creative things like seller financing, because you’re not going to get a conventional loan. In that space, you do sort of have to operate by no everything yourself. But if you’re looking at something on the MLS, you should have an agent that can direct you to what to look for. They should have connections for a lot of the things you’re going to need.
The loan officer should help you the same way. And I just want to encourage everyone who’s trying to pick up some traction, if you’re having a hard time it’s because you don’t have a Johnny. If you had a Johnny, you would just say, “What can I expect to this market?” And Johnny would tell you. Well, how much would it cost to fix that? It’d be approximately 30 to 50K. Well, what would that do for the rent? It would be about this much. You get a really good understanding by using the experts. And there’s too many people in our field that don’t understand the asset class of real estate.
Rob, I know you have seen this with as much real estate as you’ve bought, where you come across that agent and you think, I know more about this than you do, and this is your job. It’s maddening. I wanted to kind of throw that back to you, Rob, and then to you, Johnny, what are some things that you have noticed when you picked the wrong agent that lets you know, I need to move on and find somebody else?

Johnny:
For me personally, well, we’ll start with, what’s wrong in an agent? Or what I find to be not as attractive in an agent. My expectation of an agent is to find the correct deals for me and convey why the deals will work but based on the criteria I’ve given him. Red flags for me is someone that’s not communicative, someone that doesn’t send me deals, someone that doesn’t put an effort to be in front of me.
Versus a good agent, I’ve noticed that is one that’s constantly sending me deals. Hey, Johnny, this is one you should buy. These are the reasons why I should buy it. Here’s the Rentometer. Here’s the P&L. Worst case scenario, I think you’ll be here. Best case scenario, you’ll be here. It’s literally just like laid out for me like, oh crap, he put everything together. They’re in these organized folders. And all I have to do is reconfirm the math, do my due diligence real quick and say yes or no. That experience works really well for me.
I’ve noticed that when I’m on the other side as a real estate agent, helping our clients, it works really well for them as well. Because they’re coming to us looking for some type of guidance. Of course, as a client, you still should have a game plan in place and double check everything. But I really like the experience where they lay everything out on the table and it’s as simple as yes or no. And I think that’s what makes a good agent, someone that does a lot of good follow up and someone that can just lay everything out for you and consistently provide you deals where you can look at it and review everything they’ve given you, and it’s as simple as, does it meet my criteria or does it not? And you say yes or no.
I think the ones that create challenges are the ones that just blindly send you deals and say, has a little bit unpermitted work. I don’t really know what to do with it, but let me know what you think. That becomes an issue of, okay, now I got to take time from my W-2 job and look at this and spend hours researching about it, which it is part of the game. It is part of buying real estate, but what I would prefer and what I find in a good agent is someone that has listened to me in the very beginning and conveyed all the items that I need to understand to be comfortable to move forward.
Switching it back to the client side, I think that’s very important too, to be able to come to the agent with some type of general consensus of what you’re trying to do. Not saying like, “Hey, I have to 20K. I’m not really sure what I want to do. I don’t really know what the next couple years look like. Can you just find me a deal and get me a return on it?” Versus someone that says, “Hey, Johnny, I have about 50K. I’m looking to reduce some of my living expenses. I’ve looked through Zillow and looks like the price points of these homes are 800.”
“I’ve talked to a lender, they said I can get approved for 800. I’m just trying to figure out how to get started. Can you help me?” They’re vastly different in terms of the two outlooks. So, to summarize my thought process there, I would say a good agent is someone that’s proactive, someone that’s communicative, and someone that just lays everything out for me so I can make an easier decision. A bad agent is someone that’s completely opposite of that, that’s not as responsive, that gives me an extra job when their job’s supposed to be making me more comfortable and making me understand that this is the right deal for me or not. That’s basically how I’ll grade the two different sides.

David:
What about the clients, Johnny, that are going to ask you to do a lot of research that you may think is not an agent’s job? Before Rob you answer, I just want to get Johnny some follow up. What are something people will often ask of their agent that you would say, that’s something that they should be doing on their own?

Johnny:
I would say, although I know a lot about permitting and how to do those things, because I’ve done it multiple times personally, I still think a client or a newer investor, they should put the legwork to do it themselves the first time around so they can understand how that process works. Although I do run numbers for our clients, I always tell them, “This is what I came up with. These are the tools I use. I want you guys to then do it yourself to see what you come up with.” And we can both put our heads together to see if it makes sense.
That was kind of not a direct answer to your question, David, because I think it really depends on what type of expectations are set in the beginning. Because I do have clients that they’ve purchased a couple deals, and they’re like, “Johnny, I just need you to send me a good deal, give me the rents, and I’ll run everything else myself.” Then I have the other end of the spectrum where they tell me, “Johnny, I really want to learn how to invest. Can you walk me through what it looks like for the first couple deals and show me how you run the numbers, and eventually I’ll get to a place where I can do it myself?”
It’s hard for me to directly answer that question because it’s different for every client. But my standard answer to that, I guess would be, whatever you’re trying to figure out from your agent, you should try to look for the answer yourself from two different resources and then go to the agent to ask them. But it also, again, ties back into what expectations were set from the very beginning and what that communication log looks like between the two of you and what you decided on before working together. Again, David, that was kind of a running around to your answer because it’s just so different client to client.

David:
No, I was more getting at the idea that a client may say, “Hey, agent, I’m not pre-approved and I’m not going to get pre-approved until I find the perfect house, but here’s 50 houses I want you to show me. And I just want to text you randomly and have you take … Because that’s your job is you should take me to see these homes.” Then you go look at the house. You say, “What do you want to do?” And they say, “Oh, I’m not in a rush. I’m just going to wait and see.” And you find yourself in the situation where the client is kind of running the show.
And they’re telling you, “This is what I want. Go do it for me. That’s your job.” You can see, as the agent, they’re never going to get success from that. At what point do you feel it’s appropriate for the agent to put their foot down and say, “If you want to hit your goal, the way you’re going about this isn’t right, that’s not something that I can help you with?”

Johnny:
Immediately. I feel like you have to do that right away. Right away, upfront. Because at that point, you’re setting the wrong expectations, and then the relationship is just going to be bad throughout the whole time period. It’s funny because I think a lot of agents do this. I feel like, when you’re working with clients, and this is for clients as well, you’re entering into a partnership where you guys are both helping each other build wealth,.
Whether that’s through someone that’s selling the house or whether that’s through someone acquiring their property, you’re still in a partnership together. So, you have to lay out all of those things and really, really find a level of commitment on both sides, right? Because it’s just, it doesn’t make sense for someone that’s not pre-approved, but expects an agent to show 50 houses to them, because it just shows that you’re not committed and you’re not committed to making this partnership work.
I feel like people should understand that because time is very important and you should enter into a partnership with someone with a win-win attitude. So, in that situation, David, to answer your question, I think you really have to have that difficult conversation up front and immediately because that’s just going to tarnish the experience for both people as you get further into it.

David:
Rob, same question to you. When you are working with an agent, what are some of the red flags that you notice and you think, “Ugh, I don’t think this one’s going to work out, I need to cut bait and find another one?”

Rob:
There are a couple things here. I would say one, I do like to know that they have some investment experience. I mean, it’s not required, but I do want to know that they play the game a bit. That way they’re not just speaking to me in conceptual terms. They actually have tactical things that they can help, anecdotes like Johnny has, that helps me understand certain situations. That would be one. Two would definitely be the Rolodex. Hey, do you know a contractor that can help me with this basement conversion or a landscaper that can help me de-weed this plant box, or an electrician that can help replace that floodlight?
If the answer is no on the majority of those vendors, I’m just going to move on because it’s so much easier for me to find somebody that knows all these people. That way I don’t have to Google electricians, landscapers, pest control, all that kind of stuff. It’s very helpful. But really, I would say there’s two things that really irk me when I’m looking for my realtor. Thing one is when I call and I lay out my expectations and what I’m looking for. And I say, “Can you put me on a list?” And they say yes, and then they don’t put me on the list. That’s very frustrating.
Usually, I give it about a week depending on how urgent it is. And if I follow up and say, “Hey, haven’t gotten that list yet.” And then they say, “Oh so sorry. Yeah, sorry. I’m working on it.” And if they don’t send it again, then that’s basically, I’m like, okay, I’m going to move on. That would be one thing. Second thing here is whenever … And I’m a little bit more flexible than Johnny here. I mean, I don’t necessarily expect a deal to be outlined because I can do my own research.
But there’s a really big difference to me when a realtor out a deal, right? Like crazy off market deal. And I’m on BCC list. Versus when they shoot me a text message with a deal that they’ve picked out. Like, our Arizona realtor, he texts me houses from Redfin all the time.

David:
[crosstalk 00:52:43], Robby.

Rob:
When he sends me a Redfin listing, I’m like, oh, he actually was in the Redfin app. And he said, “Rob would like this.” And then he sends it to me, and I’m like, oh, this fits my criteria. This is exactly what I was looking for. He doesn’t have to bring me the off market juice. It doesn’t have to be the craziest off market gem. I just want something that’s curated based on my expectations.

Johnny:
I love that you said that, Rob. I really do because I think that’s what separates a successful agent versus a unsuccessful agent, is someone that’s more proactive in just sending the deals and not just putting people on listing alerts. I know that was your first thing. Because part of what I think made me very successful in this space is, what I’ll convey to the clients is, before we even hop in a car to go view any houses, I’ve already done some research on it to see if that meets the criteria that you’re looking to get into.
For example, if we’re going to go look at three houses, I’ve already called the listing agents ahead of time to understand what offers we have to be at, what type of offers are coming in, if they have any special terms, like a rent back for example, and just see that those type of turns meet what the client’s looking for. Then once I do all that research upfront, I’ll present it to the client because we know that we have a good shot at it. I know that, this is more advice for the agents, I know that takes a lot of upfront work, but it creates such a good experience for both people, right?
Instead of going to all these houses and then finding out after you view 10 houses, you only have a shot at maybe one, right? Opposed to just canceling out all the noise and digging deep and doing that upfront work to provide a better experience for your clients. I think that’s another thing clients should look for as well, is someone that can do that research on the backend and bring deals to you that are tangible.
Especially in a high appreciating market where it’s very competitive, half the time you don’t even know, this is what people have told me, half the time their realtors took them to places they didn’t even know they can compete against. I think that’s another thing to look for in an agent and that’s another thing to do as an agent, because it just saves everyone so much time and creates a better experience.

Rob:
Awesome, man. Well, I really like to hear it from the other side, Johnny. I appreciate you putting it out there because I’ve learned a lot, even just doing this podcast. That my expectations or what I want oftentimes, aren’t necessarily realistic, and it’s because I don’t just sit down and talk to my realtor and say, “Hey, what would you like to see?” I think you summarize it perfectly. I don’t actually hear a lot of people say that it’s a partnership. I’m in a partnership with my realtor.
I have to put forth effort, and so do they. And if they put a lot of effort out there and I don’t reciprocate, well, they’ve just put a lot of time and wasted it. I think, if you could start thinking of your realtors as partners in your investing journey, that will be a very fruitful relationship for many, many, many years.

David:
All right, Johnny. If people want to reach out and contact you, I know you’re pretty active on BiggerPockets, but let’s say that they want to use you as an agent to buy or sell a house out in this area, how can people find out more about you and where can they reach you?

Johnny:
My Instagram handle is investingjohns. Spelled I-N-V-E-S-T-I-N-G-J-O-H-N-S. And yeah, that’s how they can reach me.

Rob:
And by the way, do you happen to know your BiggerPockets profile name, or your username, or handle on there?

Johnny:
Yeah, so they can find me at [email protected] That’s spelled J-O-H, and then [email protected]

Rob:
Awesome. What about you, David? Where can people find you, my man? And how can people find you on the BiggerPockets forum too?

David:
I’m not too hard to find on BiggerPockets, believe it or not. If you search for David Greene, you should be able to find me. I think my profile name on BiggerPockets is also davidgreene24, just like on all social media. My YouTube is youtube.com/davidgreenerealestate, but everything else is davidgreen24. And if you are an agent, if you’d like to get trained by us, if you’d like to join our team, if you’d like to join what we’re doing, please do reach out.
Johnny is a great example of what it looks like when you get an agent that loves real estate, invest in real state, wants to help people, and is pretty smart, and they all come together. And he’s one of the top 100 agents in the biggest real estate brokerage in the world in his second year. Johnny, I’m very proud of you. I’m very glad to be in business with you, and I appreciate you joining us today. Rob, I got to say, I’m proud of you too. You asked some really, really good questions.

Rob:
Thank you. Thank you.

David:
I thought you were going to say, do realtors poop in the toilets when they’re showing homes? No one knows, and I was wondering if that’s where it’s going to go, but you actually avoided the poop joke and you stuck to really relevant stuff.

Rob:
Well, I did ask it, but it was edited out in post, so what can you do?

David:
All right. Well, thank you very much, Johnny. Anything you want to leave us with before we get out of here?

Johnny:
No, I think this was a great talk. Thanks again for having me, guys. This was awesome. This was very surreal to me. Yeah, my utmost gratitude to you, guys.

Rob:
Awesome, man. Well, thanks so much.

David:
All right. This is David Greene for Rob poop joke Abasolo, signing off.

Danielle Hale of Realtor.com joins a ‘CNBC Special: The Fed Decision’ to discuss what’s likely to happen in the housing and mortgage markets for the rest of the year. With CNBC’s Steve Liesman.

Mindy:
Welcome to the BiggerPockets Money Podcast Show Number 282, Finance Friday Edition, where we interview Nicole and talk about investing in real estate even if you’re getting started a little bit late.

Nicole:
That’s when I thought about that goal that was kind of for me to live comfortably and be able to take vacations and do whatever I want to do with my daughter. That 4,000 would be comfortable for me. Even though I’m living below that now, it’s for a reason, but I don’t want to continue to live that low.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my solves the Wordle on his first try co-host, Scott Trench.

Scott:
I don’t know about that Mindy, but I did get … I’d only done one Wordle and the word was moist last week. So I know that’s favorite word of many listeners.

Mindy:
That’s such a gross word.

Scott:
Wasn’t that your first word that you guessed in Wordle each time?

Mindy:
That used to be my first start word, and then I stopped and then it was the word and I was very upset. So now I have to find a new first word and someday I will get it on the first try. But I don’t right now. Anyway, 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’re starting.

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

Mindy:
Scott, I love today’s guest because she is not financially perfect but she’s doing a lot of things right. So we give her several things to look at, very … There’s a couple of research opportunities in there as well. And I’m excited for her trajectory. I think she has a lot of potential.

Scott:
You say she’s not financially perfect, but she’s pretty close, in my opinion, relative to where her current financial position is. She’s got complete control over her budget. She ends up a little over a median income, I would say around a median income, and doesn’t have much in the way of assets. But I think is really setting a financial foundation for herself that’s likely to be really strong. I think it’s just a great perspective and someone to learn from. I think we’re going to be all admiring her progress within the next three to five years, based on the trajectory that she’s set up for herself, and we heard about today.

Mindy:
I agree. And when I said she’s not financially perfect, I meant there’s things that we can suggest and there’s room for her to explore. And we were able to give her research opportunities, which I love. Okay, before we bring in Nicole, I have to tell you that the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets are 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 financial implications of any financial decision you contemplate.
Nicole is a recently divorced single mom looking to get started investing in real estate. She feels like she’s getting a little bit later start in life. But at age 35, I think she’s doing really well. Her monthly spending is tight. Her debts are low and getting even lower. And she’s got a military pension and a VA loan to help her on her way. Nicole, welcome to the BiggerPockets Money Podcast.

Nicole:
Thank you for having me.

Scott:
Nicole, before we get into your numbers, could we hear a little bit about your backstory and what’s happened over the past 10, 15 years to set us up for this conversation we’re going to have today?

Nicole:
My money journey, growing up, we had very little but we made ends meet. But I wasn’t really educated on finances and saving for the future. So I really had a lack of knowledge with that. I joined the military at 17 years old. After I graduated high school, I joined the army reserves. I’ve been in for 18 years now. Went to college, did not incur any college debt. Worked two jobs to pay for everything, and came out of that degree with zero debt. I had a full-time job, started working, but wasn’t really saving. Didn’t have a good understanding of saving for the future. I could have started a lot earlier.
About seven years ago, eight years ago now, I started my current W2 job and started saving for my future with their 401(k) program. So I was saving 10% of my income with that 401(k). I’ve been divorced for about two years now. Through that divorce, I lost quite a bit of money, $30,000 out of my 401(k), $20,000 in marital debt that I did not know about that I had to pay off. So that set me back a little bit. But through that divorce, I’ve regained that financial freedom. We were living off of my income, family of four. So it was very strapping and wasn’t able to really save as much as I wanted to. I just got back on my feet, was able to buy a home. I still have a marital home that I’m trying to get rid of. But was able to buy a home for my daughter and I, and on my way to financial freedom, hopefully.

Scott:
Nicole, would it be fair to say that following the divorce here, that’s when your money story really begins or the next chapter begins?

Nicole:
Yes, definitely.

Scott:
What’s happened since then from a financial perspective? Have you started learning more? Have you been taking different actions or changing up how you invest or save? What’s been the trajectory, if any, has changed?

Nicole:
I ended up living with my mom for about a year to get back on my feet. I was able to save up enough money to buy a home for my daughter and myself, and saved up that money for closing. I had to pay a little more over the appraisal rate. I started just building up my emergency fund. And I started listening to BiggerPockets about eight months ago. And it has just opened up a whole new world for me. I had always had a budget and lived frugally. But now I read Scott’s book about two months ago and I’ve really started on that plan and process to move forward, save as much as I can, lower my spending, and on that right track.

Scott:
Awesome. So let’s go through your numbers now with that back … Thank you for sharing that backstory. And let’s start off with the income statement. How much are you bringing in and where are you spending it?

Nicole:
All right. It’s about 4,000 for my civilian job and then 500 a month for my army reserve position. My monthly expenses, my mortgage is 895. Electric/water, 200, 113 for cell phone, 500 estimated for groceries. Current car payment is 181, gas is 120 a month, auto insurance is 99, gym membership, 30, miscellaneous entertainment, 150, internet, 54. And then I do have allotted 275 for credit card payment. I have $3,300 at 0% interest so I’ll pay that off within the year. That is included in my monthly budget. I have about $1,900 left over after my monthly expenses.

Scott:
Awesome. That’s a really tight budget. So you’re doing a phenomenal job on that front, at least my opinion on that. Where’s the money going? What are your assets, liabilities, debts?

Nicole:
Currently, I have two mortgages. The mortgage I live in, the house I live in right now, I pay. My previous mortgage that is still under my VA loan. My ex-husband assumed the mortgage so it’s a wash not paying for that. That will be refinanced and out of my name, off my debt to income in the next 90 days. That’s 188,000. The home I currently live in is 155. I have 3,300 in credit card debt. So that is my liabilities right now, my debts.

Scott:
Great. Do you have any investments in cash savings?

Nicole:
I have 12,000 in cash and 80,000 in my 401(k).

Scott:
Great. Any other assets or things that we should be aware of?

Nicole:
The one thing, I do have my military pension. Like I said, I’ve done 18 years. At 20 years, I’ll get my 20-year letter and I will be guaranteed that military pension. So current value is 325,000. And then when I complete my 20 years, it’s estimated at 387,000 and that’s in current value.

Scott:
Great. And how long to the 20 years?

Nicole:
October of 2024.

