\n<\/p>\n
You may know how to build a real estate portfolio<\/strong><\/a>, but how do you build an unshakeable one? Most real estate investors think that buying a few dozen dirt-cheap houses<\/strong> is all they need to do to make millions and live a life full of passive income<\/strong>. This is far from reality<\/strong>, as your entire <\/strong>net worth<\/strong><\/a> could come crashing down<\/strong> as soon as a housing market crash, correction, or new rental policy comes into play. So how do you build a sustainable real estate portfolio\u2014one that will grow your wealth even during the worst of economic times<\/strong>?<\/p>\n David Greene has touched on this topic numerous times, often referring to \u201cportfolio architecture<\/strong>\u201d as one of the most crucial aspects of building wealth through real estate. This strategy not only helps you <\/strong>grow wealth<\/strong><\/a> but keep it even when everything goes wrong<\/strong>. Don\u2019t believe us? Listen to David and Rob\u2019s individual stories on what happened to their portfolios during the 2020 lockdowns<\/strong> and how quickly they bounced back while other investors had to completely rebuild.<\/p>\n In part one of this two-part podcast, David and Rob will go through the most common weaknesses <\/strong>in their real estate portfolios<\/strong>, what could cause everything to come crashing down, and the five most important keys to portfolio architecture<\/strong>. They also talk about diversification and how having just one type of real estate in one location could be a huge mistake<\/strong>.<\/p>\n David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/em>sponsor page<\/em><\/a>!<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast, show 705.<\/p>\n
Because that\u2019s what real estate should be. It\u2019s like you should always feel like you\u2019re broke if you are investing correctly. And that\u2019s a whole \u2018nother probably episode of, I always call it the broke millionaire conundrum, where you actually are a millionaire on paper, but you\u2019re deploying all of your cash to your investments. And so you\u2019re always like, \u201cDang it, where do all my money go?\u201d And it\u2019s just tied up in equity, which is a good thing.<\/p>\n
What\u2019s up everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with my co-host, Rob Abasolo who you just heard popping off with excitement about one of our biggest bookings to date, not just in the amount of money, but in the short period of time. And I hope you\u2019re just as excited as we are. But today\u2019s show\u2019s not going to be about a bunch of wins, actually. You are going to hear about a lot of things that are going wrong in our portfolios, things that we didn\u2019t anticipate that actually became hurdles for us, mistakes that we\u2019re trying to work our way through, changes in the economy, just a bunch of stuff that isn\u2019t going right because a lot of people are dealing with this. And how you handle mistakes is even more important than not making them.
Today\u2019s show is a fantastic episode where Rob and I are going to go deep into our own portfolios, lives and businesses and share what we\u2019re doing to handle the chaos and destruction that often comes for being a real estate investor. And I think you\u2019re going to love it. Rob, what were some of your favorite parts?<\/p>\n
Oh, man. Oh, this is just filled with goodies because we talk about the multiverse, right? We may not be able to get you to get into Interstellar, but we can at least get you to talk about the concepts of the parallel universes, of the demise of our portfolios. And we even get to go toe to toe on metaphors and analogies. You talk about energy storage. I bring it with a battery analogy and I\u2019m like, \u201cWow, the student has become the teacher.\u201d And then lastly, we give a lot of just good thought about portfolio architecture, and how to structure your portfolio in a way that can help you weather any economic storm that we may or may not face.<\/p>\n
That\u2019s exactly right, and that\u2019s what I think is personally important. I\u2019m talking a lot about how you build a financial fortress, not a flimsy shack that you could just throw together really quick, which frankly a lot of people did the last five or six years with the economy, there was people throwing things together that they never should have been, and they\u2019re not doing very well. But there\u2019s a way to construct your portfolio in a way that will stand the test of time, and that\u2019s what we at BiggerPockets believe in.
Before we get to today\u2019s show, a quick tip for the audience. Today\u2019s quick tip is consider how your portfolio can be perfectly balanced, as all things should be. Consider yourself Thanos, and ask, \u201cHow could this all fall apart? And how can I create the amount of balance that I would need to prevent that from happening?\u201d It could be seasonality with short-term rentals. It could be having a lot of money in the bank and then spending it all on a deal. Rob\u2019s still trying to work out the balance. It\u2019s harder than it looks, isn\u2019t it over there?<\/p>\n
You got to see it on YouTube.<\/p>\n
Poke holes in your own portfolio. Make it a poke-folio, and look at ways this could fall apart and then be proactive about trying to prevent that as opposed to just living in fear, anxiety, and worry about what could happen, not having a plan for what you\u2019ll do if it does.