Scott:
You’re two years away from realizing this $354,000 asset.

Nicole:
I cannot collect that until age 58.

Scott:
Okay, great. Well, awesome. What is the best way we can help you today based on what you’ve told us?

Nicole:
I’ve made some adjustments to how I am in investing, I guess, in saving. I have a couple questions with that. And then also I would like to really start investing in real estate. Do I use my VA loan? Do I go conventional? What is your recommendation? I can start with the how I’ve changed my investing a little bit.

Scott:
Well, let’s zoom out a little bit. What’s the goal?

Nicole:
Short term, one year, I want to save at least $20,000 for this year. Starting with your steps and $20,000 to $24,000. Three years, I would like to have $2,000 in passive income. And then in five years, I would like to have $4,000 in monthly passive income.

Scott:
That’s fantastic. Thank you for being so clear about what it is you’re looking for. I love it. I think that these goals make a lot of sense. They’re ambitious, but definitely achievable. This will be fun. So that sounds like the first question is to save 20K, which you already have 12,000. You’re not even including the 275 you’re paying towards credit card debt, which I count as savings towards that savings number. And you’re accumulating 1,900 a month in cash based on what you told us from the budget. So you should absolutely crush that goal over the next 12 months. That would be 22,800. In additional savings, in addition to paying off your credit card, in addition to the 12,000 in cash over the next 12 months. Is that right?

Nicole:
Yes.

Scott:
Awesome. I love that. It sounds like the next question really then is the real estate side of things. You’re talking about using a VA loan. My belief is that VA loan will require you to move into the property so that implies you thinking about house hacking. Is that right?

Nicole:
Yes. To reference your book, currently I have two VA loans, the mortgage I’m living in now and then my previous home, so it’s tied up my eligibility. Once that other home is refinanced out of my name, I will gain that eligibility and then the eligibility I have currently in this home. So my question is this home that I have now, if I were … I’ve lived it in a year and after a year, you’re able to … You can rent it out. So I would still have VA eligibility left to purchase something else if I wanted to within a certain number based on how much eligibility I have left. Or I can keep it or I can sell it and purchase possibly a duplex house to make additional passive income. Because this would only produce probably $200.

Scott:
Yes. Well, I think that’s the first really smart question is what do you do with the existing home? And you have to run the numbers and analyze. And I think you say, “If I was starting over, would I buy this place as a rental property today?” What’s the answer to that question in your mind?

Nicole:
I think I bought it for too high to get enough passive income out of it.

Scott:
How long have you lived in the property?

Nicole:
A year.

Scott:
How many months?

Nicole:
April, it’ll be a year. So it hasn’t been a year quite yet.

Scott:
Okay. I love the way we’re thinking about this. The reason I’m asking that is because if you live in a place for more than two years, you can sell it and you do not have to pay capital gains taxes up to a certain threshold on that. So that’d be April of 2023. That might be too long in your position relative to the … Well, how much do you think the gain would be? What’d you buy it for? And what would you be able to sell it for in April?

Nicole:
There’s probably only $15,000 worth of equity in it.

Scott:
Okay. So to me, that’s too small of an amount to necessarily disrupt your whole strategy in order to realize the $3,000, $4,000 in tax savings you might have from the sale of that home. I like the instinct to potentially sell the property, but let’s do a couple more questions on it before we do that. How much would it rent for from a short term perspective? Would it make a good short term rental?

Nicole:
The area, I really don’t see that it would be a good short term rental.

Mindy:
What about a medium term rental? Do you live near a hospital? Do you live near a large corporate facility where somebody would need to be staying longer term? Do you live near an oil refinery? Is it Louisiana that does the oil refinery stuff? He’s got a bunch of properties that he rents to the people that are working in the oil refineries because it … The contractor’s down there.

Nicole:
Unfortunately, I’m in a location that is there’s tons of rentals and there’s really not a market for that. I have explored those options and there’s really not a market. So I’m leaning towards possibly just need to get out of it.

Mindy:
Okay. You would be, if you live in there for more than a year, but less than two years, you’re looking at short term capital gains, and that is taxed at approximately 15% depending on your financial situation. I think based on your financial situation, it would be 15%. So it’s 15% of the gain, which is going to be $2,200. Not an amazing amount, not a horrible amount.

Nicole:
What if I rented it for a year and then sold …

Mindy:
Same thing.

Scott:
You got to live in it for two of the last five years.

Nicole:
Your primary residence.

Mindy:
Unless you wanted a house packet and get a roommate for a year, then it’s still your primary residence. That could be an option. I don’t know if you have enough bedrooms to do that. That could be an option while you’re looking for your next property. But like Scott said, the VA loan is an owner occupant loan. You must live in there for the first year. So you can use your VA loan up to four units. It doesn’t just have to be a duplex.

Nicole:
Four doors.

Scott:
Let’s go through absent the financing for a second. What would a good house hack or investment property look like in your area or the areas you’re considering moving to?

Nicole:
There’s not an abundance of duplexes, triplex, complex in Central Florida. So it would really be a find if I did come across one, but it probably … Price point, is that what asking or …

Scott:
What’s a good deal look like to you?

Nicole:
There’s not even that many for research-wise, but I would probably be looking at 250 for a duplex, at least, would be a decent deal.

Scott:
What are the numbers? It doesn’t have to be duplex, right? There could be a single family where you live in one part of the house and rent out the other part or whatever. This is going to be turned into the first homework assignment I would have for you is I think you need to get clear on what a good move looks like. So you have three to six months to really prep yourself for, “Okay. What am I looking for here?” And if you’re going to follow the stuff and set for life, and thank you for mentioning the book a few times here, then you’d want it to make sense as a rental after you moved out. What’s the place that would produce the most income while you live in there and then be a great long term rental for you as soon as you leave the property?

Nicole:
Definitely would have to be a duplex or a triplex. Would definitely have to be that. Something else I was considering all over the place and what to do is possibly partnering with somebody for finding a short term rental and continuing to live in my current home. Because the mortgage isn’t too high.

Scott:
Well, let’s think about the financing here next. Within a year, you’re going to accumulate a total of about $30,000 to $32,000 in cash. And you could use 5% of that, if you bought a $250,000 property, for example, like you just mentioned, 5% down would be $12,500. So you have $20,000 left over, which I think is a really solid position to be buying a property from. If you have good credit, you have $20,000 in cash left over, you’re buying a house hack, that’s a really strong position for that. And that allows you to keep your VA loan. Why that might be interesting for you is because $250,000 is probably well within your purchasing power with your current income and situation. And if you were to get a tenant to rent from you, for example, for a year for half the duplex, you’ll have that rental history on your tax return.
And when you go to buy the next property, you might find, “Hey, I’m going to buy this quadplex for $700,000,” making that up. Well now, because you’ve got the income from the rental and you got a history there. Not only will you get to add that to your income and your salary and your military income, you’ll also be able to add the rental income and the projected future income of the property that you’re considering buying. So your VA loan may balloon in purchasing power on the second purchase if you were able to, for example, swing it to put down the 5% using an alternative form of financing. I’ve heard of military folks, for example, putting down the 5% when they’re stationed in Florida and using the VA loan for the San Diego purchase, for example.

Nicole:
That definitely makes sense. I was questioning that. Do I use it or do I save it? I definitely think that’s great advice as far as possibly the first purchase, saving it, not using it, and using the money that I saved to put that 5% down.

Scott:
I think you can’t make the decision about the … I like the instinct to house hack. It’s a great starting point for someone in your situation making around a median income, starting with relatively few liquid assets and you don’t have hundreds of thousands dollars to … You’re doing great, but you don’t have hundreds of thousands dollars to invest. And that’s just a really powerful tool in the kit. It’s likely to be a big winner for you. Even if it doesn’t produce cash flow or let you live for free, it’ll likely substantially reduce your month to month living expenses. So I love that. What does the short term rental look like?

Nicole:
I was possibly thinking of something local, beach-wise, but possibly partnering with somebody. Because short term rentals here are not $250,000.

Scott:
What’s local?

Nicole:
Beaches, New Smyrna east coast or west coast on Central Florida. So either coast.

Scott:
How far are these from where you live and work?

Nicole:
New Smyrna Beach is 30 minutes. The other coast is about an hour-and-a-half.

Scott:
Would you consider living in one of those places? For example, is there a duplex or a condo with one of the doors that locks off the other unit or whatever with that for a year? Would that be an option available?

Nicole:
I was looking at one of the beaches that’s close or 30 minutes away. They do have more duplexes there, and possibly being able to use one half as a short term rental and then live in the other half. So it would be house hack times two with the short term rental.

Scott:
Would you be required to commute every day?

Nicole:
I work remote. The only limitation would be my daughter and her school zone, which I could still commute with that. It would just add extra transit time for myself. But it would definitely, profit-wise, would be worth it.

Mindy:
I’m looking on realtor.com at some of these New Smyrna Beach houses. I like the idea of a duplex on the beach where you’re living in one portion of it and renting out the other portion short term. You can do the turnover so you are not paying somebody to clean. That is the biggest pain point in short term rentals is finding somebody reliable to clean the property on your schedule. There’s ways to do this, especially when you’re doing it yourself, there’s ways to do this where you just literally bring everything back to your house and take brand new over there, have two sets of everything so that the turnover is a lot easier. Now the schooling for your daughter, is she in a special school or could she go to … Could she just transfer to the school in New Smyrna Beach? I mean, she’s pretty young. I’m assuming she’s only in the first couple of years of school.

Nicole:
She’s in kindergarten. It’s a little bit difficult. Her father lives in that school zone and that’s what we’re going off of right now. It is something that could possibly work moving her, but I would probably keep her in her current school. But the drive wouldn’t be out of the question.

Scott:
I think, if I’m looking at this now that we’re a couple minutes in the conversation, I think the biggest challenge for you is you’ve got a really strong financial base. You got really clear goals here. And real estate’s your tool that you’re likely going to use. Your market seems, from my seat, to be one that is affordable and within your reach to buy properties in, you’ve got the VA loan, all this kind of stuff. I think what I would advise you to do at the highest level is I think you need to pay what I call the entry price into real estate investing, which I think is in about 250 hours, maybe more, of just listening to podcasts, reading books, analyzing deals.
I think you’re still exploring some of these concepts at a high level. And I think you need to get clear on what good looks like and you’ve got at least 90 days before you’re really able to make the decision. Or if I were in your shoes, I’d feel comfortable buying property until that mortgage is off of my name. I think that would be a really good thing is I’m going to walk away from … Today’s February 8th when we’re recording this. I’m going to walk away from end of April and I’m going to be super confident. I know what a good deal looks like. I can articulate it in crystal clear detail about what I’m going to do.
One of several options or one particular strategy, here’s a duplex, it’s $200,000. It was built in 1950. It’s two bed, one bath on each side. Or three bed, two bath on each side. The square footage is this. It’s got a garage, it’s got a yard for the dog, whatever it is that you want to, that you’re looking for, cash flows like this. And here’s what’s going to do for me when I move in, here’s what’s going to do when I move out. There are five to 10 of them that have sold in the last 90 days or that I’ve watched sell over those last 90 days. So I know that they’re likely to come on the market.
And here are the Airbnbs in New Smyrna Beach. They’re within my price point from a VA loan because I’m qualified there. And here’s what they would produce from income. That I have to commute 180 days a year to the school zone for that or whatever it is. I think that’s what I would love for you to be able to articulate something to that effect very confidently by end of April. And I think that’s a very achievable goal over the next couple of months, in my opinion, for you.

Nicole:
Definitely. I’ve just struggled with that. And finding what I want and what looks good. So that definitely helps me. Thank you.

Scott:
Since we already plugged my book, maybe this will be the show of plugs here. Maybe we could send you your pick of 10 BiggerPockets books. Any ones that look interesting to you, we’ll send your way in your preferred format. And I think we will also give you a pro membership. so you can use the calculators to analyze as many deals as you’d like in there to help with that search. But I think it’s a self education slog to …

Nicole:
I’ve definitely tried to continuously listen and educate myself. Sometimes it can be overwhelming. Like Mindy was saying, your position is different than everybody else’s. And when you’re listening to someone that is younger and in a better position, it’s sometimes discouraging but I feel like I’m on the right track.

Mindy:
You have a great track. That is the part that I think we have … We don’t spend enough time on this show saying you’re doing great. You are 35 and you don’t have a net worth of $7 million, but you also don’t have a negative net worth. You don’t have $400,000 in student loan debt or $300,000 in credit card debt because you went nuts with the credit card every day for seven years. You’re doing really well. Your expenses are super tight. Could you cut things? Sure. Let’s put you on beans and rice every single day for the next month-and-a-half. Let’s take away your cell phone and take away entertainment and take away your gym membership. We can get your $2,600 spend down to $1,500. We can really tighten that belt and make your life totally miserable or we can continue on a path where you are having a good life and saving and you’re still doing really well. Does your budget feel tight?

Nicole:
No, I think it feels comfortable. Like you said, I could definitely tighten it up.

Mindy:
You could also definitely loosen it. You have $1,900 every month at the end. Go on a vacation every single week or buy a house once a year.

Nicole:
There you go.

Mindy:
I think that you should connect with a real estate agent. I’ve got a note here to reach out to you after we’re done recording to get a list of books and to connect you up with the pro membership. Thank you, Scott, CEO of BiggerPockets for offering that. That’s very generous of you.

Scott:
This is who they’re for, right, is you. You’re getting some information together. You’ve got a good idea of how things look, but you need to push through to that, “What does good look like so that I can actually feel confident to make that?” You need to do that over the next … You can’t take action for the next 90 days so that says time to study up. Probably, in addition to that analysis and that education, it’s probably a good time to meet a couple of lenders and agents as well and pick their brand, and local investors. If there’s a local investor meet up or anything like that, those would be really good things to start paying attention to and learning about in your area.
Take everything with a grain salt. See if you can pick out who you think knows what they’re talking about and who you think is maybe a little too aggressive or doesn’t really know what they’re doing. Once you get to that point where you feel like you actually can make that distinction, that’s when you know you’re ready from an investment perspective, to make that next purchase and make it really good decision.

Mindy:
I’m going to go one further and say, if you are a New Smyrna agent who has information about the area, please reach out to me, [email protected] and I will connect you with Nicole. I think Seth Jones is a mortgage … I know he’s a mortgage broker in Florida. I think he’s all of Florida. So I will introduce you to Seth after the show as well.

Scott:
And we have no financial affiliation with Seth Jones or any of these other folks, right?

Mindy:
Correct. No, we don’t have any financial … I’m just a matchmaker …

Scott:
Members of the community.

Mindy:
… to members of the community. I love to connect people. It doesn’t do me any good to just hold Seth Jones to myself. He’s the not going to write me a mortgage, because I don’t invest in Florida right now. But just talk to an agent and see what’s out there. There are zero quadplexes in all of New Smyrna Beach. Okay, that’s good to know. Or there are 17,000 or they’re building new ones. I don’t know anything about New Smyrna Beach. I don’t even know where it is on the map. I’m sorry. I don’t know what coast it’s on either.
But it doesn’t matter because I’m not the one that can help you with this. I can just connect you to somebody who can. So find what’s there. I mean, if you’re looking for a duplex and there’s only two in all of the city, that’s a really great indication that we need to change our focus. Could you find a really large house and turn it into a duplex? Is that something that would be easy to do? Or maybe there is a large house that’s already a duplex that isn’t official and you go through that channel?

Scott:
I don’t like the large rehab project for her at this point with that. I think that’s a big thing, like, “It’s great. You put in $30,000, $50,000 and turn it into a duplex.” Well, that’s just not reasonable relative to Nicole’s position because she doesn’t have all that cash. I like the single for the first play here. And then after two, three years, do some of the work yourself, get good with that and then take on the bigger projects incrementally with each of the next two or three projects.

Mindy:
I sometimes get ahead of myself. I’m like, “Just do it yourself.” Not everybody’s been doing it themselves for that.

Scott:
That was a big worry for me, I remember because I was like, “I have $12,000 and no skills.” I don’t want to do that on this particular project.

Nicole:
I do want to invest in real estate. I do know that. And it is a little discouraging knowing that I don’t have an overabundance of liquid cash. So it is discouraging at times, but it can be done and working towards that.

Scott:
But that’s where you can look for the work that would be reasonable for you to do yourself like kitchen … When I bought my first duplex in a very similar financial position to what you’ve got here, my evenings were spent staining the kitchen cabinets, which came unfinished. And painting and installing blinds and doing those types of things. There was a plumbing project that I did have to spend $8,000 on and that was it, and I knew that going in. That level of work might be very reasonable for you and might be able to get you a good deal.

Nicole:
I’m definitely not above doing any of that work and do have a little bit of background in that. My dad used to flip houses when I was younger. So free work, free labor.

Mindy:
Paint can transform a house for $35 a gallon. It is amazing what you can do with a gallon of white paint.

Scott:
I feel like your instincts are … I’m completely aligned with your instincts and it sounds like Mindy is as well here. House hacking is a great next option for you. Your foundation is perfectly set up for that. And real estate is you’re perfect fairway for someone who might benefit from real estate investing. You’re willing to do the work yourself. You’re willing to learn about it. You’ve got the financing options, you’ve got a good job with all this. You’ve got a high savings rate. You want the passive income in a reasonably fast period of time, so I love that. What else can we help you with today from a strategic ..

Nicole:
So recently, I cut my contributions to the [inaudible 00:36:46] which is 4% at my work so that I can save as much as possible. And I switched that over to a Roth rather than the 401(k). Does that feel like that was a good move? Should I continue with that?

Scott:
If the goal is $20,000 in income in a year and $2,000 in passive in three years and $4,000 in passive in five years, then absolutely, that’s a great move. That’ll be really hard to do inside of your 401(k) in my opinion. I like the move to the Roth. Take the free money, put it in the Roth and then put the rest towards the fund to go after the real estate investments. I think that makes sense to me.

Mindy:
I’m wondering what your W2 job is. And are there any opportunities for advancement within your company? Are there any opportunities for advancement by, advancement meaning an increase in salary, by finding a new job if you’ve been there for a while? And are there any opportunities for generating any additional income as a side project, either through your W2 or through … maybe your fluent in, I don’t know, Swahili and you want to give Swahili lessons and that’s something that is going to be a lucrative side hustle. I wouldn’t necessarily suggest doing something that’s pretty low value like DoorDash that doesn’t really pay a lot. That’s a lot of initial cash outlay in the form of wear and tear on your car and gas into your car, and then you’re not making a whole lot of money on that. Are there any side hustle opportunities for you?

Nicole:
Over the past two years, you know, since my divorce, I’ve really tried to focus on getting my life back together and focusing on my daughter. So currently, I don’t manage anyone. There are opportunities I could go back and manage people and certainly increase my salary. So that is something that I have been contemplating going back into to make additional money. Also, I have explored an additional job, maybe cleaning. I used to take real estate pictures for foreclosures. And when people left and it was disgusting, I would go and clean houses and do that. You could pick and choose what you wanted to do, which I need flexibility when it comes to having my daughter. I would clean houses for that, again, just to make that additional money.

Scott:
I love it. I think it’s not a lot of folks would, I think, do that in your situation. And the fact that you’re willing to do that, the fact that you’re saying, “I want to become financially independent. I want to build wealth. I’m willing to house hack. I’m willing to clean. I’m willing to take on these jobs or fix it up myself.” As a single mom here with that, I think, is super impressive and something that five years from now, when we have you back on the show and you’ve got your $4,000 to $10,000 in passive income from this, you’re going to be an inspiration and very proud of that dynamic. I think it’s awesome and I love that.

Nicole:
I definitely want to make sure that I instill that in my daughter and she sees that hard work, too.

Scott:
All the right things are going on in your financial position. You have been sitting on this particular trajectory for a long time. And I’ve mentioned that before on some of the system of our guests where you come in, you’re eight, 12 months into really absorbing perspective on finance and learning about what good looks like from a personal finance position. You’ve set that up. And you just haven’t been sitting on it for two, three years to stockpile, to see the results of that piling up from a cash position and then in investment form.
So that’s why you feel like you’re behind. But I guarantee you … I don’t guarantee you. I think there’s a high probability that over the next couple of years, you will see the compounding benefits of what you’re doing here if you continue to keep this trajectory going and slowly accelerate it month to month. I think it’s awesome. We answered your question about the 401(k). What other questions do you have?

Nicole:
I haven’t calculated my FI number. Is that something that you could assist me with? And the best way to factor in my military pension.

Scott:
I wouldn’t worry about your FI number right now, honestly. I would worry about it in two years or three years once you’ve got the first $2,000 in passive cash flow. You can absolutely calculate your FI. I’ll give you the technical answer. Right now, you spend $2,600 a month. Therefore, your FI number is somewhere between years three and five when you hit $2,000 to $4,000 in passive cash flow from your real estate investments or other investments. Another way to calculate the FI number is to take the total amount of your assets, like your equity in the real estate, plus your stock market investments and boil it down to the 4% rule.
So right now, you spend 2,600 a month, 2,600 times 12 is going to be 31,200. Therefore, you need about 25 times that amount in assets. That’ll be $780,000. But I believe that as you go down this journey and build up some of those assets and get more confident with your real estate investing career and keep this going, that that number will expand to some degree and be a little higher than the $31,000, $32,000 in annual that you’re spending today. I think that’s why I wouldn’t worry about your number quite yet. I just worry about keeping the trajectory going and building the asset base.

Mindy:
Okay. I’m going to give you a completely different answer because yes, Scott’s right but also Scott’s wrong. So you are spending approximately $32,000 a year. $31,200, let’s round up to $32,000 just to make it easy. That is $780,000 is your FI number. I need to get to this so that I can start withdrawing according to the 4% rule. However, you have a pension. Your pension is $12,000 a year, approximately. So now we’re down to a $480,000 nest egg for you to withdraw from the 4% rule because of your pension. We did a show back on Episode 259 with Grumpus Maximus where he talks about pensions. Should you cash it out? Should you take it as it comes to you? Since it’s a government pension, I would not cash it out. I believe that’s what Grumpus said as well.
The government’s not going to go out of business. If they do, you’ve got way bigger problems than just the fact that your pension’s gone. So I would keep it the way it is. I would also not really worry about it. I say this flippantly and I don’t mean to, but it’s $1,000 a month. That’s not going to be hugely helpful in your … By the time you’re 58, your spending is probably not going to be just this $2,600 that you’re at right now. Maybe your mortgage is paid off and maybe it is only $1,600. And now you’ve got $1,000 from your pension and you need to cover up the $600, or make up the $600 difference and then it would be really helpful. I would keep it in the back of my mind as, “Yes, I will get this someday. But because it isn’t such a large amount of money, I wouldn’t be concerned with it so much. I wouldn’t really factor it in. I would just continue to …”
I mean, if you have $2,000 in passive income in three years and you have $4,000 in passive income in five years, you’re kind of already generating all the income you need without doing anything. You don’t seem like the kind of person who’s just going to be like, “Well, now I’m going to the beach every single day. I don’t have to do a thing for the rest of my life. I’m just going to sit around and do nothing.” I think that understanding the numbers behind the 4% rule are good. But I also think that your $4,000 in passive income goal in five years is not only doable but also a really good FI number for you in general. That’s already more than what you need to live right now.

Nicole:
When I thought about that goal, that was, for me, to live comfortably and be able to take vacations and do whatever I want to do with my daughter, that $4,000 would be comfortable for me. Even though I’m living below that now, it’s for a reason. But I don’t want to continue to live that low. Thank you. That helps me a lot with understanding with that perspective.

Scott:
It’s this trajectory of, “Hey, I’m going to spend at this very low level for a period of time in order to stockpile the asset base. And then as my asset base begins growing and compounding, and that’s a greater and greater percentage of my wealth accumulation, it’s not just coming from the spread between my income and my savings.” You can begin easing off and letting the assets pay for incremental lifestyle expenses. And that’s what I found to be true for my personal life.
I would never have been able to articulate that when I first wrote the book with that but I can see that now. That’s how I would think about the FI journey is. Get the first couple thousand in passive cash flow and then take a look in three, four, five years from position of even greater financial strength and say, “Okay. What is the end game now? And how do I make sure that I’m never dependent on wage income on a go forward basis?” But also have that trajectory to get in the lifestyle I do want at the end state.

Nicole:
Yes.

Mindy:
Okay. Before we let you go, I have one more comment about the VA loan. The VA loan is a wonderful tool for our veterans. I think that it is fantastic. And I think that it also has a lot of stigma around it from real estate agents who don’t necessarily understand what it is and what it does. It is a benefit to you. There’s not really a lot of downside to the sellers. And having a lender who specializes in the VA loan is going to help get your VA loan offers accepted more so than a lender who’s like, “I’ve done them before.” They can take a really long time. They can take forever because there’s all these little steps that you have to do. But a good VA lender knows that you can start all those steps as soon as you go to contract.
I have a VA lender who’s done three VA loans for me, 21 day closes. And that is kind of unheard of in lending in general. But in the VA loan world, I’ve seen people write 45 day VA loan closes. And they’re like, “Well, I hope I don’t have to extend this.” In this market right now, it’s unfortunate, sellers don’t have to jump through hoops and “deal with the problems I’m doing” for those of you who aren’t watching me on video. They don’t have to deal with the problems of the VA loan. There aren’t problems with the VA loan. I have had more problems with FHA loans than I have ever had with a VA loan. They’ve always been smooth sailing. But because there are so many agents who don’t deal with these loans on a regular basis, they can see one and maybe they have two identical offers.
But one is a VA loan and one is a conventional or an FHA. They’ll be like, “I’ve heard VA loans are terrible so I’m just going to go with this one.” So when you go to use your VA loan, make sure you’re using a lender who does them all the time, who knows all the … I don’t want to say loopholes, because that makes it sound like they’re doing something wrong. They’re playing by the book. I mean, it’s a government program. There’s rules and you can either follow them or not get your loan approved. But they jump through all the hoops in such a fashion that it doesn’t take forever to get it closed. That’s my rant. The end.

Nicole:
I actually had a nightmare with purchasing the home that I live in now. The credit union that should deal with lots of VA loans and I literally had to do the work myself to get my certificate of eligibility. They got the wrong one. It was a nightmare. And if you could send me that lender, that would be great because I will not use the lender I used before because I almost lost the house because of how poor of the process it was. And it was a 45 days and they wanted to extend it. It was just a horrible experience. Luckily, everything worked out. But I do not recommend the lender I use. It was a bad process. Like you said, there is a stigma around VA loans, but there’s nothing wrong with them. And the lender makes all the difference.

Mindy:
It really does. I will send you that when we’re off the call.

Nicole:
Thank you.

Scott:
You had at least one more question. I’m cheating here, looking at the notes since you haven’t asked yet. But I think you were wondering about whether 2022 is a good time to do all this stuff. Is that right?

Nicole:
Yeah.

Scott:
I love talking about this one because it’s always on top of everyone’s mind. I bought my first property, a duplex for $240,000 in Denver, Colorado when I was making $50,000 a year and saved up my first 20,000 in 2014. And everyone was talking about how the market had been going up for five, six years in a row, it was absolutely crazy. And there’s no cash flow left in the market in Denver. It was the peak of the market and the bubble was about to burst. I bought the property in November. All of 2015, I was worried about the crash. 2016, second property. 2017, I think it was. The next one, 2018 was the next one. Another one last year. And the whole time, you’re worried about the market conditions. Nobody can predict the market reasonably well.
I will try to pick the market for you anyways in a few seconds here. But I think that it’s just very hard to do that. And it’s like, “I’m going to base my investing philosophy over a lifetime because I would like to be financially free for the entire rest of my life. Not just the next couple of years with this.” So I buy one property every year or two, and don’t worry about the market conditions. I’m just consistent. The strong financial foundations, spending less than you earn and buying and buying and buying and buying. Never to the point where that property can bankrupt you, but always with the idea that long term, that property will go up in value, rents are going to increase. I’m going to pay down the mortgage and it’s going to be a long term winner.
That philosophy I think, is a really powerful position to not worry about the market. Because if the market tanks next year, great. You are going to buy property number two next year and you’re able to get that one at a lower value with that. It’s the dollar cost averaging with real estate, you’d know that long term over a five, 10-year period, if you sustain it, absent apocalypse, which is going to affect everyone, you’re probably going to be in a pretty strong position even if you do have to go through a couple of years of downturn.
That’s the risk we’re going to take with real estate if you’re going to use leverage to buy an asset. But I think that you can feel comfortable over a long period of time that you’re playing the long term averages reasonably well, or at least I do, with that. That’s my answer about the market. And I think that it’s much more predicated on your personal position, which I think is nearing a position of a really strong position to get into real estate with a strong savings rate. Plenty of down payment and $15,000, $20,000, $30,000 left over in cash in emergency reserve.
Now, second part of that, what do I think’s going to happen in 2022? The big question mark this year is interest rates, right? So the Fed is signaled that they’re going to raise interest rates in March and people are pricing in, I’m hearing, up to five interest rate hikes over the course of this year. Long term, the factor, if you forget about those interest rates, you think prices are going to rise. If interest rates were to stay flat, prices should rise. Because millennials are buying homes. There’s a ton of demand. There’s not enough land, there’s enough … The supply and demand factors are really strong for this. I mean, I’m interchanging them. But lots of people want homes. There’s no supply of labor, there’s not a supply of land, there’s not a lot of water in parts of the country. It’s just hard to get these properties built.
And I think Dave Meyer estimates that there’s four million, our VP of data analytics here, estimates that there are four millions home short of meeting demand in the country currently. It’s going to take eight to 10 years at current build rates to really catch that up. But interest rates rise, that can have a big impact on things. And so my prediction for 2022 is that I think interest rates will rise. I’m not clear on how much that will affect pricing. It could be that prices come down, it could be that they don’t appreciate quite as much as they did last year. It could be that they appreciate a tremendous amount because the interest rates don’t rise enough to offset those factors.
What I think might happen this year is that rates will increase, prices may not appreciate as much and rents will rise very quickly relative to that because of inflation. Is that the worst thing in the world if you don’t get that much appreciation? Or even if your property loses some of its value, but rents increase over the next couple of years, if you believe that. I wouldn’t make an investment decision based on a market forecast because no one can predict the market. But I do have fun talking about that and at least thinking through that. That’s my bold hypothesis, is that rent growth will outpace property growth in 2022 for the first time in a while but we’ll see.

Nicole:
After talking to you guys, I’m not going to let any of that hold me back and I’m definitely going to make that next step. Do my research like you said, and make that next step.

Mindy:
In addition to everything that Scott said, I think we still have low inventory. I’ve got a really great graph that I will include in the show notes, which can be found at biggerpockets.com/moneyshow282. You can also find it at fred.stlouisfed.org/series/houst or just click on the link here. Scott, I shared it in the show notes that we have, and it is showing housing starts dropping from … What is this? 2006. They just went down almost to nothing all the way down to 2009 and they have not come back up to where we were in pre-2006 levels. So I think that there is an enormous shortage of houses to be purchased. So I think that yes, interest rates are going to go up. The Fed has said they’re going to do that. That might cap the skyrocketing prices a little bit but I don’t think that the market is going to just stop. Of course, past performance is not indicative of future gain. Your mileage may vary. Insert other clever comments here.

Scott:
There are no guarantees but I’m planning to buy again this year per my strategy that I outlined.

Mindy:
I’m keeping an eye on the market. When something nice pops up, I might snap it. And if nothing else, I’m helping people buy.

Scott:
Any other questions or things that we can help answer or discuss today?

Nicole:
No. I think you guys really covered it all and gave me a better understanding of what I need to do and just the research I need to make for making that first step into real estate investing. So thank you, I appreciate it.

Scott:
Well, thank you for sharing your story here and for the great discussion today. Thank you for plugging the book and letting us plug a bunch of bigger podcast stuff today. Hopefully, that’s helpful to you. Really look forward to seeing what you end up deciding and doing over the course of this year. I’m very optimistic about the next couple of years from a success standpoint for you.

Nicole:
Thank you. I will keep you guys posted.

Mindy:
Please do. We would love to check back in with you in a few months … Maybe in a year. Let’s see what’s going on in a year.

Nicole:
Let’s go with a year.

Mindy:
Okay, great. Well, we will talk to you soon. Thank you, Nicole. Okay. Scott, that was Nicole. That was a great episode. That was a lot of fun. I’m super excited for all of the options she has available. She’s doing really great. I think that we stink at being supportive and celebrating all the great things that she’s doing. Her budget, her spending is so good without feeling unnecessarily restrictive to her. She’s doing awesome. She’s saving money every month and she’s got clear cut goals. I love her story.

Scott:
What I think was really important that we heard today was Nicole is willing to do whatever it takes to move her financial position to the next level. She is considering moving into a house hacks. She’s willing to move into an Airbnb. She’s willing to clean up really what sounded like horrible messes from foreclosure properties and those types of things to get ahead. She’s not above doing that. And I think that’s what it takes to really get the start of this grind over with. To be willing to take on that house hacks project and to earn those extra bucks by putting in the extra hours and doing the work that you don’t want to do for a couple of years to get that financial foundation. Over the hump where it can begin to support you in the asset base, it gets large enough to start snowballing you.
That asset base outside of your retirement accounts, outside of pensions that only come into play when you turn 58. That asset base that you can actually spend in your early or middle aged adult life with that. I think she’s doing all the right things to set herself up for that. What’s so hard and frustrating for many listeners who are probably in her position is because she’s only been on this trajectory for a year or two, really, and building that financial position, she feels like she’s behind. So just give yourself another one, two, three years if you’re in a position like Nicole’s because you will see those results or you will have very good odds, at least, of seeing those results carry through if you’re willing to pull those big levers and grind it out for a couple years, the snowball will start rolling down the other side of the hill with it.

Mindy:
If you’re listening to the show, if you’re thinking about your finances, if you are tracking your net worth, tracking to your spending, if you are even being conscious of the fact that money comes in and money goes out, you are so far ahead of the average American who doesn’t do any of those things. And she’s got a positive net worth, she’s got a plan, she has well-defined goals. She would really have to try not to succeed. She would have to try to sabotage herself in order to not succeed, just because she’s so driven and she’s going to do the work.

Scott:
But another thing you just said there that’s such a great point, clearly defined goals. It’s so hard to put together a good financial plan and say, “What should I do with my 401(k) or my Roth?” Well, it depends on your goals. “My goal is to save up 20,000. My goal is to get $2,000 a month in passive cash flow within three years. My goal is to get $4,000 within five years.” Okay, great. Now we can work with that and back into that and say, “Well, is that realistic? Well, if you’re willing to clean foreclosures on the weekends and house hack, it’s realistic. If you’re not willing to do those things and want to live in a nice house that’s a big percentage of your income and have your car payment, maybe that’s not realistic for you.” We can give feedback about that.

Mindy:
She doesn’t have the goal of $10,000 in passive income by the end of the year. That’s not a realistic goal. Her goals are realistic, her goals are doable and she’s taking steps to do them. Like you said, she’s willing to do the work. She’s willing to do, what is that phrase? Be willing to live like nobody else now so you could live like nobody else later. She’s willing to go above and beyond, to go extra, to do more so that when she’s a little bit older, she doesn’t have to go above and beyond.
She doesn’t have to do extra. She doesn’t even have to do the bare minimum. It does it for her. It’s called passive income. But you have to do the work now. You can’t just sit around and go on vacations all the time and eat bonbons and go to the beach every weekend. And all of a sudden, life is great and throwing money at you. That’s not how it works. You got to do the work at some point. And she’s ready. She’s willing. She’s going to do it. And she is going to be successful.

Scott:
Love it.

Mindy:
And we’ll check in with her in about a year. I can’t wait to see all of the successes that she’s had in the next year.

Scott:
Absolutely.

Mindy:
Okay. Scott, this was a super fun episode. Are you ready to get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 282 of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen saying, in honor of Girl Scout Cookies season, peace out, Girl Scout.

David:
This is the BiggerPockets Podcast Show 581.

Derek:
You can sit there with the bat on your shoulder and watch all these houses come down the pipe. And when you see one that has ADU potential after you’ve done this a few times, it’s so obvious. It looks like a beach ball coming down, belt high, fast balling. That’s the best way I can describe it. Is you have this really easy criteria, and then you just sit there and wait for one to come along.

David:
What’s going on everyone, is David Green, your host of the BiggerPockets Podcast. The show where we teach you how to find financial freedom through real estate. We do that by bringing on different guests, as well as sharing information ourselves to sort of highlight for you what it looks like to find that financial freedom that you seek.

David:
Today’s guest is a specialist in accessory, dwelling units, or ADUs. If you’ve ever wondered, what is an ADU, why do people talk about them? Why are there so many acronyms in real estate that I don’t understand? Well you’re going to learn a lot about that today. This is a very, very, very relevant and important sort of like a hot topic that’s going around in the world of real estate. And we brought in an expert from Oregon who knows construction, who also knows ADUs, who does it himself, and then helps other people do it to share a lot of information with you. Henry, what were some of your favorite parts of the show we just did with Derek.

Henry:
Man, this is arguably one of my favorite episodes so far of the BP Podcast. And not just because I got to be here and co-host it, but the information that was provided was phenomenal. Because you’re right, it’s a topic a lot of people want to know about that not a lot of people are talking about. Some of the favorite parts of the show for me were him giving great tips and ideas of how to look at properties that you probably see every day.

Henry:
You may have walked five properties last week with your real estate agent. And maybe one of those would’ve been an excellent candidate for an ADU and you didn’t know that. He’s going to start to reveal to you what you should be looking for and I promise you, you’re going to have some aha moments about, oh, you know what, that house is a great one for this. Because I had two of those aha moments myself, just thinking through my market as he was talking.

David:
That’s how you know, it’s a great show, right? As you’re listening, when you’re like, ooh, ooh, I could go do this thing. That’s exactly what we’re looking for.

Henry:
Yeah. Just what I needed, another strategy to go look at for real estate. But yeah man, it’s phenomenal. He also gives a great, great tip for how to speak to people, especially when you’re going to do these ADUs, you have to talk to the city, city council members, planning commissions, right? He gives a great tip on how to approach them to not only get their expertise on your plans, but to essentially help them green light what you’re trying to do.

David:
Yeah. We cover that in the fire round. So make sure you listen all the way to the end where we get into the fire round, where Derek gives some really practical advice that’s sort of unheard of. We don’t hear many people that are actually helping you walk through the permitting process with the city.

David:
And then he gives a really good point about how, if you go the traditional method, you might have a 20 page report of code that you have to abide by. But if you go the ADU way, it might be actually 20% of that much, much smaller. So the ADUs provide a workaround for a lot of the common problems that investors face. So if you’re somebody who has often wanted to invest in a market that you feel is too expensive or wouldn’t cash flow, or you just don’t want to pay the mortgage to buy a house there, this is an episode for you.