With that being said, we are going to pull back the curtain and show you guys what\u2019s been going on in our portfolios, how we\u2019re handling those challenges, and what we\u2019re doing to lock in and keep it tight.<\/p>\n
All right, David, I know you\u2019re not a fan of Interstellar because you still haven\u2019t finished it and you\u2019re not really into the whole parallel universe thing, but I wanted to throw a couple of parallel universe scenarios at you and talk about it on today\u2019s episode of BiggerPockets. Is that cool?<\/p>\n
I can probably get into the parallel universe thing. It\u2019s kind of being forced on us all, if you like Marvel movies. You just have to accept it. Yes, exactly right. So we could bring the multiverse into the podcast.<\/p>\n
Okay, well let\u2019s do it. So today what I wanted to talk about was we are relatively successful real estate investors. We\u2019re in different journeys, different parts of our journeys, if you will, and we\u2019ve done really, really, really well for ourselves. And I think we have enough systems in place and protections in place to really kind of weather any storm that\u2019s approaching or that we\u2019re currently in. But I wanted to flip the script a little bit today and talk about a world where our entire empire falls apart and talk about the scenarios that would cause the demise of David Greene and Rob Abasolo.<\/p>\n
I think that\u2019s healthy. I think constantly planning for a paranoid worst case scenario can only make your portfolio stronger. So this would just be a multiverse scenario where Thanos is king and Iron Man has lost his armor and Captain America can\u2019t find his shield and the Hulk has become anorexic. And how are the earth\u2019s mightiest heroes going to manage these challenges without their superpowers?<\/p>\n
Okay. So yeah, I mean I\u2019m curious, have you ever given thought to a world where your entire portfolio crumbles?<\/p>\n
Yes, I do think about it a lot. I think the challenge is that when things are going really well, you have the thought in your head of, it won\u2019t always be this way or you got to prepare for whatever. But the emotional environment that you\u2019re operating out of is very different. And the same is true on the other side, when things are very difficult, you have the thought in your head, I know I can make money through real estate, it can work, but your emotional state is just so negative and fear-based, it\u2019s very hard to operate. So these exercises are good, because it forces you out of the emotional state you\u2019re in right now based on temporary factors like the market, how your last deal went, or what you ate for breakfast this morning and into the mental side of it where it\u2019s much more stable and beneficial to be approaching financial aspects from that perspective.<\/p>\n
But deep down, I know that you\u2019re probably always comforted knowing that you have 10 million credit card points, right? Isn\u2019t that your apocalyptic scenario, if everything is gone?<\/p>\n
Yes. That\u2019s my one backup plan. So yeah, we were joking about how I have a lot of credit card points because having them there, it makes me feel better in case everything gets wiped away. If Thanos snaps his finger and half of my wealth disappears, I\u2019ve still got these credit card points that I can live off of for six months without having to worry about going hungry.<\/p>\n
Yeah, David hasn\u2019t really disclosed how many he has. That\u2019s my guess. I will say that is the one thing, I\u2019m more protective about my credit card points than I am my real estate portfolio. I\u2019ve got like $12,000 worth of credit card points, I think. I don\u2019t know. What\u2019s 1.2 million credit card points, like 12,000 bucks? And I\u2019m like, \u201cI am never going to touch this.\u201d<\/p>\n
That\u2019s so funny, that and my Beanie Baby collection that I keep in various safety deposit boxes throughout the Midwest.<\/p>\n
I\u2019ve seen that thing, man. That\u2019s extensive.<\/p>\n
Yeah.<\/p>\n
Well let\u2019s do it, man. Let\u2019s talk about it. Let me just give my point of view before we get into it. I think, like you said, it is healthy to talk about the good and the bad and hey, what scenario, this and that. We have this mindset when things are going well that, \u201cHey, we\u2019re crushing it, blah, blah, blah.\u201d Honestly, I don\u2019t care one way or another, this is probably a hot take, how the real estate portfolio does on a day-to-day. Like the cash flow is always nice, but I kind of stash it all in the bank account anyways and I really rely on appreciation anyways. So I have really good months. I have so-so months. Most of the time, they\u2019re good months.
But honestly, at the end of the day, it\u2019s a long game. And so I\u2019m just like every day pushing that stone a foot forward, if you will. That\u2019s not how it goes, but you know what I mean.<\/p>\n
Yeah. So from your perspective, when you\u2019re\u2026 one of the ways you\u2019re playing defense here is that you\u2019re not going to spend the money from the cash flow. So you project the cash flow that you want to get, but you don\u2019t rely on it. So there\u2019s never an emotional connection you\u2019re saying to your safety being relied to the cash flow.<\/p>\n
Yeah. Yeah. I\u2019m a big advocate of having your real estate work for you and build wealth and everything, but to have a bunch of other streams of income that you can actually live off of\u2026 So I have probably 10 to 15 streams of income. That\u2019s really what I live off of, so that I can always propel the real estate portfolio forward.<\/p>\n
I think that\u2019s healthy. And the reason I think it\u2019s good for us to bring this up, is most people don\u2019t acknowledge that fact. The majority of the time, if you\u2019re getting free information about real estate investing, if you\u2019re paying someone, this could be different if you\u2019re paying for coaching or a course or something, but if you\u2019re getting the information for free, the person giving it to you has to make money somehow. So they\u2019re usually going to be making money by trying to get you to\u2026 like for advertising, or to get views, to get attention to get followers. The quickest way to do that is to tell someone that they can make more money easier than what they\u2019re currently doing. This has just been around forever.
So if there\u2019s a girl that you like and she\u2019s got a boyfriend, the first thing every guy wants to do is tell her all the reasons that her boyfriend sucks and how he would be better, right? The same thing comes true for if you want someone\u2019s money, you got to tell them that the place they\u2019re currently getting their money from could be better. \u201cAnd if you come over to this world, girl, I\u2019ll show you how to make some passive cash flow. Wouldn\u2019t that be better than having to go to work every day?\u201d
And so you\u2019re frequently seeing TikTok and Instagram and social media scripts with little emojis in them that says, \u201cDo you want to make $6,000 a month? Do you want to know how I make $300,000 a year without working?\u201d And inevitably, this is some form of cash flow from real estate, and it\u2019s true that in principle, you can make money passively from real estate. It\u2019s also true that it is inherently less reliable than that W2 income that everybody is trashing.
So the new guy\u2019s always going to tell you how he\u2019s better than your boyfriend in all these ways. But then if you jump ship and you hook up with the new guy, you realize, \u201cOh, there\u2019s a lot of stuff my boyfriend was doing that this guy doesn\u2019t do that I maybe took for granted.\u201d And for a lot of people, their W2 job is not the best thing they need to get out of it. But for others, you forget that when you\u2019re having a bad week or you\u2019re feeling down or you\u2019re distracted or your kid\u2019s sick and you\u2019re not sleeping, man, that paycheck just keeps on coming. It doesn\u2019t matter if you don\u2019t perform.