David:
If you’re a creative person who says, “Hey, no, I’m willing to do some work to make this deal work. I want to make real estate work.” This is a deal for you. And if you’re somebody who’s just curious, like why does everyone talk about ADUs and what does that even mean? And you don’t want to feel like you’re left out of the next meetup or the next party you’re at, this is an episode for you.

David:
Today’s quick tip is brought to you by me, David Green. In today’s market, we mentioned in the show, you don’t find a great deal. You could find a great deal, but it’s probably going to be a great deal that just finds you. If you go looking for it, it’s very difficult to find, but you can make a great deal. So I want to highly encourage you to look at property from a creative perspective and ask yourself, how could I make this work?

David:
And if you do that for long enough, you’ll start to find patterns in properties and floor plans that you will recognize when you see them. Once that happens, you’re going to need a person who’s going to help you with writing an offer, doing some research. Don’t try to do it all yourself. BiggerPockets has an agent finder system that will connect you with a real estate agent that you can reach out to when you have questions, just like from today’s show.

David:
What I love about it is that your agent is probably listening to the same podcast that you are right now and they’re learning all the same things as you. So I like to try to keep it within the BiggerPockets community whenever I can. Henry, anything you want to say before we bring in Derek?

Henry:
Yeah, man. I just want to encourage people to listen with an open mind. I know for me, I’ve thought about ADUs, but the second you start digging through city codes and ordinances and having to call the city, it kind of gets overwhelming, especially if you’re a new investor, I’m a seasoned investor. But what our guest Derek kind of points out is that this is a whole lot easier than people think on the front side.

Henry:
And so listen with an open mind about this ADU strategy and it’s a pretty flexible strategy. You can have them attached, you can have them detached, some are cheaper to build, some of them more expensive to build. And it’s just, you can take something existing and convert it as it sits.

Henry:
There’s a ton of ways to take this ADU strategy and make it profitable. And I think you just have to have an open mind, take some notes and our guest is just, he’s just so kind and thoughtful and ready to help. So this episode comes with a teammate for you to reach out to and get help. I love of this episode.

David:
Great point my man. Appreciate you pointing that out. All right. Let’s bring in Derek. Derek Sherell, welcome to the BiggerPockets Podcast.

Derek:
Thank you David. Glad to be here. Thank you.

David:
How are you today?

Derek:
Better than I deserve.

David:
That’s a Dave Ramsey line, isn’t it?

Derek:
Hey thanks, you get bonus points for calling that out. Honestly, if I was any more excited to be on BiggerPockets today, sharing this ADU strategy with all the listeners, I’d probably fall out of my chair, and I’m not kidding.

David:
I’m really glad to hear that. I hope you don’t, but I understand. I believe you’re a firefighter, right?

Derek:
Yeah. I put my seatbelt on.

David:
Okay. So if you fall out of your chair, you’re the best person qualified to sort of get yourself back out of it. Again, we don’t have to worry about you being stuck-

Derek:
Copy that.

David:
… and not able to get up. So tell us, what does your business look like? What’s your portfolio look like and a little bit about yourself.

Derek:
Yeah, thanks. So my portfolio consists of six primary houses, 14 units total. And what I do is I’m a buy and hold, build and hold investor. And I’m looking for a property that I can either convert, attach, or build a detached accessory dwelling unit, turning a single family property into a small multifamily. And my goal is to create the best product on the market, a product that’s really high demand, low supply, and get the best tenant and place them in there and then teach the tenant how to do this process. And I also like to teach first time home buyers how to use this strategy to break the barrier of home ownership.

David:
So how did you first come across this idea of incorporating ABUs into existing properties?

Derek:
By complete chance, David. I started an apprenticeship in high school. So I got into this construction technology class when I was 16, and Oregon was on the cutting edge of accessory dwelling units in the country. And we had a two term class where we were building a guest house for one of our teachers. That’s where I saw the process. I later became a carpenter. I was a licensed finished carpenter for years and I was building accessory dwellings and guest houses in Southern Oregon, Ashland, Oregon. And this was a product that was right before my very eyes the whole time. It wasn’t until years later that I realized it was actually an investment vehicle that I could attain myself.

David:
Now you have a construction background, is that right?

Derek:
Yeah. I was a builder and like I said, I started apprenticeship in high school and right after high school, I got my contractor’s license and this is back in the run up of the great recession. So everybody was a builder. Everybody had a truck and a lumber rack. We were all making really good money, so we thought at the time. Everybody was buying boats and little did we know there was this huge crash that was coming a few years later. So that was kind of, I got started in the height and I got out as everything was falling, the whole Cardhouse just started collapsing.

David:
So it sounds like you sort of built your skillset when it was really popular to be in construction. It fell apart, you got in something more stable. So now you’re working as a firefighter, but you still have those skills. And now you’re seeing, “Hey, there’s a lot of demand for this stuff. People are looking to fix their houses up again, right?”

Derek:
Yeah, exactly. So as we know in healthy economic cycles, we have this kind of ebb and flow and this up and down. And where the idea really came to fruition for me was when I was looking to buy my second house. I bought a home and I got into real estate on accident. I bought a house in 2004 and I was that guy. I was the subprime poster boy.

Derek:
So I went in to get this loan. They said, “How much do you make?” And I said, well, I don’t really know. And they told me, this is what you’re making, we’re doing a stated income. And they said, these are your assets. I didn’t have those assets. And I was able to get this subprime mortgage on this house.

Derek:
So a long story short, when I moved into town to pursue a career in the fire service, I needed to find something a little bit closer to the municipality. And the only way I was going to be able to buy a house, we’re a high market. Our average value in our two towns, average sales price is from 400,000 to 700,000 in the two towns. So it’s a high barrier of entry. And the only way that was going to be achievable for an average guy like me, was to have income property attached to a single family residence that I could buy for 5%.

David:
So you sort of had to house [inaudible 00:09:56] in order to make it work with the job you wanted to have?

Derek:
Absolutely had to. And this was before house hack or it was curl locked or before bur this was just common sense. It was like, how do I do the math? So I can have a home. I grew up in apartments and my path to real estate was how do I have a roommate at my first place? And then the second place, how do I build an accessory dwelling unit? So I can start to be an adult and not have a roommate, but still have income coming in from that primary property.

David:
Well, they say necessity is the mother of invention. And I think in this case that worked out. Now, this first ADU, did you build it from the ground up? Did you buy something? Already had one? How’d you make that work?

Derek:
Yeah. Great question, David. And this is what I teach people for free. This is what I’m so enthusiastic about for first time buyers is, you have to look for a house that has potential to do a conversion. Some people call it carve out. So this first house, it had an attached space that at one point was a music studio. So it was completely finished, it had a bathroom in it, it was basically Turnkey ADU.

Derek:
And so the thing that I try to tell people is, go with what you have. If your price point is only going to allow you to do a conversion ADU, because that may cost 20, you want to stand alone, may cost 120, set your goals and go from there. But that project was an attached ADU that was already 90% done David.

Henry:
That’s super cool, man. This is an interesting strategy. It’s one that I’ve thought about several times. And it’s one that I think a lot of people, especially people in higher price markets such as yourself are looking into. So it’s great to talk to somebody who’s putting it into actual practice. So talk about kind of in a little more detail on your first deal. So did you go looking specifically for property that was set up for an ADU and how did you go about deciding what kind of an ADU and kind of what that process looked like on your first deal?

Derek:
Yeah. Wonderful Henry, thanks. This is not just my first deal. For our audience, these few criteria, this is for your next deal or your first deal, for what that’s worth. I look for the zoning code. So in order to deploy this strategy, you have to become an expert in ADU zoning. And it sounds really extravagant but it’s not. Most accessory dwelling unit codes are like five pages or less. So when I say you need to be an expert in ADU code, you need to spend about an hour reading something and digesting maybe a couple phone calls to ask some questions.

Derek:
But to circle back to the question, I had a crystal clear criteria, even before I knew what a crystal clear criteria was. I knew this is a town, an accessory dwelling unit attached interior or detached is an allowable use in that zone and I could meet the standards. So after that it was like, is this a place that I could live forever with my family? That’s kind of my meter. How’s the crime, how’s the transit, how’s the jobs, could I live here forever? And then can I fund it and make it work? So it’s that simple. Is it an allowable use? Would you want to live there forever? And can you pull it off? Does it make sense financially?

Henry:
So when you say, would you want to live there forever? Are you using that as just a criteria? As that’s just something Derek wants to own or is that a criteria because some of these uses require you to live there?

Derek:
Yes and yes. So my thought is I’m going to live there for the first year before I go do it again. And my second thought is my criteria, my needle and my stomach, could I live here forever if I have to? If there’s a downturn like there was an ’07 and all my friends lost their boats and their houses, would I feel comfortable moving up here into this place? Could I live here with my family?

Derek:
So that’s kind of my gauge of my criteria. And then the second piece of that is a great question. I’m glad you brought it up because part of becoming an expert in your ADU zoning is some areas do require a residency requirement in the primary or the accessory. So in other words, I was doing a little research recently in Arkansas, and there’s a small town where you can have two ADUs, one attached, one detached, there’s no limitations, there’s no residency requirement.

Derek:
And then there’s a town, just a couple, one county over and they allow one accessory dwelling unit and you cannot rent it unless it’s your primary residents. So if you’re an investor and you’re going to stack all these up, you may not be able to deploy this strategy. But what’s so powerful and what we know and what I know from almost 600 episodes is that it’s not the first deal that we go big on. It’s not the first deal that builds wealth. It’s the first deal that lights the fire in our belly and says, “I’m a normal a guy or girl, and I can do this.”

Derek:
So that’s really what I kind of coach people into the code and say, “Hey, if this is an area you’ve identified, can you build an ADU? Do you have to live in it if you do?” So that’s kind of a long winded answer Henry, but there’s just so much information. It’s hard to kind of keep those short and brief.

David:
So this next section, Derek, we’re going to sort of get into what challenges you faced, how you overcame those and like what you learned through the process of having to overcome some hurdles.

Derek:
One thing I’m really proud of and I don’t know it’s worth even mentioning, but the coaching I’m doing right now for all these homeowners, it’s not freely like getting no down payment, it’s free like I’m giving my time. BiggerPockets has given me the tools to go become wealthy and on a scale that I consider, and now I have the time to go give this away. So that kind of is the intro into the fire stuff, and my town did burn down. Can be hard to talk about at times, but that’s kind of the back wrap.

David:
Well, I think the ADU strategy is super popular right now, mostly because there’s a shortage in housing, people need places to live. Housing is expensive, so people are willing to get a smaller property to have less of a payment. And then if you’re the investor who wants to own the asset, you’re trying to figure out how do I make an expensive of asset cash flow? I need another unit that I can rent out, another source of revenue. So ADU is kind of work for almost every single perspective here in how to make real estate work when it’s hot.

David:
Now, I’m sure that could be a problem if there’s not a lot of people that need to rent in an area, if the population is shrinking, but right now that’s not our issue. So as you sort of said, hey, this is my niche, I’m going to continue to replicate it and keep moving. What are some of the challenges that you faced in doing something that not a lot of other people are doing?

Derek:
There’s a lot of challenges that come with kind of being first to market. Not that I’m the first person to build ADUs because I’m not. But a lot of people in the town that you’re in may not know that it’s an allowable use because single family zoning for years and years and years has kind of been the gold standard for planning in this country. And as we get more open to infill, especially in these appreciating markets where there’s a higher demand for housing than there is available units, some of the challenges are just literally educating the cities at times of their own code because city planners have so many things on their mind.

Derek:
They’re looking at flood Plains, long term master plans, housing needs analysis. They can’t dive in as detailed as we can. So one of the challenges is just kind of educating people that is allowable use, the neighbors.

Derek:
So if you’re doing infill build, a lot of people, they really value their privacy. And there’s an area in your backyard that they’ve looked over for years that they actually kind of feel like is their backyard because of their view. And all of a sudden you go out there with an excavator and you’re digging a 20 by 40 pad in the ground. People can kind of get their hackles up rightfully so.

Derek:
Another challenge that I’ve seen come up is costing. So people think because it’s small, it’s going to be really affordable. And it’s quite the opposite of that. When we’re building, we don’t really have an economy of scale on a small unit because we have all the infrastructure, all the system development fees, all the appliances, all the amenities of a large custom house, but we don’t have any volume to kind of cost average that in.

Derek:
So those are just a few of the challenges. Maybe one more I would add, and this one could be debated in its own show, but would be, what is the best way to finance them or why are they so hard to finance? And the reason for kind of all four of these challenges is just because they’re new. As a planning community, as a building community, as people in general, we’re really just slow to change, we’re archaic, we don’t like to move this big ship and do something new. There’s probably 100 benefits, but those are four challenges that I’ve brought up against doing exclusively accessory dwelling unit as a strategy.

David:
Yeah, that’s the same thing that I’ve found with our clients that want to do it. Here’s a common question that I’ll get. Hey, David, I want to buy this property or maybe they already own a property. They say, I want to build an ADU. And it’s going to cost $125,000 to build it, but it will then create this much cash flow. And so it’ll bump my ROI up to this point on my current house, or at least my cashflow.

David:
And I’ll look at that and I’ll say, “Well, here’s the issue, that isn’t going to add $125,000 of value to your home, guaranteed.” It might be more, it will likely be less because at this stage, their new appraisers are not at those in every circumstance like they’re as valuable as I think the market is saying that they are.

David:
So it’s going to be tough to get your money back if you do that. And because you can’t finance it, it’s the equivalent of $125,000 down payment that you could make on a complete different property. And then you’re getting to buy, a $500,000 house with this $125,000 down, instead of just adding $125,000 ADU to your property. What is your answer to the people who find themselves in that situation?

Derek:
The answer is kind of multifaceted, but I would… First I would say, it really depends on your goals, because if your goals are to scale, it’s not to put that 125 down, it’s to go by two properties with 25% down potentially. But I would say if you’re thinking of building an accessory dwelling unit and you own a home and you’re talking to David, you’re in an appreciation market and there’s a high likelihood that you have good equity in the house that you’re already using and maybe not all of it, maybe you don’t get the whole build cost.

Derek:
But what we’ll do is we’ll set up a financial stack where we’ll, we’re going to take funds from wherever we can, home equity being a good one. There’s another great product for somebody in this scenario for that question, David, that has a house.

Derek:
Maybe they refied, they were smart, they refied last year and they’re under 3%. So they don’t want to do a cash out refied because they don’t want to set that back up at 4% today. But maybe they’ll look at a second loan or maybe they’ll look at a potentially a custom construction loan or there’s a product called a HomeStyle Renovation loan, that’s a Fannie Mae product where you can get a loan depending on your loan ability, 75% to 95% of finished value.

Derek:
So in that case, your client comes to you and says, “David, I own this house in XYZ, California. And I want $125,000 ADU, but I don’t have any equity, but I am lendable, I have good credit.” I would say those are three really good options to look at. But it all depends on your goals.

David:
Yeah. That’s a great point. If your goal is build as big of a portfolio as you possibly can, as fast as you can, it might make more sense to take that same equity and use it to buy more property. Assuming you can. Some markets are so hot that you just can’t get a house at all.

Derek:
Totally. And the last thing I would add, and it’s very important and I don’t mean to interrupt, but it is kind of an issue, like how do I fund this? And what I do is it’s a mindset, do I think about it is this is going to be hard to fund or do I think about it as, oh my goodness, I live in one of the most highly appreciating areas in the country and I have a free lot, how do I build a small house on my free lot?

Derek:
And if we change our mindset and we look at it that way, it’s not a problem, it’s a solution. So again, it’s just about goals. So it’s not the greatest and best use in all areas. And some of these neighborhood protectors, which is the new term for NIMBY, because NIMBY is not really appropriate, but neighborhood protectors, they have good points and some of them, they don’t think it’s the greatest and best use in their neighborhood, and some of them are right. So that’s worth noting too. David, thanks.

David:
Well, one of the areas that I’ve found that does make it a no brainer, because I’m in this situation all the time where clients come to me and they say, “David, what do I do with my money? How do I get it the biggest point?” So I have to work through the same things that you are. If it’s building it from the ground up, it usually makes sense, if you love the house, you’re going to live in it. You want to place that you can include in that area and adding square footage to your property is going to make the value go up.

David:
So like in the bay area where I am, this makes a lot of sense. In many cases, this can make sense. It wouldn’t make sense in the example that we said where you’re just trying to get the most value that you possibly can out of the money.

David:
Another scenario where it is a no brainer is when there is an existing structure on the property that could be converted into an ADU without having to build it from the ground up. So do you mind sharing Derek a little bit about when you do that, what to look for? What are the things that you want to see in a structure that will reduce costs? Sometimes I’ll see a shed and my client will say, “Hey, can we convert that into an ADU?” You might as well, that’s going to be more expense because you have to get rid of the shed. So what are the things that they want to be looking for in the structure?

Derek:
Yeah. David, just so you know that’s all solid gold, that’s solid gold, that’s awesome. So what I tell people to look for in a structure is what’s easy? You’ve been talking for years, David, about house hacking and if you see something on the MLS, that’s a three, two and has 1800 square feet or 2100 square feet, you always know you’re getting another bedroom.

Derek:
It’s the same exact lens, you just shift it a little bit. And it’s like, “Okay, we have this big Gotti formal dining room and there’s already a bathroom over here. We have 400 square feet. It’s vaulted.” I mean, I’m talking about pulling the permits, paying system development fees and spending $500 to put up a firewall, two layers of 5/8 Type X to get life safety protection, carbon monoxide detector, and a smoke detector, and a kitchen.

Derek:
So there’s opportunities that are very, very easy and very, very affordable, like you said, an absolute, no brainer to convert them. And I’ll share a quick story with you. I get calls all day long about ADUs and I did a walkthrough with a lady in Ashland, Oregon yesterday, who’s a first time buyer.

Derek:
So I said, “Hey, I’ll come give you my two hour free consultation.” And this property she’s under contract with it, $565,000, it has an 11, which is a really weird number, an 11 by 26 detached permitted legal shop. So it has 100 amps of power, it’s finished, it’s got drywall it’s roof. I mean, it really just needs a bathroom and plumbing and she can turn this thing into an accessory dwelling unit. And I get it there and we do the figures and then we’re looking at SDCs, and we’re looking at kitchen, and we’re looking at a sewer tap.

Derek:
And I said… We were an hour into this, and I said, “Well, what are your goals?” And she said, “Well, I was just, I kind of wanted to just get a roommate, I’m only one person.” This is a house that’s almost 1900 square feet, it’s a huge cabin style, two, two. And I said, “Let’s go in the house.” And we walked in the mud room, which is now after I left is the kitchen.

Derek:
So we walked into the mud room and there’s this big dice area, there’s a big, beautiful bathroom and a huge bedroom, and there’s 136 inch transit walkthrough into the kitchen in the main house, in the other living quarters. And it was just like, bam, right there. I mean, we were looking at spending $50,000 for her to potentially convert this little tiny narrow structure that would not have really efficiently fit a bed and a bathroom.

Derek:
And we go inside and there’s another opportunity, that’s a couple $1000 that accomplishes the same thing because she wants to live alone, she was already going to have a roommate. And so it’s really about going into a property with the lens of how do I meet my goals?

Henry:
And that’s awesome. So what I hear you saying is really, as you’re looking at these properties, if you’re somebody that’s thinking about doing an ADU, it doesn’t always have to be an external ADU, and you can look at a property and what David preaches and kind of what you said is exactly right. If you look for these houses that are three twos with over 2000 square feet or two, twos with, 1500, 2000 square feet, there’s obviously extra space in that house.

Henry:
And so if I’m hearing you correctly, you just have to be kind of mind present or thoughtful of that space and try to envision, Hey, is there a bathroom close by this additional space? And is there a way we could put a wall up at a kitchen and then maybe some way for them to access that space? And then now you’ve taken something that was already under roof and made it to unit. Is that what I’m hearing?

Derek:
Oh, that’s right on the money Henry, all day long home run right there. And the thing about that too, is we have to plug this is you’re buying this single family turn duplex potentially for 5% down while you live in it for a year and then you go do it again. Unlike a lender, that’s going to say, Hey, if this is an investment loan, you have nine, maybe 10 before you get out of nonconforming loans. Owner occupied loans, you could do this 100 times, not that you would want to.

Derek:
But more to your point Henry, Warren Buffet talks about this book that Ted Williams wrote, The Science of Hitting. And Ted Williams took the strike zone and he cut it into 77 different cells, each the size of a baseball, and he realized what he would bat if a pitch was in his strike zone or out of his sweet spot.

Derek:
And this is the same thing with ADUs and MLS or off market single families that have ADU potential. I just, you can sit there with the bat on your shoulder and watch all these houses camo down the pipe, and when you see one that has ADU potential after you’ve done this a few times, it’s so obvious. It looks like a beach ball coming down, right belt high fastball.

Derek:
And sorry, I don’t have a better ju-jitsu analogy for David, but that’s the best way I can describe it. Because you have this really easy criteria and then you just sit there and wait for one to come along.

David:
Well, the reason I suck at ju-jitsu is I don’t have that perspective. I don’t know what I’m looking at when this person’s coming at me. It’s, I’m the newbie in this world and I’m like, “What do I do when this happens?” And you watch the people that are good and they don’t even think they’re just like, “Why would you leave your hand down right there?” They’ve jumped right through. So it is encouraging when you’re saying “Henry, did you have something you wanted to add?”

Henry:
Yeah, no, I was just going to say it’s like the red truck theory, right? Like once you know what you’re looking for, once you’ve seen it a couple of times now, everywhere you go, you can spot it pretty quickly.

Derek:
Definitely. Yeah. That’s awesome.

David:
The last thing I want to run by you, Derek is the expert here is one of the areas that we found a lot of success for our clients, because basically we’re like scavenger hunter in probably the hottest market in the country, the Bay Area right now, we have to try to find a way to get a person in there with outbreak in the bank.

David:
And so I’ve become incredibly creative at finding floor plans and opportunities like what you’re saying. Garage conversions have been really, really big. Can you share any insight that you have as to what to look for and how to execute a garage conversion?

Derek:
The number one thing and we’re not thinking about it, probably not even on our radar, is that, can we meet the parking standard in the outline zone if we turn our garage, our parking spaces that we use to meet the standard into living space? So that’s where it goes back to my step one of my crystal clear criteria, you have to become an ADU zoning expert.

Derek:
So the garage conversion is the most attainable, it’s the most affordable, but it’s also really hard if you have a parking standard. I can’t speak intelligently for California, but I know in Oregon, January 1st, 2018, we passed a house bill that required that all cities and municipalities in our state remove a parking requirement for the first accessory dwelling unit. But to further dig into your question is that the ADU conversion into a garage is amazing.

Derek:
And if you have clients in a really, really high price market, I’m sure you know this strategy, David you’re super sharp, you’re a lender. You have all the angles. But one to think about if you haven’t is, if you can bring a design to the closing table and you can bring a license contractor that meets the needs of the lender, you can bring that custom construction loan to the table with the primary loan and you wrap it all into one deal for 3% for a first time buyer.

Derek:
So if you have a property in your market, that’s a million dollars and they want to convert the garage for 100,000 and it will meet the siding and design standards in their zone because you’re now an ADU expert or you called me and I told you, and you can meet the parking, you can show up to the closing table with the finished value of that accessory dwelling unit built in to the price and finance 1.1 at 3%, that would be a strategy I would say to look into.

Derek:
I mean, we know that lenders are not created equal, you might have three people tell you no before one person tells you yes, but I can tell you this, accessory dwelling units, they’re not just a new fad, they’re here to stay, they’re sweeping across the country. And whoever comes up with a really, really good product to lend on these and to lend high loan to value on these, is going to be really rich. They’re not going to be working after they figure it out.

David:
Okay. Now Derek, let’s say I’m a home buyer, I’m an investor, I’m out with my agent, we’re walking a property. I love the location, I love the house, I want to buy it. It just feels like it’s going to be a little too high of a mortgage or it’s not going to cash flow. But I got a little capital that I can use to do a garage conversion.

David:
Tell me as I’m walking into that garage, what should I be looking for? Should it be attached to the home? Should it be detached plumbing, electrical? What are the things that I can see that lets me know, ooh, that’s the red truck that I’ve been looking for?

Derek:
Yeah, David. So the cheaper option is a lot of times the better option. So if it’s attached, it’s going to be more affordable, so we’ll start with an attached unit. If it’s attached, we’re looking for first and foremost, I’m looking for sewer.

Derek:
So we’ve been using gravity for a long time, thousands of years because it works. And if we have a property grade and the sewer line is on the other side of the house, it may be a tough lift. We can pump, we can pump sewer, but I’m looking for sewer first, the next thing that I’m looking for is if I-

David:
Well, hang on one second there, you’re looking for the sewer line to be on the same side of the house that the garage is on, that’s what you’re saying?

Derek:
Yeah, or a spot that I know it will fall to. And it’s really easy, you can pop your head in the crawl space and you can see the main and you can usually see which corner of the house it goes out. So that’s a quick way to identify that without an inspection or a scope.

Derek:
The next thing I’m looking for is the attached garage. Is it big enough to be a unit? Does it have seven foot ceilings or nine foot ceilings? What’s the shared wall? Is the shared wall that would be the bedroom of the ADU? Is that the master? Because we can soundproof that, and we can vibration proof that, but that’s not ideal. We’d rather have that be a kitchen wall.

Derek:
Couple other things is what is the natural light. If I’m going to do a conversion in your market, in a garage, it’s still going to cost me 50 grand and I want it to be marketable, again, if you go back to my criteria, it would be the same that you would want for your client. Is it the best ADU in your neighborhood?

Derek:
So those are a few things. Detached is way better. Ideally, you want a detached unit because A, the house has privacy, and B the tenant has privacy, and people will pay a premium for detached. So if you’re walking through a property with your client and has a detached garage or shop that’s, I usually say 400 square feets about the minimum, and there’s already water, sewer power out to it, that’s a no Rainer. That’s that beach ball coming right down the belt, high, fast ball.

Derek:
But I’m just looking for mostly where’s the sewer, and if I was a tenant and I was going to live in here, how does it feel? Is it a dark little, 300 square foot garage with seven foot ceilings that are trusses? Because if it is, I’m going to have to take the roof off. I’m going to have to go up. If the sewer lines on the other side of the property, it might not be worth the effort, I might be better off starting new.

Derek:
But to tie that all in together for the garage is will it work? When you walk in there you know, you don’t need to do very many of these and you walk in and you say, “Gosh, this just feels great.” One thing that I do always add on the garage conversion is when they do garage for uncondition space, they don’t put a vapor barrier under the slab on grade. And what you get is you get this effervescence and you get this moisture similar to a basement where they didn’t properly do a moisture barrier.

Derek:
So if I’m starting with a place that feels kind of dang, that’s just kind of a red flag. So it’s really like, how does it feel when you walk in? Can you get sewer fall and how much privacy is your tenant going to have? And are you going to be able to get? As Joe Asamoah calls it the creme de creme, like how do you get the best tenant? It’s by having the best product and giving the best customer service.

David:
Awesome. Henry, anything you want to add on that?

Henry:
So also what tends to be in place in some of these garages in my market specifically is the electrical panel for the entire house is a lot of the times found in the garage. And so when you see that, is that a big red flag? Or are you moving those with ease? Or how does that work?

Derek:
Yeah, what you do is you just flip them over. So they’re already on an exterior wall and all you have to do is pull the meter and you flip them over. So that’s not a major concern at all, that’s like something easy, if there’s everything else and there’s electrical panel in there, that’s butter. If you see a gas meter, that’s a lot different, those should be exterior.

Derek:
But a lot of times people build garages where their carport was, where their gas meter used to be, and those diaphragms off gas. So that’s a whole different thing. But David, just to jump back to your question, walking through with first time buyers, I would ask you to maybe at least give them the option of looking at a master conversion, because the garage is so much harder, if we’re looking at like, how do we get into our first house? And you’ve got clients that are right on the edge of getting qualified, the master is so much easier to convert, especially if it already has an exterior door.

Derek:
And everybody, they want their kitchen and they want their bedroom, those might be their goal. So it might be a hard sale to your clients, David, but just consider master bedrooms are always the easiest. Everybody thinks it’s the garage, it’s not the garage, especially if you can’t meet the parking standard.

David:
So if you see a master bedroom, that’s big, has its own bathroom, has its own entrance, you’re saying that can easily be converted into a studio, just throw a kitchenette in there in your…

Derek:
All day long for so, I mean, your ROI is so much better, and then a year later, you go by the one you want that has the master. And a lot of times, if it’s a three, two, there’s a Jack and Jill, or there’s a close bathroom, or if there’s not a close bathroom, there’s plumbing on the wall of one of the other bedrooms, and you can add one little bathroom in your master and turn your master into an apartment for pennies on the dollar compared to a standalone build.

Henry:
That’s a phenomenal piece of advice, because most floor plans now new floor plans are split floor plans. And so you’ve got your master on one side of the house, anyway, that’s a phenomenal piece of advice for people looking to do conversions.

David:
And this what we mean when we say in this market, you don’t really find great deals, you make great deals, because you’re turning that into something great. If when I go look at homes, I’d say 90% of what I’m doing is walk in this house and my mind is trying to figure out, could I do exactly what Derek’s describing? What areas would become their own units? Where is the plumbing running? Is there a bathroom right on the other side of this wall, that I could just take all the plumbing and push it over here? How would we run the electrical for the kitchen that has to go in there?

David:
I love what you’re saying, Derek and I think that it’s never been more necessary than now in a market that’s hot. The last piece that I’ll add, that I don’t know if we covered it in depth before we move on, is that in California and in many other markets that we actually passed legislation in California, that made it illegal for a city or municipality to say, “You cannot have an ADU.” I believe it was SB 9, do you see something similar happening in Oregon?

Derek:
Yeah. House built 2021 in Oregon, SB 9, SB 10 in California. It’s going to change the way housing is built and accepted. Very similar to when we had urban sprawl 50 years ago, and the first multifamily structures started being built in primarily single family zones. It’s the same wave, if we go back and we look at the history, if you’re not on board with an ADU strategy right now, you’re going to get left behind.

Derek:
And not only because you brought up California legislation, not only did the cities say, “Hey, all you planners at the state…” Told all these city planners, you’re not doing it right. All of our long term planning sucks. We have a housing crisis, we’re going to tie your hands and we’re going to set the rules.

Derek:
They also said, “You can split these off and sell them as fee simple loans.” So which is going to completely change the dynamic in California. You have what? The fifth largest market in the world, setting this new housing standard, it’s just going to sweep across the country. I mean, Florida’s already doing it, there’s stuff in Texas, Connecticut, New York.

Derek:
I put some stuff in the show notes where there’s AARP is setting a model code that a lot of cities and states are adopting. So if you’re looking at an area and you think ADUs are coming, I would read AARP’s model code, and that’s probably pretty close to what’s going to stick.

David:
Well, I’m glad we have you on. I imagine I’m not clairvoyant, but I would imagine your inbox is going to get pretty full after the episodes. [crosstalk 00:39:34]

Derek:
I don’t know. I just tell you what, all I want to do is help people and I want to make the promise that if you reach out to me, it may take me a year, if I get 1000 emails at an hour each, but I will get back to you. I want to help you create housing, I want to help you get off the hamster wheel enough.

David:
All right. Well, we can’t keep you all day, so we are going to move on to the next segment of our show, it’s The Deal Deep Dive. All right. On this segment of the show, we are going to dive deep into one specific deal that you’ve done, do you have one in mind? And are you ready to go?

Derek:
Sure. Shoot.

David:
Okay. We will alternate our questions and I will go first. Question one, what kind of property is it?

Derek:
Single family, turned multi-family with the ADU strategy.

Henry:
Awesome. How did you find that deal?

Derek:
MLS. I never get a good deal, I always pay market because I make the deal.

David:
Awesome. How much was this deal?

Derek:
316,000.

Henry:
And how did you negotiate it? If you did?

Derek:
That’s great one, it was on an online auction and I was bidding against a machine and I made a decision to spend 316, the deal closed, I got a call saying, “You didn’t get top bid, you can add five grand if you want. And I said, “No,” I stuck to my guns, which was stupid, I would’ve added another 100 grand if I know what I know now. And they called me back and said, “Actually, you got the deal.” So I was betting against the machine and just got lucky.

David:
That’s awesome. I love that you admit that. I’ve been there many times, I’ll give you a… This is not my deal, deep, dive, but I’ll just say, last summer I was looking in 2021 for a property for myself. This is the deal that got away. It’s like that one girlfriend you’re like, “What was I thinking?”

Derek:
Oh yeah.

David:
Except for me- [crosstalk 00:41:21]

Derek:
Heartbreaker.

David:
Yeah, they wanted 1.8, I offered 1.85, it sold for two million, I didn’t want to go that high. And now that property is probably like, it’s the best you could find in the 2.5 range over just like a seventh month period. I’m like, “Why didn’t I?” Yeah. So I feel you Derek. All right. I’m glad it worked out for you though because we have a deal deep dive to get into. Next question, how did you fund this deal?

Derek:
With owner finance? So 5% down, primary mortgage, secret weapon.

Henry:
That’s amazing. So what did you do with it?

Derek:
So this house is the textbook. It had a big, huge Gotti formal dining room with a kind of like second living room, and there was one wall, it was a shared wall with the kitchen and a shared wall with the staircase, and an entrance on each side, I literally pulled the permits, paid the SDCs, covered the two walls, soundproofed the entire shared wall, and punched a door out to a cute little patio, and I’ve got the happiest tenant you’ve ever seen in Oregon.

David:
Well, you sort of also described the outcome there. So we’ll skip to the last question. What lessons did you learn from the deal?

Derek:
I learned the lesson that this process is really simple, anybody could do it, and the deep dive here, David and I won’t take up too much of your time, but it was on a big enough lot that I was able to split the lot and do the exact same process behind it. Like when I thought it couldn’t get any better, it got better.

David:
Well, there you go, folks, that is exactly what it can look like when you use this same strategy. Simple doesn’t have to be the deal of the century, but it ends up looking like the deal of the century after you make it into that. So thank you Derek for sharing that, that’s a great example. We’re going to head over to the next segment of our show, which is The World Famous…

Automated:
It’s time for the fire round.

David:
We are going to ask you questions that come directly out of The BiggerPockets Forum, and fire them at you, and we will see what you can do with them. So if you’re listening to this and you like what you’re hearing, go check out The BiggerPockets Forum and see what else might be in there. Question number one, what are the pieces that I should be looking for in my city’s code for ADUs?

Derek:
You are looking specific for the ADU ordinance. Like I said, it’s usually five pages or less. Most cities use the same code management software and there’s an hour, there’s a search bar and you simply go up into the search bar, and type ADU and it’ll bring up every code, it’ll usually bring up the definition and then the specific piece of municipal code, read it.

Henry:
Awesome. Question number two, how much return will I see on an ADU? What are the risks to consider?

Derek:
So like anything, there’s risks in all investments. The return that I tell people to shoot for is 25% cash on cash return, unless you can use a little bit of leverage and then the return is infinite. But for the example that David used, I’ll just pull that one up.

Derek:
Somebody owns a property in Dubai, they have a $120,000 standalone bill and say they can rent that for 2,400 a month, they have a 20% cash on cash return right there. If they don’t bur out of it, if they don’t refi out of it, that’s kind of where I tell people. But if you buy a house with a really easy master conversion, it just goes up from there.

David:
Okay. Next question. Little different, but I’m curious if there is an answer to this. Are there any workarounds I can use that make ADU comply if they aren’t legal in my city?

Derek:
Great question. Yes. And that’s where you go back and you become code expert, and outside of municipalities, counties aren’t as friendly to accessory dwellings or there’s small towns that don’t want to compete with the city. And what we have is a piece of code called the detached living space.

Derek:
And the living space is kind of defined by the national standard of planning as not a dwelling because it doesn’t have more than three of the five dwelling statistics, which is eating, sleeping, living, cooking, and sanitation. So you build a detached living space at your municipalities max, a lot of them are 400, 600 or 800 square feet and you put in a bedroom and you put in a wet bar and you can’t have a stove.

Derek:
So what you do is you use legally, you get it permitted as a legal user in your zone. And then after the inspection’s done, people just use a plugin hot top appliance. And those are kind of called legacy accessory dwelling units, but that’s the legal workaround. So you meet the standard with the city and then you want to make sure you ensure it properly if it’s a living space. So those are the things that I would say are workarounds per se.

Henry:
Great. Question number five, who are the people I need to seek out to start an ADU build out? Just the GC, is there other people?

Derek:
I would start with doing the research yourself, in today’s climate, you can get a general contractor, but you’re going to probably end up managing the general contractor. So I tell people there’s two ways to build an ADU. There’s the easy way where you pay for everything, and then there’s the hard way where you kind of self-manage.

Derek:
So depending on your time, and your goals, and your skillset, I usually recommend people at least try to general the project. So you follow a couple steps, you have somebody like me help you and you are a construction manager. So that would be kind of the steps to go about building an accessory dwelling. The more formal way would be to get a set of plans, and then you shop the plans around, and you have a general contractor provide that product for you at said price.

Henry:
Awesome. So I’m going to sneak an extra question in here. So you talked a lot about speaking with city planners and people of that nature to do your research, but there’s oftentimes in art form when it comes to speaking to these planners and getting them to understand why you’re asking questions, what you’re trying to do, because they’re trying to protect their communities. So what tips can you give people when reaching out to the cities to talk about potentially adding ADUs or how to get that going?

Derek:
I usually just start by telling them exactly what I’m looking at and what I want to do. So there’s, you’re very direct. And I lead with, I have a little bit of planning knowledge, and I’m really good at research, but I’m just, I know just enough to be dangerous, could you tell me based on your professional opinion, what you would do with this property, if it was yours to get the greatest and best use?

Derek:
And what I’ve learned is that you, it’s not a manipulation tactic, you just, you empower them because they are the smartest person in the room. You empower them to tell you what you should do. And that’s been the best strategy that I’ve found is just treating people right, being direct and asking them what they would do. And what I found is most of the time people come in and they tell them what they’re going to do.

Derek:
But if you ask them what you can do and what they would do, you see this shift and they’re like, “Oh wow.” This person cares about my education, and my knowledge, and my experience.” And I kind of take that approach mixed with my imagination and my experience, and we can usually come up with a really good plan. So that was a great question, I’m so glad you added that Henry. I mean, that’s probably the relationships, and the talking, and the communication is probably the most important piece of this puzzle.