You get into the world of real estate or entrepreneurialism and you\u2019re not on your A game, that money might actually stop. And so it is worth acknowledging that income coming from a secure source has a value that income coming from an insecure source like cash flow doesn\u2019t have. And it\u2019s also worth acknowledging that this is never talked about in the real estate space because most people sharing the information don\u2019t want to tell you that cash flow is unreliable. Because then you\u2019re not going to follow them. You\u2019re not going to subscribe to their channel, you\u2019re not going to give them the like, you\u2019re not going to give them the currency that they need to justify the free content they\u2019re putting out.<\/p>\n
Oh yeah. It\u2019s so funny because I\u2019m always like, well on YouTube, in my content, or just my students, I\u2019m like, \u201cAll right, let\u2019s get you to $10,000 a month. I\u2019m going to teach you how to do that.\u201d And they\u2019re like, \u201cOh my God, let\u2019s do it.\u201d I\u2019m like, \u201cAll right. And here\u2019s what\u2019s going to happen when you make $10,000 a month, you\u2019re not going to spend it.\u201d And they\u2019re like, \u201cWait, what?\u201d I\u2019m like, \u201cGotcha. I made you wealthy and I\u2019m not letting you spend it,\u201d because that\u2019s what real estate should be. It\u2019s like you should always feel like you\u2019re broke if you are investing correctly.
And that\u2019s a whole nother probably episode of, I always call it the broke millionaire conundrum, where you actually are a millionaire on paper, but you\u2019re deploying all of your cash to your investments. And so you\u2019re always like, \u201cDang it, where did all my money go?\u201d And it\u2019s just tied up in equity, which is a good thing.<\/p>\n
And that\u2019s one of the reasons I\u2019ve started referring to money as a store of energy and work as energy. I\u2019m trying to move our thought off of the US Dollar, which has a value that\u2019s constantly fluctuating with inflation. It\u2019s very hard to know what a dollar\u2019s worth, into an understanding of energy to where you can make a bunch of money, which was just you converting work into energy and then taking it in the form of money. And then you go trade that money for fancy clothes and fancy shoes and fancy cars and fancy vacations, and you\u2019re just wearing your energy on the outside.
That\u2019s all that it is. You\u2019re not wealthier than other people. You\u2019re just putting energy into things like cars and clothes, versus with real estate, we are constantly putting our energy back into the asset, back into the portfolio. We\u2019re putting it into the future where it\u2019s going to grow and replicate and create more energy, and we can pull energy out of the portfolio through cash flow, through cash out refinances. There\u2019s these vehicles that we use to access that energy. But you\u2019re right, the better way to grow your wealth is to keep as little of the energy as possible for yourself, and keep as much of it inside the vehicles where it\u2019s going to grow more, which often leads to people wearing t-shirts just like you.<\/p>\n
That\u2019s right. My one, my single shirt, I only own one. Actually, I think to use your analogy here, I actually think it\u2019s better to think of your\u2026 Oh, this is really good. Okay. I got to work through it with you on the air here. But your money and your wealth is sort of a battery, battery storage, all right? And so you can store all your batteries for a storm, and when that storm comes, you can use it to weather the storm.
However, if you use your batteries for dumb things, I don\u2019t know, RC remotes or RC cars or whatever, as soon as that energy is gone, it\u2019s gone. You\u2019re not getting it back. It\u2019s a depleting source. And then on the flip side of this, batteries don\u2019t last forever. If you just keep your batteries in the closet for 20 years, they lose power over time, which is inflation. So you have to be able to consistently move your energy to something that is going to produce more energy. I did it.<\/p>\n
I love it. Yes. And there\u2019s so many people that think, \u201cOh, my laptop is charged. I\u2019m at a hundred percent. I don\u2019t need to plug it in.\u201d Terrible attitude. You shouldn\u2019t be like, \u201cI\u2019m rich, I\u2019m at a hundred percent battery.\u201d Plug it in. Keep the energy in the power source and have new energy coming in from the electricity to restore it, which would be new ways of making income through real estate, new ways of making income through entrepreneurialism.
Yes, you have a bunch of wealth stored inside of your real estate. Don\u2019t just pull it out because you never know when you\u2019re going to need it. You don\u2019t know. What happens if the power goes out? Like you said, you can\u2019t recharge that battery and you\u2019re only at 4%, you\u2019re only at 12% because you were too lazy to plug it in.
So in today\u2019s show, we\u2019re literally talking about how we prepare for that storm that\u2019s going to stop you from being able to replace that energy, how you prepare for the storm that\u2019s going to cut your battery life in half. How when everything is great and you think it\u2019s always going to be great, we plan for when it\u2019s not going to be great because those storms tend to not be the case all the time. We don\u2019t have 20-year storms. They tend to be wicked, nasty hurricanes that come through in a couple years of devastation and then the economy\u2019s better.
So overall, this is why we\u2019re always doing well, collecting energy and collecting electricity in our portfolio when we\u2019re investing it. But you\u2019d be a fool to not plan for the fact that you\u2019re going to have downturns, and the goal is just survival. How are we going to survive those short periods of time where the storms hit and we got to batten down the hatches, get in the basement, wait for it to pass, and then once it\u2019s done, come out of there and go start planting our flag and scooping up all the real estate we can.<\/p>\n
Well, we just really, really masterfully put together a good analogy here over the last 13 minutes. I hope it actually makes it into the final episode. If you only heard one minute of this, just know there was a lot of good stuff that we just talked about.
But yeah, let\u2019s talk about it, man. Let\u2019s actually get into the structural weaknesses of our portfolios and what some of those scenarios are that could cause them to crumble. Obviously, they\u2019re not likely, but we should consider what could happen to take us down.<\/p>\n
Yeah. So where do you want to start?<\/p>\n
Well I mean, the general question here is how could the whole empire fall apart? And I think that there\u2019s a few ways that we could do that. So we could start with the question, like what are areas of possible weaknesses in your current strategy? Do you have anything to speak on on that kind of first bullet point?<\/p>\n
And I was just thinking before we recorded, I was having a conversation with somebody and we were talking about where business is going good and where business is going bad. And in general for me, the actual decisions I\u2019m making are close to a hundred percent solid. I rarely make a bad decision when it comes to what to buy or how to manage it or how to manage the energy flow.
And so I will talk about that in the show, how I look at it so that I rarely make bad decisions, but I still have significant stress and problems and things that go wrong. So I was trying to figure out how is that happening if I\u2019m making good decisions in all my investments? And what I realize is it comes down to two things and there are things that I cannot control. They are other people and they are things like regulations.
So I could look at a deal, analyze it from every single situation, walk into it with a really good plan, buy the property, and the neighbor complains about the construction and the city gets involved and they slow you down and it turns into a six-month project instead of a 30-day project and you lose 10 grand a month before you even get the property out and you\u2019re $60,000 in the hole.
So then you don\u2019t realize you need a second kind of permit. Well, that\u2019s going to take another three months before you can get it, right? And then you go down this rabbit trail of just your construction, or your jump off part took nine months and you didn\u2019t have $90,000 set aside, and the next thing you know, you went from being extra liquid to barely liquid at all. And then if you have another problem going wrong somewhere else in your portfolio, boom, you\u2019re at that point where you\u2019re not going to weather the storm.
So regulation is one thing that is very difficult for investors to navigate right now. And that is especially true with short-term rentals. You don\u2019t know about what the neighbor\u2019s complaining to city council and they come in and say, \u201cThis is no longer allowed.\u201d Or an associate of mine recently had to sell three properties of his in Virginia because out of nowhere, the HOA just decided we\u2019re not going to allow short-term rentals anymore. So what\u2019s he going to do? He had to put the houses on the market and sell them. He wasn\u2019t able to sell for a profit. Most of the money that they had been crushing it making over the nine months before that from all the work they put in, went to cover the closing costs and the realtor fees. And then after he and his partner split up the money, there was barely any profit that was made for nine months of hard work and success. Nothing that they could control.
So things like regulation can absolutely screw me up. And the other one is people. I was thinking about all the problems that I\u2019m having. There are always problems from deals I did with other people. A partner in a deal got greedy or got lazy, or didn\u2019t have the same value system as me and they made decisions that I wasn\u2019t looking at that were very poor. So even though the plan and the property was perfect, the person was not perfect.
Or a business partner that you go into business with and you find out that the friendship you have with someone is not the same relationship you have once money gets involved. So I\u2019ve had situations where we started an enterprise and they did really well really quick, and they completely changed. They don\u2019t have the same values, they\u2019re acting much differently. Their ego is more important to them than the success of the business. They\u2019ve never experienced that much affluence that quickly, and it hit them in a way that I couldn\u2019t have anticipated.
So those are typically the things that will cause stress in my life. And so trying to learn to limit how dependent I am on other people in these enterprises is the biggest threat to my portfolio. And most of the issues that I\u2019m having right now come from that.<\/p>\n
Is that why you shut down your pink Volkswagen beetle rental service? I\u2019ve always wondered why that went under.<\/p>\n
We had a ton of demand, and it was really good for my image. But yeah, the partner that I had decided, they didn\u2019t want it to be pink anymore, they wanted to move into purple and I just couldn\u2019t live with that.<\/p>\n
Creative differences. No, man, that makes a lot of sense. I think there are definitely\u2026 I mean regulations even go past, I think laws and short-term rental laws and everything like that. I mean we know that I am a short-term rental host. Obviously, we talk about it all the time, but there are other regulations that can really throw you for a loop. And I\u2019ll give you one example of where someone\u2019s empire might have crumbled. Mine did not, thankfully. I guess for the purpose of this podcast, we\u2019ll say it was my empire.
I had a relatively successful Airbnb operation and a little glamp side operation that was cash flowing, a lot of money, things were going good, I was flying hot\u2026 Icarus, if you will, flying close to the sun. And then we got this little thing called COVID-19 pandemic across the world. And guess what? Airbnb canceled all of the reservations that we had for three months straight, and then the city shut down and they wouldn\u2019t let you do Airbnb.
And so we actually had to refund 40 to $50,000 worth of reservations overnight. Now, I think for most people that are overzealous and very levered and don\u2019t have a lot of reserves or anything like that, that would\u2019ve eaten up most businesses. But my standpoint has always been to just keep all of our money in the bank account, don\u2019t spend it. As I said, I try not to spend real estate money. So it was really no big deal. It was not a big deal for us to refund it. Obviously, I didn\u2019t like refunding like 50 grand, but it was like, okay, we have the money, we\u2019re just not going to make it. It\u2019s not a big deal.
And then guess what? We ended up, because we were able to weather that, we were actually the most profitable we had ever been for the rest of the year. Whereas there were a lot of people in rental arbitrage, like master lease contracts where they had a hundred units, a lot of them went under during that time specifically because they couldn\u2019t get tenants to rent their Airbnbs.