Henry:
That was a phenomenal answer. I hope you guys wrote that down. You’re right. It’s not a manipulation tactic, it’s just treating people right. But it feels like a Jedi mind trick at times, right? Because you’re getting people to talk, well, people love talking about themselves, and people want to feel like they’re respected and that their opinion is valued. And that really opens them up to being more helpful to you. I love that tip, great.

David:
And I will second what Henry just said there, as far as your answer, Derek. I still, at this stage of my career, asked that to every single person. I was just this weekend, looking at a house for myself in the East Bay Area, beautiful house, $2.5 million place, we’re going over, what we would do to do exactly what you’re saying with it.

David:
And I would say, “Hey, here’s what I’m thinking. What do you think about that? What would you do differently?” And oftentimes what you’ll see is hesitation in your contractor’s face as they’re listening to you, because they don’t want to say that’s dumb or it won’t work, or maybe they’re thinking through when I’m like, “Hey, here’s my idea.” And there’s like 19 steps they got to figure out.

David:
Which I found is very different than me, they’re like where would the air return come from? And where’s our drain going to be? And you realize, oh how would you do it? They say, “You could just put it over there,” and I’m like, “Yeah, but that doesn’t make sense,” why? Because you don’t have to do this, and this, and this, and, “Oh, all right.” So, and there is not a point your career, I think we should ever get to where not asking those questions, I really liked that you brought that up.

Derek:
Cool. Thanks David.

David:
Yeah, absolutely. Thank you for that great answer. Next segment of our show is going to be…

Speaker 8:
Famous for.

David:
This segment of the show we ask every guest on every episode, the same four questions. And we are going to ask you yourself at this time. Question number one, what is your favorite real estate book?

Derek:
My favorite real estate book, if you’re not already tracking, I’m obsessed with accessory dwelling units and this is the best piece of literature, this is the ADU Bible. My buddy Cole Peterson at a Portland, Oregon wrote that it’s Backdoor Revolution. If you are wanting to build an ADU yourself, if you’re a professional practitioner, or if you are a policymaker, you got to have the book.

Henry:
Awesome. What is your favorite business book?

Derek:
Business book? I thought long and hard about this one. I wanted so bad to say Set for Life by Scott Trench. I mean Scott and Mindy, if they ever listen to this, they’ve helped me tremendously. And I love Scott’s approach that’s simple, it’s based on a solid financial foundation, but it was slightly beat out by Jim Collins, The Simple Path to Wealth.

Derek:
And although it’s more of an investing book, it’s the same key principles. It’s all about simplicity, a simple average plan repeated over time and you have extraordinary results. And if that’s an index fund, so be it. If that’s an accessory dwelling unit or if it’s a self storage unit, the same rules apply.

Henry:
Fantastic. So what are your hobbies?

Derek:
My hobbies, right now are taking phone calls all day long for first time, home buyers for free and going and looking at almost every house that’s for sale in the neighboring markets to try to help people say, this is where you can do an attached or detached ADU. Is starting to bog me down, that’s the only reason I started this business is so I could like track the calls, and so I could kind of organize the workflow.

Derek:
But outside of that, I’ve got an amazing girlfriend, Bryce and my family we like to run around in the sun. I’m an avid trail runner, so I’m training for 100 miler this year. I run a 50 miler every year, trying to run about 60 miles a week. And if the snow’s good, you’ll find me probably calling in sick at work and skiing powder on Mount Ashland.

Derek:
So running, skiing, ADUs are incorporated into everything I do. You know, if I’m on a trail run, on the PCT I have the three spots I know I can stop and get cell phone reception to look at something real estate. And if you don’t believe me, both of you are welcome to call me and I’ll answer my phone and I’ll probably be on a chairlift or something. So try me.

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

Derek:
Relationships all day long and not just this awesome relationship with my lender or the relationship with the subcontractors, but the relationship that I have with myself, believing in myself when it’s really, really hard or the relationship I have with my girlfriend when she basically props up the whole day, so I can work 16 hours and literally fall asleep on the hardwood floor in front of the wood stove at night.

Derek:
The relationships I have in my life are the only reason I’ve found a tiny bit of freedom, it’s no work of my own, it’s all the people around me. I didn’t even choose to surround myself with, they kind of found me. And to end with, anybody can have those relationships, I’m just an average person like you can do this.

Henry:
I love that, man. It kind of rings true to one of the things that I always say as people say, they’re these self-made millionaires and that’s normally not the case, man it’s, you’re a team made millionaire typically.

Derek:
Every time, every time. Oh, that’s beautiful.

David:
All right. Well, Derek, this has been an amazing interview on a topic that doesn’t get talked about enough, so I really appreciate that you did this. I think one thing that stood out to me was I’m most of the, and this includes me. Most people assume an ADU always means a standalone dwelling unit that is not attached to the home, but you gave a lot of examples of ways you can take square footage you already have, that doesn’t require a really big rehab budget or the $150,000 that I mentioned putting it down, and you can just take the property as it’s built. Any last words that you want to add on that subject?

Derek:
Yeah, just directly to that subject. I know that there’s a lot of places in the country that build with basements and we didn’t even get to talk about basement or attic conversions, but everybody’s looking for a garage conversion. I mean, is it built on a house? Do you have a daylight basement? Can you put an egress window in for a few $1000? And bam. The other cool thing about a basement conversion is all these municipalities have a high end cap on square footage, unless it’s a conversion of a part of the existing home.

Derek:
So if you have an 800 square foot ADU max in your area, but you have a 3000 square foot, two story house, you can convert not even the basement, the lower or upper floor. So I’m always thinking, shared wall duplex, over under duplex, cottage style duplex, but they’re all within the ADU strategy. And the most powerful piece of the ADU strategy is you’re getting multifamily results without the 200 page code that wants carbon gutters, street trees, fire sprinklers, all this list of bureaucratic processes that you can kind of go around with accessory dwellings. So I’m glad you brought that up, David, I wish I would’ve been able to share more about basement conversions.

Henry:
Awesome. So tell everybody where they can find out more about you.

Derek:
Yeah. Check out my website, at thataduguy.com, and then I also put a bunch of other competitor websites in the show notes. So there’s a bunch of other people that kind of do similar things in different regions, and it’s all about sharing, this is collaboration, not competition.

Derek:
So everything that I know ADU that I send people to, I put in the show notes, but thataduguy.com, send me an email, my phone number is on there. If you call it, I probably will answer. I just ask that if you call me, be ready to take actionable steps to change your life.

David:
Awesome. Well, thank you very much. I appreciate that. Everybody reach out to Derek. He wants to help and you probably need that help if you’re trying to do what he’s doing, which we do all the time, where I live. Henry, also great job today as always, really appreciate your support in this. I’m going to let you guys get out of here. This is David Green. For Henry, find that red truck Washington. Signing off.

Ashley:
This is Real Estate Rookie episode 163.

Andrew:
If you just made a little bit of progress every single day, you will get to your dreams. When there’s two years, five years, 10 years, it will be much quicker than you think. It’s a snowball, but if you don’t start it now, you’ll wake up at 50 building somebody else’s dream.

Ashley:
My name is Ashley Kehr, and I am here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie where every week, twice a week, we give you the inspiration, information, motivation that you need to get started as a real estate investor, or keep going if you are already started. So Ashley, what’s going on?

Ashley:
So as you can see, I am not in the closet, Tony’s not in his office and we have someone sitting in between us. So we are actually in Tennessee right now in one of Tony’s short term rentals. So Tony, do you want to just give like a little brief overview real quick of your cabin?

Tony:
Yeah, yeah, so we bought this cabin a couple months ago. But as part of the purchase of this contract or the purchase of this property, we had to honor a property management contract from the previous owner. So they had it under contract at the end of the year. So we took over control officially this week. So we figured let’s come out, let’s see what it’s like and decided to invite Ashley along and our awesome guest. So we’re all kind of here breaking in the cabin for the first time.

Ashley:
Yeah, so today we’re just going to meet doing a live podcast. We also have a meet up tonight that we’re doing. So hopefully if you guys listening in Tennessee, we actually met each other a couple months ago when this is recorded.

Tony:
So Ashley and I want to start doing this a little bit more often. We got our Rookie road trip. We’re just going to kind of pop around in different markets that we like, markets we’re investing in and set up shop, interview a guest on spot on location, and then hopefully have a meet up and meet some cool people.

Ashley:
Yeah. So we actually put out an Instagram post that we wanted to interview somebody in person. And the first person that reached out to us was Andrew.

Tony:
Sorry, not the first person, the best person that reached out to us was…

Andrew:
Thank you. Flattery will you everywhere with me so go ahead.

Ashley:
So Andrew, why don’t you go ahead and tell everyone a little bit about yourself?

Andrew:
So my name is Andrew, Andrew [inaudible 00:02:11]. That’s what my mother named me. Most people call me Breezy, but you guys can call me whichever you prefer. So I grew up in Chattanooga, Tennessee, about two and a half hours from here. And I’m really, really excited to get on here and tell my story. When I was a little kid, I think like most people I had dreams of what I was going to be, but I figured it out a little earlier than most. I’m sure you guys have never heard this story of a 15 year old reading, Rich Dad, Poor Dad, never been heard on this podcast before. But I read that and I got so obsessed with real estate, with financial freedom and I never thought about money in a traditional way. Again, I didn’t want to work for somebody else.

Tony:
You were poisoned from an early age.

Ashley:
How old are you now?

Andrew:
I’m 33.

Ashley:
Okay.

Andrew:
So I was 15 or 16, I don’t remember the exact time, but all the Ritalin in the world couldn’t get me to focus at school. And then I told my dad and I just wouldn’t stop talking about Rich Dad, Poor Dad and how excited I was. And so we went to Florida on vacation and he said, “I will buy you whatever book you want, however many books you want to read, just let me know what you want.” So I left the condo twice that entire week, I read like 2000 pages as a 16 year old. And I was hooked from then on. And I didn’t get started as a 16 year old, unfortunately, but I knew from then on, I wanted to be a real estate investor and I didn’t want to work for somebody else for the rest of my life.

Tony:
Just out of my own curiosity, what introduced you to the book? Did you just stumble upon it?

Andrew:
Somebody gave it to my dad, told him my dad was a pastor and my mom was a nurse growing up, and someone at church said, “Hey, you should read this book and you should give it to your kids.” And my dad respected that person enough to follow that, read it and then give it to me. And I don’t actually don’t know who that was, but it was pretty fortuitous for me.

Ashley:
Yeah, that’s awesome. So after that, you’ve read that information, then what happens when you graduate school? You go to college or you pick up a nine to five job that you didn’t want or what happens there?

Andrew:
So I went to a small private school that had really good study abroad options. So I went to Italy to study abroad, same tuition, all the classes transferred, great. I meet the girl of my dreams, my now wife, and I don’t come home for two years because I couldn’t leave. And what I learned during that experience, why I think that’s relevant to our conversation today is I learned that not taking no for an answer and being like, “How can I do this?” Because I went to the office of the school and I said, “I want to stay here and I want to work for you guys. I’ll clean dishes, I’ll clean floors, whatever it is,” and they laughed me out of the office.

Tony:
You stayed at the university?

Andrew:
I stayed at the school.

Tony:
I thought you were stuck in Italy. I thought that’s…

Andrew:
No, I voluntarily stayed at the school because I didn’t want to come home. I met the girl of my dreams and I was like, “I’ve messed up. I can’t go home now.” And so I got laughed out of that office. The school director said, “Hey, every year, you’re a nice kid, but every year kids want to stay. This is paradise for you. You’re here in downtown for Lawrence, Italy. You’re living the dream. This is not a place for you to stay.” And I said, “Okay.” And I knew how they worked, they worked on guys had to get their visas or girls had to get their visas coming in to work at that school. And I was told by several employees that oftentimes visas get denied and they have to pull kids out of the community to work there. And so the second I found out that visas had been denied, I was back in that office.
Still told me no. But a few weeks later, I just kept persistently going in there and telling, “Hey, I’m still available. I still want to stay. I only have a one way ticket. I’m not planning on going home.” They relented, they paid me [inaudible 00:05:13] a month. They gave me room and board. So I had cafeteria and I literally scrubbed floors and cut vegetables and did whatever was needed. I made beds, anything that was needed at the school for a whole nother 14 months before I went home. And then my wife and I got married and then I did not get a nine to five at first. I tried to figure out what I was doing in my life, dropped out of school, didn’t need a liberal arts degree to be a real estate investor, didn’t want a bunch of student debt. That led to me working some seasonal jobs, getting my CDL, getting a job, driving a truck, and doing what would kind of be a house hack at my parents’ house.
My parents were super generous with us, let us move into the basement, and we took six years off and on building a full apartment in the basement. So we put in every Sunday for eight hours and then whenever we could during the week we built a full bathroom, a full kitchen, put in a laundry room, put a bedroom, we put a window below grade. And we did everything. It flooded at one point because the water main broke and we repaired all of that. I put in a sub-panel. If the county’s listening, this was all permitted and good, but what I did learn is that I could do a lot of this with hustle and with work. And so when we did save up, when my wife got out of nursing school and I had progressed in my job into sales after driving a truck at the beer distributor, I was able to then buy a house hack and move out into my own with some skills and not just YouTube for the first time. I’d already done that for a little a while.

Tony:
I love stories of perseverance and just like rolling with the punches that life gives you and like you said, not taking no for an answer. There are a lot of skills that people, technical skills that I think people need to develop to become a good real estate investor. We talk about those a lot on the show, but there are also a lot of soft skills that people need to develop to be good real estate investors. And a big one is having the, I don’t know, the grit to be able to roll with the things that life throws at you, man. So I love the fact that you shared that story because I think it exemplifies that really well.

Andrew:
Yeah, the sticktoitiveness, I was not taking no for an answer.

Ashley:
Yeah. Well, while all this was happening, real estate was still at the back of your mind. And then when did it become time to actually take action on it?

Andrew:
So I started thinking about it a little bit and I found the perfect fourplex that will forever haunt me. We didn’t get it, spoiler alert, because at that time it was about $425,000. My wife had just started working or was just about to start working. I had maybe been working for few years making 40,000 or $38,000 a year. And we did not have our financial house in order. We weren’t bad, but we didn’t have a ton of credit. We weren’t ready. And so it comes on the market. I’m just starting to look around. I see it.
It is walking distance from all of my favorite bars, all of my favorite restaurants. It is right off the main drag. It sold for like $750,000 last year, just a few years later. So it would’ve been amazing, but I couldn’t afford it. But what that did is plant the seed that, okay, it’s time. We’re not that far away. So at that point we were DINKs, dual income, no kids. We saved about $40,000 over a couple years. And then in 2017, we started looking in earnest for a house to buy. We wanted the house hack and we were looking for duplexes specifically.

Ashley:
I think Tony wants you to go over the word DINKs again.

Tony:
I’ve never heard that phrase before. Dual income, no kids.
But it reminds me-

Ashley:
It’s like part of-

Tony:
Doug Funnie, right? Is that where it’s from? I don’t know.

Ashley:
It’s from like the personal finance community.

Tony:
Oh really?

Ashley:
Yeah.

Tony:
Boy, if you guys know Doug Funnie from the 90s Nickelodeon TV show, his neighbors, they were the DINKs.

Ashley:
Oh really?

Tony:
They were dual income, they had no kids.

Andrew:
No, I saw it on the internet one day. And then I was at a bar at some point and someone was like, “Oh yeah, we’re all DINKs.” And I’m like, “What?” And then once that got in my brain though, that became the greatest way to describe those of us who were in a different path. We were in our mid twenties, no kids, and dual income. So we’re able to save a significant amount of money compared to the average person. Kids were expensive and living at home with my parents just paying 350 or $400 a month of utilities, that’s all they let us pay, allowed us to really set a nice footing and I’ll be forever grateful for that.

Tony:
Yeah. Can we talk a little bit more about the work you were doing in the basement? Was there an agreement between you and your parents to say, “Hey, we’re going to do all this work and then we’re going to rent it out.” Or are you just doing the work so you had a nice place to live? What was the thought process behind that?

Andrew:
It was a little bit of both. I did tell my parents as a selling point, and I’m really lucky that my parents have trusted my judgment. My dad and I are kind of the same person so that’s helpful. We definitely think things alike in a lot of ways. So that’s helpful. But I told them initially, “Hey, we don’t know where we want to go. I don’t want to get a mortgage or rent because then I will be stuck in a job. I want to do real estate or me go back to school or something. But this is a bad decision, me just going out and getting job flipping burgers or whatever I can to just pay rent.” So they were like, “Cool. Move into the basement.” Well, my wife didn’t love that idea. But she trusted me as well. And once we moved in, my dad helped me put a wall in.
And then he was basically like, “Whatever you want to do down here, we’ll cover the money and the materials and whatever else. We don’t have the money to pay for somebody to come do the work, but we’ll put this on all credit cards, Lowe’s credit cards, you can just buy the materials and you can do the work, whatever you think we want to do once you move out, we’ll rent it.” And I was like, “Cool. That is exactly how I hoped this would work.” And that was how it worked. And now we’re actually in a partnership on something differently later on that we’ve can talk about that this laid the groundwork for and we were much more explicit about. But luckily alls well that ends well. Working with family can be very, very tough, but my parents are really nice and we got along and so it worked out.

Ashley:
With your family in that apartment in the basement. So they do have it rented out now?

Andrew:
Yes. So it became an immediately a rental as soon as we moved out. They had to learn how to be landlords. That was a little tough for them. And then they’ve actually moved out to take care of my grandparents now. And I manage both the upstairs and the downstairs of that property now..

Ashley:
Okay. So then let’s go back to you. So your first property then let’s go through that.

Andrew:
Sure. So we actually got a duplex off market and the way that happened was, this is my belief on her motivation, we ended up with a real estate agent, didn’t know what I didn’t know, so I went to a guy that was a mortgage broker and I was like, “Hey man, I know you, I trust you. I know you won’t screw me over on purpose. So let’s do a loan together. And I don’t have a real estate agent.” And if I had known about BiggerPockets at the time, really followed what was, I kind of knew it was there, but I wasn’t paying close enough attention. And so he gave me a real estate agent, I think brand new. But what she did have was like the ability, I guess, to follow what we wanted. So we had very clear what we wanted. We wanted at least two bedrooms on each side.
We wanted side by side, not up and down. And we wanted at least one and a half bathrooms. We had been in a one bed, one bath for six years. My wife had lived through a construction zone. So we wanted something that was at least almost livable, that didn’t really happen, but it was close, but really wanted two bathrooms. And so that was what we decided on. And we probably toured six or seven properties. There wasn’t a lot available. And then none of those made any sense. We wanted to be in what’s called Red Bank, which is a particularly hot part of the market now, was unbelievably hot at the time. And so after six or seven properties and we were very specific in what we wanted, our real estate agent said, “Hey, would you be interested in looking at two duplexes on the same lot that my sister owns in Brainard?” And both my wife and I were not really interested in being in Brainard, but there’s no reason not to look.
No reason not to check it out. So we go there, we tour them both. They’re on one lot, technically subdivided because they’re deep lots, but they’re right together. You would not want to own one and not the other. They share a driveway, they share a parking, they share mailboxes, they share steps up. I mean, it’s all together. And so eventually we decide, okay, this is actually a really good opportunity. One of these duplexes with two units is two beds, one half baths each, side by side, exactly what we wanted, just old and beat up, needed love. And the other set are one bedroom, one bath loft apartment. So it’s got an open loft, similar to what this has here with the [inaudible 00:13:17] room. And so we were like, “I don’t know about these one bedrooms, but two duplexes for the same price that we were looking at ballpark for these other duplexes in the areas we liked, okay, let’s take a shot.”
So we settle on $250,000 that overall purchase price report.