So even more of a global regulation could really cause your empire to crumble. Did you have any issues during that time with any of the rest of your portfolio, or were you okay? Did you have anything at all during your time when COVID-19 first hit that caused any structural cracks in your system or were you okay because you were mostly in long-term rentals?<\/p>\n
Well, the rental properties were more or less\u2026 Okay. I had a handful of tenants that didn\u2019t pay, and I had one where the tenant didn\u2019t pay for over a year. The problem with that was that I wasn\u2019t watching the portfolio super close because of all the other businesses I have. So I don\u2019t even know that a year went by or more than a year without this person paying. The property manager didn\u2019t push it to the front of my attention.
That was the biggest problem with the rentals. The bigger problem was with the real estate team. Real estate agents were considered to be not essential. So we literally could not show homes anymore. Not just holding open houses. You can\u2019t even get into a house to even go show it. Nobody was going to be buying homes. So this entire income stream was basically just shut down. You weren\u2019t going to be able to sell anybody\u2019s home and you weren\u2019t going to be able to help buyers with buying it.
And it\u2019s very easy from an emotional standpoint to see the money keeps rolling in. I can keep buying, I can keep spending, I can keep doing whatever I\u2019m doing. And then COVID hits, which was a black swan event, no one would\u2019ve ever thought, boom. They actually had a couple week period where loans wouldn\u2019t fund. Fannie Mae and Freddie Mac loans, the government\u2019s like, \u201cWe\u2019re just not funding anything.\u201d The only way you could buy houses with cash and the only way you could buy houses is not seeing it.
So no one\u2019s going to be buying houses at that time. And so your portfolio as a whole is not just the assets that you own, it is your life, right? Like you mentioned saying you were over\u2026 you could be over levered. Everyone assumes that means taking out a loan on the property that\u2019s too much of an LTV. No, you could be at 50% LTV really low, but what if your life is over levered? You\u2019ve got massive car payments, you\u2019ve got a huge house payment that you can\u2019t afford. You\u2019ve got a ton of debt you never paid off. You\u2019ve got a lifestyle that other people are spending your money and you\u2019re not paying attention to it. You can have prudent investments but run your lifestyle in a way that isn\u2019t very disciplined and you can easily lose the assets because of what was going on on the other side.<\/p>\n
Yeah, for sure. I mean, I think speaking of the loan thing right now, another thing that probably a sticking point for a lot of people are bridge loans, or people that are flipping right now based on ARVs from six months ago that now that we\u2019re taking maybe a\u2026 I don\u2019t know what the correction is right now, but let\u2019s just say it\u2019s a 20 to 30% in the next six to 12 months if that\u2019s what it is. I don\u2019t know off the top of my head. But if that\u2019s what it is, then it\u2019s going to be a very tough to cash out and actually get your money back. Or if you\u2019re even just selling, if you already had razor thin margins and you were only going to pull 10 to $30,000 of profit on a really light remodel, the correction of prices and then the increase in interest rates might cause buyers to not want to buy your flip and thus you are in this hard money loan or bridge loan that you can\u2019t get out of.<\/p>\n
That\u2019s actually happening to me right now on several properties. So I went on a buying spree right before rates went up, and then they\u2019ve just continued to go up. So I\u2019ve got a couple properties, like pretty big rehabs on million dollar or several million properties in the Bay Area where I locked in a bridge loan for 12 months at something like nine, 10% interest. At the time, rates were four and a half, maybe five, but probably less. And rates have gone up so quickly that to refinance out of my bridge loan, which is a form of a hard money loan, my 30-year fixed loan will be higher than what the hard money loan was.
And I can\u2019t sell it because the values have gone down. They haven\u2019t like crashed, but they\u2019ve gone down less than where it was when I paid it because the rates have gone up so high.
So it is these perfect storms that we\u2019re talking about. I had a lot of exit plans, okay, buy the property, fix it up, the ARV should be here, I\u2019m going to get more than a hundred percent of my capital back out and I\u2019m going to have this great asset. Well now, the cash flow is significantly less because rates were at five and then they jumped up to 10 and a half for this particular property I\u2019ve got. And I can\u2019t exit it by selling when the market was just climbing, climbing, climbing because the prices have gone down and they\u2019re also in the middle of being newly renovated. So I have to finish the renovation.
And then of course, you get issues with the renovation, how long it takes, and then when you get permit issues that get popped up, new stuff just keeps starting to add on and you\u2019re not able to collect any revenue for the property. You\u2019re not able to sell the property and you got to keep putting money into it, until it\u2019s finished so that you can actually have something that could be rented out.
And then when it is rented out, you\u2019re not going to be making nearly as much as you planned because rates have gone up so much higher and you\u2019re not going to get all your money back, or as much money back because the value went down. This does happen in real estate.
And the thing that you got to understand is it could not have been predicted. We didn\u2019t know when rates were going to go up like this. We didn\u2019t know when COVID was going to happen. You can\u2019t know what\u2019s going to happen. And the flip side of it is when you let the fear of something going wrong create analysis paralysis and you do nothing, and you watch everyone around you making money.
So you\u2019re in a position where there is no risk-free move. You\u2019re either going to lose out by not taking action or you\u2019re going to take action like I did and you\u2019re not going to get the result that you wanted. The only way that you mitigate that is that you don\u2019t look at what\u2019s happening in the immediate future. You look at what\u2019s happening in the long term. I did certain things well, I bought them in locations that are guaranteed to appreciate much more than everything else around them, grade A locations, right.
I created additional units in these properties, so my cash flow will be more than a comparable property would be worth. At some point, rates will go down, I\u2019ll be able to refinance and I\u2019ll be able to get back to the numbers that I originally thought. It\u2019s really just time that I lost. I thought I was going to be making a certain amount of money in six months, maybe it\u2019s going to be two and a half, three, four years, hopefully less, but it could be that long before I end up making that money. So I just lost time.
But there\u2019s still like, what if I\u2019d have bought these in terrible locations? Oh, there\u2019d be nothing I could do right now. You\u2019d just be screwed, right? So the principles of real estate, this is where they come from, is we are planning for the worst case scenario. Did I think rates were going to go from five to 10 and a half for me? No. Did I ever think I\u2019d refinance into a 30-year fix that was more than the hard money loan that I used to start the rehab? No. Did I think that the ARV would drop that significantly because the rates went up so high. On a $2 million house, if rates double, it hurts the value a whole lot more than a $200,000 house. No, I didn\u2019t think any of those things. But what you do with your money and how you can struct your portfolio will allow you to survive those times.<\/p>\n
Well let me ask you this, just out of curiosity. When you go to refi those homes, you were saying you may not get the full\u2026 you may not get all your cash back, you\u2019ll just leave cash in the deal in the house\/<\/p>\n
Yeah.<\/p>\n
So it\u2019s just energy that\u2019s staying in the house, right, if you will. Yeah. I hate to use this against you, but in the Burr Bible you do talk about this a lot where people go and they rehab the house and for them, they want to get all their money back, but they may only be able to get 80% of their money back and they have to leave 20% in the deal and it\u2019s like, \u201cOh, too bad.\u201d Now you just have locked net worth into a home or whatever.
So I think at the end of the day, as long as you\u2019re looking at it from a long-term perspective, you aren\u2019t really losing\u2026 It\u2019s hard to lose in real estate on a 20 to 30-year cycle, if you\u2019re actually holding onto your assets.<\/p>\n
Almost impossible.<\/p>\n
Yeah.<\/p>\n
That\u2019s exactly right. And that\u2019s what we\u2019re pointing out, is what I lost was time. I thought I was going to be at a certain point in my timeline sooner, and I didn\u2019t. But I gained a bunch of time on the stuff I bought in the last eight years because inflation was so wild and rent increases were so crazy, that I got to where I should have been in 20 to 25 years in five.
I have some properties that I bought in 2013 that the rents have more than doubled. So a property, a fourplex is the one I use a lot. I bought it at rents for 700. Now rents are at like 1750, 1850 depending on which unit. That shouldn\u2019t have happened for 20 or 30 years. That happened to me in eight or nine years. So I gained a lot of time on those deals. And on these ones where the market turned on around on me quickly, I\u2019ve lost some time.
But yes, as long as you hold it for long enough, you\u2019ll be okay if you\u2019re following the right principles. But it\u2019s not fun. Part of why we want to make this episode is so other people hear it. You\u2019re not the only ones going through this. When the market shifts that rapidly and that unexpectedly, the rug is pulled out from underneath you, you don\u2019t know which way you\u2019re going to fall.<\/p>\n
For sure. Well, I guess on that note, I sort of wanted to talk about how liquid you can be with your portfolio to triage any major changes in the economy. Do you have liquidity in your overall portfolio to be able to exit? Because I know that this is something that probably a lot of people are going to have to face in the next year. They could be in the middle of loans, they could be in the middle of refinances, they can have a bunch of homes, they may have lost their job and they\u2019re going to need money.
So through triage, what level of priority can you basically assign different homes? Can you get rid of them? What\u2019s your flexibility right now with your overall portfolio?<\/p>\n
That\u2019s good. My problems are based off of acquiring too many properties too quickly. Everything I\u2019m doing is from the acquisition problems, the rehabs, the permitting issues. All the properties already owned are fine. So that\u2019s just one thing I want to\u2026 I don\u2019t want everyone hearing this to get scared and say, \u201cOh, David can\u2019t even make it in this market.\u201d Well if you bought 20 short-term rentals in a four-month period, anybody\u2019s going to have some problems if everything doesn\u2019t go perfect. So I just bought a lot of properties and hit the perfect storm at the same time that\u2019s a problem.
As far as the properties that you already own, the question of, well how much liquidity do you want to, or equity do you want to keep in those properties? It depends on how much energy you\u2019re keeping in your bank account. There\u2019s a balance there.
So some people don\u2019t keep very much energy in the property itself, so they don\u2019t have a lot of equity, but that\u2019s okay because they keep a whole bunch of energy in their bank accounts through the form of cash liquidity. So they\u2019re fine. They don\u2019t have to ever sell a property. If you\u2019re somebody who\u2019s thinking, \u201cI don\u2019t want to have a lot of cash on the bank, I want to just put it all in the properties,\u201d maybe you\u2019re the kind of person that likes to pay stuff off, so you feel good knowing, \u201cOh, my loan to value is only at 30%. I\u2019m safe, I can sell.\u201d Well that\u2019s a person that can sell the property. But in order to access that energy, you have to sell. And I don\u2019t ever like to sell in a buyer\u2019s market. I don\u2019t want to ever sell a property unless it benefits me to sell it.
The reason I don\u2019t like the strategy of keeping your energy in the house instead of in the bank is the only way to access it is either to refinance it or to sell it or to get a HELOC, some form of that. And if values are down, meaning I don\u2019t want to sell, rates are probably up, meaning I don\u2019t want to refinance. There isn\u2019t really a great scenario there, which is why I\u2019m frequently confronting this belief that having your house paid down or paid off is not as safe as you think. I prefer to keep that money in the bank where I can use it for other things, or I can just make payments for longer.