Tony:
So for all four units.

Andrew:
All four units. So that would be 130 and 120, I think that’s the breakdown, but it was definitely 250 total. I have a piece of advice [inaudible 00:13:43] how I do things after that. But we go through the first to buy one at a time, didn’t have any paperwork on the second ones. They could have sold the second one out right from under us, they didn’t, then listed on the MLS and she represented both sides of the transaction. So Cody got totally screwed because it’s her sister she was representing, but she was great. Everything went well up until it appraised. And the smaller duplex was supposed to be 120,000. It appraised for 98,000. The duplex is supposed to be 130, appraised for 118.
And I know now what happened. It said these duplexes sit on a ridge that divides downtown from the suburbs more or less. It’s a dividing line geographically. There’s not a lot of duplexes in that area. The comp stakeholder were from a roughly from just over the ridge that has [inaudible 00:14:30] flies a couple hundred yards, but isn’t wildly, you have to go several miles to get there. That would be like comparing the [inaudible 00:14:36] that sit right above us, which is a million dollar house, but it’s up the ridge at the very top overlooking the city, whereas we’re down towards the bottom of the ridge. So they got a really bad appraisal, but their calculus was, at least to my understanding, we paid cash for these. We put a little bit of work. We cash a lot a ton of money out of them and we subdivided them so we’re making our money back. They wanted to go for Christmas to Bali, which I think they did once like a month, which is good for them. And so they said, “Let’s just close at the lower price.” But the thing was-

Ashley:
So they took the appraisal price? Wow.

Tony:
Let’s pause on that for a second. Because I think that’s a really big, I don’t know, like lesson, clue, something for Rookie investors to understand is that every seller is motivated by something, but it’s not always money. It’s not always getting the biggest return that they can possibly get. Your sellers wanted to go to Bali.

Andrew:
If they put it on the market, it would’ve been sold in February or March maybe or something.

Tony:
They wanted to go to Bali for Christmas which was a very specific timeframe that they had to operate within. And as the buyer, your job to get the best deal possible is to solve the seller’s biggest problem.

Andrew:
Yes. And my wife and I only had about $40,000. And so they were actually already taking, we talked about the loans we use, whatever else, but they were already taking some of the closing costs. So we renegotiated a little bit, but we had no extra money or we do the deal so that we are roughly $40,000 out of pocket or we can’t do it. And so we are putting 3.5% down with an FHA loan on the owner occupied more expensive one. And then we put down 25% conventional on the second one.

Ashley:
And were these both through like a local bank?

Andrew:
No, these were through a mortgage broker who, great guy, but didn’t do a ton I don’t think of investment stuff. So not the guy who’s now, no ill will, but I think that the transaction was a little bit more difficult that way. But the good part was he was previously in-house loan guy at Keller Williams. So he knew, he’s the one who recommended her because he called them and said, “Hey, can I get a real estate agent for these guys?” So he has some good relationships there so he worked really seamlessly with us and her and really we worked it around. So we worked the closing costs out so we took slightly less of discount. After the whole transaction ended, we had about $2,000 in the bank and that’s as low as we could go. And then we went from no mortgage payments to two mortgage payments and we did not buy those simultaneously. We bought one month in October I think and the second we closed [inaudible 00:17:07]. So just back to back, we started the process literally the day it closed.

Ashley:
Were they rented out already in what was becoming a landlord like for the first time, especially going from zero to three units that you’re managing and a living in one of those units too along with your tenants?

Andrew:
It was fun. It was really fun. I was super, super excited. It was the winter time so my work was a little bit slower. And first thing we did was say, “Okay, which of these four units is in best shape that we can get on the market?” They were previously all four short term rentals. This was Airbnb at the beginning in Chattanooga. They didn’t do any sort of tax collection. There was no city ordinance. Now there are permits required. There are city ordinances. There’s a whole zone. That road, in fact, our side of the road is in the overlay that allows short term rentals. The other side of the road, 35 feet from the front door, is not. So that was pure luck. That happened later.

Tony:
Let me comment on that really quickly, because that’s something that I talk about a lot to. When we talk about choosing a market for short term rentals is that I’ve personally shied away from markets that haven’t established ordinances yet. Because like you said, you got lucky that you were 35 feet the right way. But had you gone 35 feet the other way, now you’re caught holding the bag for something that maybe doesn’t work as well. So just for the listeners, I think it’s important to kind of do that research. That’s the very first thing I do before I go into a market is understand what the policies are.

Andrew:
And we did not buy these to be short term rentals. I’ll explain the breakdown of the four units and what we did with each one. But we bought them as cash flowing rentals. We believed they would cash flow, but they were all short term rentals so we kind of saw how that was and thought, “Well, this would be interesting.” And then the two, one bedroom units, there’s three parking spaces between the two of them. Really though, there’s only one parking space each because the hill that the two, one bedrooms sit on, the shared driveway, can only fit four cars total and it’s a nightmare if you’ve got four cars parked there. So we let the tenants park two cars for the unit that’s next to us. I park one car on the hill so everyone can get in and out easier. And then my wife parks down below in one of the three parking spaces.
So that makes two parking spaces, even if there were three, it’s not as big a deal. But what matters is, if you were to rent that property out yearly, who’s going to stay in a rental, one bedroom, one bath, a nice affordable housing potentially, but who’s going to stay there when you literally cannot park more than one car, where there’s no street parking, it’s a busy road? You would stay there one year at the most and you’d be out of it. And so it wouldn’t be a good investment for us. So we believed, “Hey, let’s try this furnished rental thing.” So of the four units, the two outside units of each building, so the outside one bedroom unit was in pretty good shape. We furnished that in about a month. Got it on Airbnb. Maybe it was yeah, right about a month. Started our adventure there, blind leading the blind, didn’t know anybody who did anything, didn’t have any friends that were doing it, so definitely Googled.
But like right now there are tons of stuff all over YouTube you can watch. I watched one Tony of these videos where it would make me want to buy a [inaudible 00:20:08]. [crosstalk 00:20:08] all the way up here going “No Andrew, stick to what you’re supposed to do, no shiny object syndrome.” But we got that one up. We kind of figured out our way through that. We actually moved into the other one bedroom unit next to it because it was in decent shape but it needed a little bit of work. We got the first two bedroom unit as quickly as we could, we did a basic rehab, we painted the countertops. We put in a few new fixtures. Just the bare minimum. It needed love. The only thing we did was hire somebody to come in and remove the laundry room, which was just laundry hookups in the kitchen.
There’s a patio and there’s a room off each patio, it’s a storage room. We had them re-dry wall, and since the patio room and the kitchen line up together, they could pull plumbing and pull power easily through a wall and put a laundry room in there. So that’s the only money we paid someone else to do. And then we fixed that up, got that on the regular market, got that as a regular long term rental and then completely gutted the unit we were going to move into, which was the roughest unit of the four. Eventually moved into that one, then we redid the one bedroom unit we’ve been living in, got all four stabilized. That probably took six months or so.

Tony:
So over the course of six months, you and your wife were just kind of moving from unit to unit, shuffling the rehabs around, get through them all then and knock them out and getting them ready.

Andrew:
Yes. Nights, weekends, took every Saturday completely off. But other than that, it was just all hands on deck every moment we could possibly put in before work, after work, whatever we could do.

Tony:
So, sorry, just to clarify. So what was the final decision on which one were long term and which one were short term?

Andrew:
Okay. So then as we were figuring out what to do, we had the one bedroom that was already short term, and then we had the two bedroom, one and a half bath that was long term. We left that one as long term because we didn’t want to mess with the parking situation and it was next door to us so we wanted to live next door to either people we liked, which we ended renting to a lot of friends, which I think is something that’s fun to talk about. And we wanted to live next door to the same people and not have new people coming in. If somebody throws a party door to you, it’s kind of annoying. So didn’t want to have that. The other unit, and this is what has actually really changed our investing, the other one bedroom unit needed more work. And in order to qualify for permits, at first, it was a monetary decision, but monetary in the sense that needed more work.
So I didn’t want to put as much work into it. And I wanted some stability, so we’re like, “Oh, let’s try it furnished and see what we can do.” And then we couldn’t permit it. So I didn’t want to risk getting in trouble. And so we put it for monthly furnished rentals and we had thought and we had been told by actually our real estate agent that she was like, “Hey, if this was me, by the way, I would do these all like month long. This nightly rental is really hard.” That didn’t really set in for a few months because it was six months later or so that we actually got that one done and on the market, but we started that one, we got our first booking, I think three months. And that three months turning into six months.

Ashley:
Can you just explain what is a monthly booking and what are the type of people that come? Is it people that are working virtually and just want a [inaudible 00:23:07], but who is the person that books for a month?

Andrew:
Absolutely. So that’s actually changed a lot over the past couple years for us and our business. But at the beginning, exclusively traveling nurses and people on internship. And I learned a lot about how to market to those folks. But at the beginning we got a bunch of requests, I think because it was a one bedroom, one bath on the other side, it was pretty cheap. We didn’t have a lot of reviews. So we used a lower price, try to get good reviews, take care of people, et cetera, et cetera. We got a lot of messages saying, “Hey, would you be willing to rent this out for a longer period?” And so we would actually “This one no, but we have one next door that’s exactly the same layout, here’s the literally the booking link, check it out and see what you think.” So we started that one at a thousand dollars a month, actually $33 a day, or maybe the first month was $30 a day.
I don’t remember. But at 31 days, you have a drop off in Chattanooga taxes and fees, so it becomes more affordable to rent. So that’s the first thing. The other thing is, I don’t know if this is everywhere, but in Chattanooga, the ability to rent out a one bedroom, one bath with kitchen and laundry and the things you would want to live in, it’s hard. There’s very few of them. So we kept getting these inquiries.
“Can we rent out your place?” And again, it was almost always professional folks, either traveling nurses or people doing medical internships because the university’s just over the way. That has changed. And we have had now had some folks building a home that wanted to build a home is they need a place to work from home from. We’ve had several people rent it out for six or eight weeks at a time instead of two, three or four months. And they’re just traveling digital nomads. So I’ve got a little mix the two now, but it started out as just folks who needed usually almost exactly three months because a lot of those internships were summer internships for three months, or traveling nurses who had either a six week contract or a 12 week contract.

Ashley:
How are you finding them? Is that they’re coming to you from Airbnb or I’ve heard of the traveling nurses websites. Are there different places you’re looking for these people?

Andrew:
We have not had great luck with Furnished Finder, although I have a different listing on that, it has been almost exclusively in Airbnb. And actually in 2021, we really, really changed our amount of money we were getting for these units because, watched a bunch of YouTube videos, I had the time and I really sat down and tried to get a better pricing structure and realized I was underpriced. And this is the first half cool tip, if you want to rent for three months at a time, this is not my idea, I learned this from YouTube, put little dash or something on the end and put ideal for long stays or perfect for long stays. There’s a character limit there so you got to get creative, but make it clear in your booking that you are looking for long stays. I only accept 31 plus days. I’ll do 33 days if you want, but you got to have 31 at the beginning.
And I leave that in the first part of this. So when you’re looking at your Airbnb listing and someone’s pulling it up, the very first part of the description, right below it, I make sure before you got to click to more, I make sure there’s, we are only looking for bookings of at least 31 days at this time. But in the title it says ideal for long stays. And that has increased both of our listing views in the analytics on Airbnb and our bookings exponentially. And I think that is because we were initially getting these views from folks looking for a one bedroom that they could hit up to be like, “Hey, is there any chance you’d rent this out?” I don’t have Instant Book on, which is one of the things that gets you high in the SEO on this particular unit because it’s monthly so I want to be sure I know who I’m talking to and whatever else.
So getting that, putting ideal for long term stays made a lot more people click on it that were looking for that exact same thing. And from there, it’s a little bit of a negotiation. And what I like about those tenants is if you have the money to spend 1,200 plus fees, so 1,600, $1,700 a month, which what they’re paying now, probably got a pretty good financial backing. So there’s less chance of you not paying. Then additionally, you’re probably taking it more seriously than somebody looking to party for a weekend and booking your place.
So one of the downsides of short term rentals can be that someone could trash your place, they throw a big party. And if you’re booking the place for three months, and I tell you I live next door and there’s only one parking space and we loved it, but I tell you, I love the neighborhood, my wife and I love the neighbor. We live next door. We’ve never had any problems. I’m not telling you you’re not welcome there. I’m letting you know that if you party next door to your landlord, that’s not going to be fun. So they really, for my quality of life, I turn over the unit every two, three or four months and I still get almost as much as I would get as a short term rental.

Tony:
One question is out of curiosity because I know we have times where we have guests who check in and they just kind of drive us crazy with the amount of questions that they ask and information that we’ve already given them but they’re saying that they don’t have. When you’re are walking distance from your guests, when they can just kind of walk over and knock on the door, do you see that happening a lot? Or are they pretty chill for the most part? Just what’s your experience.

Ashley:
Are they not peeking in the window?

Andrew:
So these units sit so close together. My unit and this unit are the two inside units. There are not windows on my side of the house, but if there were, we could see into each other’s units, I have the fence that runs across and touches both houses. I took the whole yard from that house so my dogs have somewhere to go. So they have a patio. They have no side yard. So they’re very close. I also keep a bunch of tools, don’t come around me, and it’s like vacuum cleaners and random stuff in the back patio closet. I make all of that abundantly clear from the beginning. “Hey, you might see me coming to get the weed eater to weed eat the inside of my fence.” That’s the first thing. The second thing, and I don’t know how this is with you, but there’s a certain Spidey sense you get when somebody reaches out to you and how they communicate and how they talk to you about whether they’re going to be trouble.
I’ve had one tough tenant and he paid through the whole pandemic. And so even though I had about a $1,500 rehab after he left, because he smoked in the unit even though he said he didn’t and a few other things, that’s the worst experience I had. I’m picky. I’m not trying to be. I just try to lay everything out before. And if I’m really clear with folks, we live next door, it’s one parking space. And I tell people being honest about the good and the bad of the unit and that if you’re polite and communicating in a way that is normal, we’re good. If you’re like, if it’s one or two words like “How much?” Well the listing price is right there. Like, “Can I have pets?”

Ashley:
It just sounds like when you list the property on the Facebook marketplace,[inaudible 00:29:19]-

Tony:
What’s the price?

Andrew:
Same type of thing. So I’ve definitely shied away from some of those folks a little bit. But we been really lucky. And even in our short term, the one next door we’ve had in since 2017, late 2017, maybe four tough experiences. And even those were not that bad. And I think a lot of that is preparation. Some of that is luck. And some of that is a one bedroom apartment, doesn’t get a ton of party.

Tony:
So give us the timeframe Breezy, how long ago did you purchase that duplex and what’s kind of transpired since then?

Andrew:
So we purchased both of those in 2017, October, November, and the first year, I think when I did my math, I think we cleared about $750 total for the property on top of all expenses, not including setting aside anything for [inaudible 00:30:01], but including repairs that we spent. Last year, we were about $600 that went in 2019, we were about $600 a month. Similar for 2020. 2020 was tough because one of the units went empty for a whole month. And then we transitioned to how can we get somebody in this one bedroom, one bath that’s normally nightly for three months? So again, that was about 600 bucks a month total. So you’re thinking $300 a door. It’s not terrible. And it’s providing my internet since they were on one lot. My lawn mowing is all billed to that. My every expense that I can put, my pest control, everything’s billed to that address.
And they happen to serve my duplex next door too. So I’m getting some benefits there, but it was not as good as 2021. So I don’t have final 2021 numbers. I haven’t sat down and crunched November and December. But we’re on pace to make about $1,200 a month.

Tony:
That’s awesome.

Andrew:
So we’ve doubled our profit and we did an extensive rehab on the units. We put in all new siding, about $6,000 worth of siding repair, as well as several other couple thousand dollars here, a couple thousand dollars there. So I think close to 10,000 in repairs and we still cleared about $1,200 a month total between the two of them. And that’s after they paid for all of my personal internet because I share the internet. All of my personal lawn mowing, I share the lawn mowing. I paid for all of that, pest control. So it was a real home run in 2021. And a lot of that came from doing my homework and trying to make sure I ran a better business and changing my pricing too all by watching YouTube and trying to make sure I was doing a better job.

Tony:
It’s a really good house hack effectively. I love the idea of combining the short term stay with the medium stay with the long term stay. I don’t think I’ve met anyone that’s kind of played with all of those on one parcel before, but it seems to be working out really well for you.

Andrew:
So when the pandemic hit, the nightly one went completely empty. Everything canceled out and we were just done. And so it was a month of being like, “Well, what do we do?” And I’ve always bought this from the very beginning that if something terrible ever happens, it’s okay that I haven’t spent the money and fixed this other one up and gone nightly because at least that thousand dollars a month will cover the mortgage and most of the utilities. And that’s exactly what it did. Even though it was rough, at least like mentally, and we didn’t have the money coming in, we were maybe $500 in the hole with all those extra expenses, that including lawn mowing and the other things, instead of being, if both of them had gone into we’d have been $1,800 in the hole or whatever.

Ashley:
Andrew, before we move on to our segments, I just want to ask you for our mindset segment is if you could do anything different or just looking back, is there something that you thought about real estate that you realized wasn’t exactly true now?

Andrew:
I don’t know if mindset wise. I thought I could do more or better than others. So we bought another duplex and I ended up when I quit my job rehabbing that for an entire year. That was… Real estate’s really forgiving, especially in this market so it all worked out, but I wasted half of that year at least, and a ton of money and I’ve missed out on all sorts of opportunities because I was stuck in this like I need to protect my cash because it’s a pandemic and what happens if they go empty and what happens? And so I should have farmed things out sooner. I should have realized several months in instead of a year in that I need to pay others to do it. And yet from now on, I have put my tools literally in storage, I can get to them if I want to do a project at my own house. But I’ve put my tools in storage so it’s hard for me to get to them so that I have to call somebody.

Tony:
Can we talk about that just really quickly because I think that’s something that a lot of new investors, it’s kind of a trap that they get caught in where they think that they’re saving money by self-performing a lot of the work, but in the long run, it’s actually costing the money. Let’s give like a real life example or not a real life example, let’s give an example, I guess, is the word I’m looking for.
But as an example, let’s say that, I don’t know, hiring a general contractor, like a handyman to do the work would cost you $10,000, but they’d be done in two months or you could self-perform the work and it’ll cost you $3,000, but it’s going to take you eight months. And say that you could rent that property out once it’s done for $1,500 a month. If you do all that math, even though there’s a cash outlay out front, the time that you’re losing by not renting that property out is going to surpass the amount of money that you saved or that you think you saved by not hiring that general contractor.

Andrew:
I feel that in my soul.

Tony:
I don’t know if those numbers actually add up because I made that up as I was talking, but you guys get the gist of what I’m talking about.

Ashley:
And just physical labor on your body too.

Tony:
Yeah.

Andrew:
And I do think there’s something to hustling at the beginning. If you don’t have a good W2, if you don’t have a ton of extra money. We put in $40,000 into those four units together and six months and we worked our tails off, that was a good use of my time at the time because my ability to get another deal was contingent on me getting those units up and going, spending the least amount of money possible because I didn’t have any money left. But later on, it was the exact opposite. I was still in the frame of mind that I was going to do what I did before and I was not treating it like a business when it should have been.