So some people will have 300 grand in the bank and say, \u201cDavid, I want to put 250 grand of this to pay down my $500,000 loan to a $250,000 loan.\u201d I\u2019m like, \u201cOkay, so if you somehow lost the tenant and you couldn\u2019t make the payment, wouldn\u2019t you rather have $250,000 in the bank to make payments for nine years if you had to, than dumping it all into the house and cutting yourself really thin when it comes to your ability to make your note payments?<\/p>\n
Yes. Dude, I struggle with this one a lot. I\u2019ll be honest. I know that the rule of thumb is always leverage and use other people\u2019s money and all that kind of stuff. I am very much for that. Hey, let\u2019s leverage, let\u2019s use that to scale, use the bank\u2019s money, right? But I am starting to feel a little bit more towards at least having your\u2026 if you could work towards having your primary paid off, that\u2019s always going to be a\u2026 it\u2019s a savings account that you have in case if you lose everything, you don\u2019t have to pay a mortgage and you can stay in your house.
I kind of don\u2019t hate that. You know what I mean? And if you really need to, eventually you can take a HELOC out. So I just think it\u2019s personal preference there. I don\u2019t say do that with your investment properties, but with your primary, I think there\u2019s a little bit of comfort knowing I\u2019m sitting on a half a million dollars of equity that if I ever really need to, I can take it.<\/p>\n
But you wouldn\u2019t feel that same comfort having a half a million dollars in the bank?<\/p>\n
Not really, no. It\u2019s actually pretty stressful.<\/p>\n
Is that because you\u2019d be tempted to spend it?<\/p>\n
Not even that, dude. I mean I have cash in my accounts right now and I don\u2019t like it. Because I just see it withering away, the value of it. And also I\u2019m always\u2026 I don\u2019t know, it\u2019s inconvenient to move it around and to wire it to other bank, then the FDIC insurance, all that kind of stuff. I don\u2019t know. I\u2019m just like, yeah, it\u2019s nice to have it. It almost feels good. But then it also is a reminder of all the employees that I have to pay to. I don\u2019t know, this isn\u2019t really real. This is more [inaudible 00:34:25]-<\/p>\n
No, but that\u2019s how human beings\u2026 this is our relationship with money and energy that we\u2019re talking about right now. It\u2019s very real. It doesn\u2019t make logical sense why you feel that way, but who cares, because that\u2019s how you\u2019re going to make your decisions. You\u2019re going to see it. It\u2019s going to cause you to have some stress.
And so I think this is part of the reason that you and I always want to feel like we\u2019re broke. Because, the minute you feel like you\u2019re rich, you start making decisions like money isn\u2019t valuable, you start to lose respect for it. You\u2019re just start spending it on things easily or letting people stay on the payroll that aren\u2019t doing a good job or paying more than you had to for the house because you have the money.
When you always feel some form of broke or at least disciplined or a little financially stressed in a small way, you value the money a lot more. You treat it with more respect because you don\u2019t have as much. I think that\u2019s probably what you\u2019re getting at.<\/p>\n
Definitely. So with that, how much money do you have in your bank account? No, I\u2019m just kidding. All right. So I actually wanted to talk about the liquidity of my portfolio. Theoretically, a lot of my portfolio is actually pretty liquid. I have so much equity because I\u2019ve purchased over the past five years and I\u2019ve never really sold.
So I bought a house in Sevierville, Gatlinburg, Tennessee a year and a half, two years ago. I think I bought it for 500, thing gets in the 808 and 850 range. Lot of equity there. I bought a house for 300 that\u2019s worth 550, 600. I\u2019ve got all these houses that have six figures of equity. Almost every single one of the houses that I own have either six figures or multiple six figures of equity. And that\u2019s not because I\u2019m a genius, it\u2019s just because I\u2019ve purchased consistently.
And so if I really needed to sell, I could sell right now in a buyer\u2019s market. Would I lose money for my equity? Maybe. But I still have the equity so it doesn\u2019t\u2026 In my mind I\u2019m like, all right, my tiny house in Joshua Tree, I built it for 165K. Whether I sell it for 300 or 350 doesn\u2019t really matter to me, because the amount of equity that I\u2019ve built, it\u2019s obviously I want as much money as possible, but if I had to lose it 50K because of the market, that\u2019s fine. The money is all play\u2026 like Monopoly money anyways. I\u2019ve never realized it and so it\u2019s not even mine. That\u2019s how I kind of think about it.
So I would say the majority of my portfolio is like that, other than some of the more recent purchases, like our Scottsdale house. We bought that for 3.25 million. We have 20% equity in it from the down payment that we put on it. But if we try to sell it right now, well, I don\u2019t know, maybe it would do okay, but with the, I mean the 6% in realtor fees would really cut into really a lot of that money for us. So overall, I feel pretty safe being able to sell my portfolio if I had to, but I don\u2019t really want to.<\/p>\n
And you don\u2019t ever want to be in a position where you do have to. You always want to be selling because it makes sense for you to sell. The leverage is on your side, if you\u2019re going to sell.
And then selling is a complicated event in itself because you\u2019re probably going to have taxes on that money you made and you\u2019re going to want to do a 1031. So if you sell this house, do you have a place you can put the money or that you want to put the money? Is it going to create more stress in your life than it wouldn\u2019t if you had just kept the property?