Tony:
I’m so glad you said that because I think that’s a really important distinction to make, is that do what you’re able to do financially. I remember when I first started, when I first got interested in real estate, I was a broke college kid and I hear these big real estate investors talking about how they outsource this and I don’t do any task that’s under a thousand dollars an hour. And I’m trying to think like, “Okay, yeah, I should start outsourcing these things.” But I’m like “With what money? Who’s going to pay these people to do these things that I’m supposed to be doing?”

Andrew:
A lot of contractors, especially if they’re not big outfits don’t take credit cards. That’s been my experience at least. So now I do have some relationship with folks that could take credit cards so I could do some riskier things. I did a ton of that on two more rehabs, but I didn’t know at the time how to do that. So yeah, I was just pinching every penny. I could put the materials on a card, but the labor was all me.

Tony:
Right, right.

Ashley:
Yeah, what Andrew’s talking about right there’s actually a really great rehab tool is to buy the materials with a 0% interest credit card. That’s 0% for 12 months or 18 months. And then once you flip the property or refinance it, you go ahead and pay that credit card off before you actually pay interest on it. But yeah, if you can get a contractor, then you can cover all of your rehab costs.

Andrew:
And look, it’s a little risky. But if you’ve done a couple, if you know how to do it, it’s okay. And if you get a Lowe’s credit card, for example, Lowe’s has 5% off so you can get savings or six months or 12 months, depending on the purchase. So you can really play the game and finance your stuff on a credit card, like you’re saying, and just buy materials and pick your battles on how you want to take things. And then all you need is the cash to pay your contractor. Or if your contractor is willing, they’ll take a credit card and maybe charge you 3% or whatever else. And you can even do that with a 0% interest. You just got to be careful because you don’t want to overextend and then-

Ashley:
Right, you don’t want to over-leverage yourself. You don’t want to be stuck in credit card debt because once that 12 months in, the interest rate goes to what, 25, 30%.

Andrew:
And you pay all the accrued interest from all that.

Ashley:
Yeah.

Andrew:
But you can do it and it’s all about being creative and figuring out don’t bite off more than you can chew, but also don’t be stuck like I was in a mindset that held me back.

Ashley:
Let’s go on to our Rookie request line. So this is where you guys can call in at 1-888-5-Rookie and leave a voicemail with your question and we may play it on the show for our guest to answer. So today’s question…

Michael Perrera:
Hello, this is Michael Perrera from Clovis, California. My question was around, do you use an LLC or C Corp and S Corp when you’re starting a partnership with somebody? I heard you talk a lot about partnerships, but not necessarily how to legally frame them. Also, just for the shout outs of the Teslas, I bought a Tesla and I rent it out on Turo on every weekend and it pays for the bill for the Tesla. And it’s been two and a half years and I haven’t made a payment yet. So that’s for your partner that’s always saying they want a Tesla. So just a little tip there.

Andrew:
So in a partnership, I use an LLC. I’m not a tax attorney. Consult your lawyers. I don’t play one on a podcast. However, what I was told by my tax attorney was that if you have a multi-member LLC, different families, different people, it is good to have an LLC. It is important for asset protection and it is better for everybody. I do most of my business in a sole proprietorship because what I was told is it’s very easy to pierce that veil of a single member LLC. And then if it’s my wife and I in LLC, that a judge is going to look at that and say, “That’s yours. This is not a real business unless you follow everything to the T.” So that’s the advice that I took. I think you could do it either way, but I would recommend hitting up, and then the way I found a lawyer and I think this is a good way to do it, I got this from BiggerPockets, write a post for your Facebook, ask for recommendations for a lawyer that you’re looking for.
If you have a real estate group you’re a member of like the Rookie Real Estate group, post, see if anybody in your area has recommendations, make that same post on BiggerPockets. Come back the next day or two days later, put all those responses together, see if there’s multiple people and then interview three. You got to interview three. And the reason is not because the third one’s going to for sure be better than the first one. You will not know the questions you need to ask the first one until you’ve interviewed the first one and taken that 10 minutes. What should I do? How should I do it? Why should I hire you? And the second one, you’ll ask better questions. By the third one, you will know if the first one, second one, or third one is a better fit for you and you will know what you’re asking about and you can make an informed decision. Every time I have done that, I have had a better outcome than just randomly picking somebody.

Ashley:
That’s such great advice. And the point that you make about that when you ask the first one, you’re not going to know all the questions till you talk to all three, that’s really good advice.

Andrew:
I’m the kind of person that that feels really daunting. And so if you just sit down and make that list and call those three people, all right in a row if you can do it, it will pay off in the end. It will save you potentially thousands of dollars on contractor bids, you’re doing contractor bids, anything you’re doing. If you just bite the bullet and get three or five or however many you’re willing to get, you will save money and you will learn about that process so that you make an educated decision, not just get the easy one.

Ashley:
And a lot of attorneys do the free initial call too. That doesn’t even cost anything to initially talk with them.

Tony:
Yeah, just one last comment on that. I think a lot of new people have this misconception that you need to have an LLC to do a partnership, but that’s not really the case. Like you said, an LLC is more so for asset protection for liability purposes. If you just want to partner with someone, as long as you guys have the details of your partnership of your agreement outlined between each other, that’s all you really need. We have joint venture agreements that we use for all of our partnerships and we don’t necessarily create a new LLC every time that we create a new partnership with someone.

Ashley:
Yeah, see with me, I haven’t done, well, I’m doing my first joint venture now, but previously I’ve only done an LLC and I do an LLC with each partner. So the properties that I buy with partner A, they all go into that LLC. Partner B, our properties together all go into that other LLC.

Tony:
And I think that works because you guys are buying multiple properties together, but for us, we haves nine properties that we have partners with. So to have nine separate LLCs, that didn’t quite make a ton of sense for us.

Andrew:
And is that operating agreement, in my opinion, that’s the important part. Make sure you have all that stuff laid out. If expectations are off, partnerships are really tough. If expectations are clear, partnerships are not that hard, kind of awesome in my experience. But you got to have it all clear and you have to be willing to talk about things.

Tony:
Love that last point about being able to talk about things. Because even if you guys go on some partnership retreat where you spend an entire weekend trying to map out all the details of the partnership, things are going happen is you’re actually working together, you’re like, “Oh shoot, we didn’t think about that.” Or, “Oh shoot, we didn’t think about this.” And you have to be able to go back, have those difficult conversations to go back and update the agreements, the partnership documents, whatever it is to reflect whatever decisions you’ve made. So it should be this kind of evolving document as your partnership continues to mature.

Andrew:
And I have questions for you guys. Do you guys put out clauses in your joint venture agreements or your operating agreements?

Ashley:
So I do a buy sell agreement stating as to what’s going to happen as our different exit strategies. If someone wants out, what am I going to buy it for? And my attorney puts together an equation like this is how we will determine the value of your LLC and this is what you would pay at this point in time.

Tony:
I got to check my LLC operating agreement because I don’t think I have that in there. But what we’ve done on our joint venture agreements with our partners is, and this is a recent change that it auto the time duration is set to five years. So if after five years, the default, if nothing else happens, the default action is that we sell the property. The only way that we retain the properties if both parties agree to renew that partnership again for another 12 month period or whatever it is.

Ashley:
Could you buy the property though, like buy out the other owners? Like that would be a sale. So you could still be the buyer of the sale, yeah. Okay, cool. Tony, do you want to take us to the Rookie Review?

Tony:
Yes, let’s do that. To the Rookie Exam.

Ashley:
Oh, exam.

Tony:
To the Rookie Exam.

Andrew:
Should I be nervous?

Tony:
Yeah. So this is our newest segment of the show. We’re asking the same three questions to every Rookie that comes onto the podcast and the hope is that our listeners get good value from this, but are you ready for the exam, Breezy?

Andrew:
I’m ready. Let’s do it.

Tony:
This has a pass rate of zero. So everyone that’s taking this exam has failed. So I have very low hopes… No, I’m kidding.

Andrew:
Is it two correct to pass? Is it one correct? How many do I have to get?

Tony:
No, there’s no right or wrong answers to the Rookie Exam. We just want to get into the psyche here. So question number one, what is one actionable thing Rookies should do after listening to this episode?

Andrew:
Okay. So analysis paralysis paralyzes everyone, myself included. I would think you guys agree that there’s times you get into into it and you don’t figure it out. So this is my cure for that. Get up 30 minutes earlier than you would normally get up. The way I do it is I get up, go downstairs, drink glass of water, put the coffee on, shower, straight down get the coffee. My cell phone is still plugged in. I don’t get on my cell phone-

Ashley:
Not even looking at it yet.

Andrew:
Not even looking at it. I used to do it an hour early, 45 or an hour, but 30 minutes is the minimum in my opinion. Go to whatever task, whatever single five minute, 10 minute task towards your goals. I need to figure out who I’m going to call in that LLC question. Then you make that Facebook post. Do that, make that post, and then decide if you have a little time left, what am I going to do tomorrow? And if every day you just got up 30 minutes earlier and instead of giving your time to a boss, giving your time to something else and giving the best moments and brain power of your day, which mean you’re fresh. And when you get home, at least for me, I am zapped. And maybe I’ve had a bad day, maybe I’m whatever and I just want to sit down on the couch and veg out and watch Netflix.
Well, I can’t do that, or I’m going to ruin a certain goal of mine. But if I’m in the morning, if I’ve accomplished one thing, even just one little thing forward, it doesn’t matter what it is. Even if it was listening to this podcast and taking notes on something that you wanted to learn. Spend that time productively, read something, do something, do a task. And if you do that 3, 4, 5, 5, 6, 7 days a week, I got financial freedom in two and a half years and that was basically my whole entire eight hours on Sunday and an hour every morning that I could spare it. And I got financial freedom long before I thought I would. And I believe it’s that consistent daily action. 30 minutes is plenty to make tons of progress.

Ashley:
You know what? Congratulations on that.

Tony:
Took the words out of my mouth.

Ashley:
That’s really awesome. And you were willing to make that sacrifice. There’s so many people that will not give up those eight hours on a Sunday or that hour during the week. And what you said about getting up and doing that one thing every morning towards your goal, that reminded me of the book, Eat That Frog, where you’re getting rid of the hardest thing you have to do, or the thing you’re procrastinating or putting off, you just get that done first and get it out of the way and then you go on to the rest of your day.

Andrew:
If you’re scared or that task is too big, break it down smaller. What’s the [inaudible 00:46:01] the most important next step in the journal, like whatever it is, you can do a smaller task or a small, if it’s collecting phone numbers for who you’re going to call, then do that. Then schedule it for your lunchtime, you’re going to call, whatever it is. But if you just make action every day, even if you don’t spend your Sundays doing it. I know people have kids. They have much why’s than I do, I don’t have kids yet, but even if you can’t give up those extra hours, if you just made a little bit of progress every single day, you will get to your dreams. Whether it’s two years, five years, 10 years, it will be much quicker than you think. It’s a snowball, but if you don’t start it now, you’ll wake up at 50 building somebody else’s dream. You will have been paid to build someone else’s dream instead of building your own. That’s my why. I don’t want to build somebody else’s dream. I want to build mine.

Tony:
It reminds me of this meme, you guys may have seen it floating around the internet, but it’s like this employee walks up to his boss and his boss just bought like a new Ferrari or something. And the employee’s like, “Man, that’s a really nice car.” And the boss responds and says, “Well, you know what? If you work hard, you put in a lot of hours, you stay dedicated, you stay motivated, maybe I’ll be able to buy another one.”

Andrew:
Painful.

Tony:
Right? But so true. But so true. But so true.

Ashley:
Okay. So onto the next question. What is one tool, software, app, or system you use in your business today?

Andrew:
I try to keep everything on my phone that I possibly can. I picked up eight rental units in the last year to manage for other people. One of the things that keeps me from having to get W2 is having some more income and my grandparents were getting older, I took over theirs. So the first thing I did was, and actually got this from your podcast, I picked up a Google phone, a number that I never really used before. So I made an email address. If you don’t have an email address, a business email address, that’s the first thing you can do. You don’t need a complicated name. I could have done my initial AB Properties at gmail.com. It doesn’t matter what-

Ashley:
Yeah. And you don’t even have to buy a domain. You can just use a Gmail, a Yahoo.

Andrew:
And then you have a business account, it doesn’t matter, you can always whatever you want to do, but then create a Google voice and give that number out to tenants. And here’s why I’ve done that. Number one, I went to Brazil for two weeks in December. I went to Jamaica and New York for a week and a half in November. And I went on a 10 year wedding anniversary in October for 10 days to Mexico. That was all amazing and I was able to manage my properties from my phone because I didn’t have internet. I did have internet access, I did not have a cell phone reception. But all of that is WiFi based. Additionally, had I not wanted to manage my properties, I could have just forwarded that number to somebody else’s number or given another property manager or a friend in real estate that log in and they could have managed my properties from their couch.
And that would’ve all been done, and my tenants would’ve never known the difference. And there was never a risk that their call would go unanswered because they called my cell phone. Also, little tidbit. If you want to be a little bit more professional and you have a number that’s a Google voice number, you can put do not disturb hours. You can choose when your calls go to straight to voicemail, and you can put a business voicemail. So your tenants or your business associates are not getting, “Hey, this is Andrew. Leave a message.” They can get, “Hey, this is Andrew with X, Y, Z Properties.”

Ashley:
And you can link it to multiple phones. So my business partner and I, we use it when we send out mailers and it’s linked to both of our phones. So we’ll both get to tag both of our phones will ring, we’ll both get the voicemail too.

Andrew:
There’s many other things I use, but I think that’s the simplest. Anyone can integrate that and you can get on your desktop too. So say you want to make a call from your desktop, you want to type text from a desktop. You want to log in, whatever, all you need is WiFi, desktop, phone, whatever and you’re good to go. And that’s helped me manage and scale and also not pull my hair out.

Ashley:
My business partner too whenever he meets a girl, he gives out the Google voice number. So I get to see all the texts from the girls coming in. I’m just kidding, he’s standing right over there.

Andrew:
If you get a wedding crasher stage five cleaner, I mean, you got to protect yourself.

Tony:
I didn’t know about the do not disturb hours for Google voice. We use that for all of our short term rentals. So we’re on the west coast. We have a lot of east coast folks. So sometimes they’ll call us at like five o’clock in the morning. So it’s good to know the do not disturb.

Andrew:
So initially I had set that up and I had a beer sales rep. I didn’t want to give out my real number because I was worried an angry customer might call me on Saturday morning when the beer distributors closed. Well, I found out, and I assume this is still the case, you could put in all of your do not share hours. So that’s what I did initially. And then like when I set up my real estate number a few years go, that’s what I set up, my business hours, and you still see the notification on your phone.

Tony:
So it’s not too bad for them either. So last question, Breezy, and this is the most important, but where do you see yourself in five years?

Andrew:
That is something I have been struggling with a lot. I want to keep this as a lifestyle business. I was burned out to the max and I didn’t know it when I quit my job. I had a soul crushing job for seven years that got worse and worse and worse towards the end. It wasn’t so bad at the beginning. But real estate was kind of forced me to retire and I was happy that I retired. I’m self-employed, but I call it retired. It feels better that way. And so now I want to continue building it. I may transition out of some of my short term. We have two more properties that are medium term now. So we have four units total that are medium term. It’s still a lot of work. So I would like to transition into more regular rentals. I’d like to buy four properties this year, eight properties next year.
And then after that, I’ll have to reassess and I’d to buy some larger multi-families. I don’t know what that market’s going to look like. I don’t know if that will still be profitable. I don’t really know. But I would like to continue working 20 to 30 hours a week at the most on a regular basis, not including the big weeks and whatever else. And I’d also like to still spend my time doing what I love, because for seven years I didn’t get to travel and visit my in-laws in Italy. I still haven’t been back because of the pandemic.
I didn’t get to spend my weekends doing the things I liked to do depending on what it was. If it fell on a Monday and a holiday, we work all holidays, whatever, whatever. So I want to spend time doing what I want to do and I want my work now to revolve around my schedule rather than my life revolving around my work schedule. So my hope is in five years, I’ve continued to keep that balance and I continue to be able to do what I love, volunteer in charities, do all the things that make me happy and give me fulfillment because real estate’s great and I like it, but I don’t believe it will bring me lastly fulfillment on its own. So all the other things that I get to do because of real estate that bring me that lasting fulfillment.

Ashley:
Well, that’s awesome. And thank you for sharing that with us and I definitely think you’re going to get there. You reach financial freedom in two and a half years and you definitely have the drive, the vision and the work ethic. So, yeah.

Andrew:
Thank you.

Tony:
Awesome. Well, let’s take it to our Rookie rockstar. If you guys want to get featured on the Real Estate Rookie podcast, get active in the BiggerPockets forums, get active on the BiggerPockets Real Estate Rookie Facebook group, get active in Ashley’s DMs, all those are very acceptable places to get featured as a Rookie rock star. So today’s Rookie rockstar is Mattie B. And Mattie said, had my very first binder conversation with two inherited tenants. It worked flawlessly. So if you’re not familiar with the binder conversation, it came from episode 448 with Dion Mcneeley, the real estate show, but Matt says, or Mattie says that both tenants went up to $1,200 per month, one from $900 and the other from $850. And that added $650 per month in cash. So he said, give it a shot, cost me 70 bucks at Staples to make the binders and I practiced my pitch before I went over there. So Mattie, congratulations.

Ashley:
Yeah. That’s awesome.

Tony:
An extra $650 per month.

Ashley:
I love the binders, yeah.

Andrew:
That’s awesome.

Ashley:
Okay. Well Andrew, thank you so much for joining us. Can you tell everyone where they can find out some more information about you, where they can reach you and also about your podcast?

Andrew:
Oh sure. So I host a podcast, a soccer podcast. If you’re a big soccer fan and you love Chattanooga Football Club, that’s a very particular niche, you can check us out at The Section 109 podcast. And if you like listening to people talk way too much about that, that’s where you can find that. You can find me on Instagram. I consume more than I put out, but there’s stuff on there.
You can connect with me on the BiggerPockets forums, I’m pro member. I love BiggerPockets. Again, there I consume more than I put out. It’s an unbelievable resource. If you have a question, it’s been answered. And if you don’t have a pro membership, BiggerPockets is not paying me for this, but the calculators are worth 10 years of pro membership just for one year. The ability to have infinite use of those calculators is so… Plus, there’s landlord docs and all the other things. So get at me on the forums. You can hit me up on Instagram and yeah, if you want more tips, more actionable things, I would love to share what I know. So maybe I’ll write a blog post and put it in my bio on Instagram with just the small things that I think you can do, the granular stuff to not make some of the mistakes I did.

Ashley:
And anyone can apply to write blog posts too for BiggerPockets. So you should submit it through there. Yeah.

Andrew:
Okay. Maybe I’ll do one of those New Year’s lists where they have all the like hacks for a better life. Maybe I’ll do that. We’ll see.

Ashley:
Yeah, that’d be awesome.

Andrew:
You’ll know by the time this is released if I follow through.

Ashley:
Hold him all accountable. So everybody reach out to him on BiggerPockets and Instagram and make sure that he does have that blog post written. Well, thank you guys so much for joining us. I’m Ashley at Wealth From Rentals and he’s Tony at Tony J Robinson. And we will be back on Saturday with a Rookie reply.