But constructing your portfolio itself so that you\u2019re in a place where you never have to sell, I feel like is more than half the battle. The actual properties that you choose and the way that they work with each other is a pretty important component to making sure that you\u2019re never in a position that you have to sell when you don\u2019t want to. So what are some of the things that you\u2019ve done, Rob, up to this point to maybe diversify what that portfolio looks like or buy different types of assets that will cover for you, so you don\u2019t get in that position where, \u201cOh man, business didn\u2019t go as well as I wanted the last couple months. I have to sell something.\u201d<\/p>\n
So I am a big fan in diversification, even just with\u2026 I\u2019m obviously mostly, if not all short\u2026 Well, yeah, short-term rentals are midterm rentals right now. But I\u2019m a big fan of diversification. I\u2019ve got 35 doors across the country, all right. I\u2019ve got a couple in California. I\u2019ve got one in\u2026 Well, I got a couple in Arizona, a couple in Tennessee, a couple in Texas, one in Wisconsin, several in West Virginia, 20 in New York.
So I\u2019m all over the map. And people are always like, \u201cWhy would you do that to yourself? Isn\u2019t it hard to hire your Avengers?\u201d But for me, what I\u2019ve found is I like to diversify across the country to combat seasonality. And this is something you talk about quite a bit too with portfolio architecture, which I want to get into here in a second. But for me, I have sort of staggered so many of my short-term rentals at different personalities that I\u2019m never really hurting in one specific month.
I\u2019ll give you a good example. If you buy a beach house and you close in May, you\u2019re going to feel like a genius because you\u2019re going to crush it from May to August. You\u2019re going to be like, \u201cOh my god, I\u2019m the smartest real estate investor that\u2019s ever lived. I\u2019m going to make half a million dollars on this house.\u201d And then September rolls around and you\u2019re like, \u201cOh, I am broke and I didn\u2019t save any of my money,\u201d right?
So to combat this, you have to understand that beach markets, for example, are highly seasonal and they only crush it for three months out of the year. Meaning that if you were going to pick up another property, you probably don\u2019t want to do another beach property or else you\u2019re only ever going to make money for three months out of the year. So what you would want to do is find another property that maybe for nine months out of the year, staggering it with the other three months, is actually making cash flow so that you always have money coming in.
And so this is something that I actually specifically experienced with, in a good way\u2026 or I\u2019ve learned it really in a good way, like our Scottsdale property. We bought a 6,000 square foot mansion in the desert, enclosed in June when nobody goes to Scottsdale. And basically from June to November, I wouldn\u2019t say it was crickets, but October was okay, November was a little slow. And it\u2019s like, oh man, if anybody else that was not prepared for this stepped into a $17,500 mortgage payment, they would be hurting. They\u2019d be like, \u201cOh my god, I\u2019m going to go bankrupt.\u201d But because the rest of my 35 units basically crush it, they\u2019re all staggered throughout the year, it was no big deal.
And now we\u2019re getting into December, we\u2019re halfway booked, and then we just got a $7,000 reservation yesterday for January for five days, a $7,000 reservation. And that\u2019s just one of the ones that came in. And now in January, we\u2019re charging like 1500 to $2,200 a night. And now it\u2019s like, \u201cOh, okay. Yeah, great. Note to self, buy a luxury property in peak season so that you\u2019re not eating that mortgage payment for six months out of the year.\u201d However, you and I were able to weather that storm because we have relatively diversified portfolios.<\/p>\n
That\u2019s a very good example of portfolio architecture. You\u2019ve got seasonality in short-term rentals. And it\u2019s important because of the mental game. And like you mentioned, a lot of people spend the money that comes from their rentals because they replace their W2 income and you spend W2 income. So why wouldn\u2019t you spend your passive income from real estate?
The problem is with traditional rentals, they lined up very, very closely, very well with the way that you manage your personal finances. So you get paid every month or every two weeks. And so you say, \u201cI make X amount of money a month.\u2019 Then your bills are all set up on a monthly thing. \u201cI pay every month this many bills so I can put a budget together based on a month.\u201d Well, if the tenant pays the same rent every single month, that fits in really nicely because you\u2019re making a mortgage payment every single month.
Well, short-term rentals, screw this whole thing up because you can\u2019t look at what you make in a month. We look at what they make in a year, because not every month\u2019s the same. And so if you spend your money, oh, it\u2019s so easy to get caught off guard, like you said, thinking that you\u2019re crashing it, you\u2019re doing amazing, now you\u2019re dumping money into the property, maybe you shouldn\u2019t be, or you\u2019re spending more money than you should be. You\u2019re justifying expensive trips to the property for stuff that don\u2019t really have to happen because the money\u2019s rolling in, and then you hit those winter months and it gets really bad, you\u2019re losing money and now you\u2019re feeling really bad. Your emotions are tanking versus, like you said, if you can get one that offsets the other, you never really have those huge spike, climbs up and the huge spikes down.
Another way that I think that the Scottsdale mansion worked out in a sense of portfolio architecture was that we knew we were not going to make a lot of money when we first bought it. I think we planned to more or less try to break even the first 18 to 24 months. And part of that was because we had to dump so much money into the property to get it ready. And also, we knew we weren\u2019t going to know what goes wrong. We got to figure out a new market.
You can do that when your existing portfolio is cash flow solid. You can\u2019t do that if this is the only property that you\u2019re buying, this is the only one coming into your portfolio, you don\u2019t have a ton of money, you would lose the property. We also bought this house with a long-term horizon.
We\u2019re like, \u201cWe\u2019re buying this whole thing for less than what the land itself would cost if we just bought land.\u201d Okay, but we\u2019re probably not going to realize that value for five to 10 years down the road. This was an area that we know we really like Scottsdale long-term, the type of people moving there, the way the economy is set up. We think that market\u2019s going to do incredibly well, but you don\u2019t have the luxury of cashing in 10 years down the line if you\u2019re barely making it right now. If you\u2019re like, \u201cI want to quit my W2 job, this would\u2019ve been a terrible house to buy.\u201d So the reason we were even been able to-<\/p>\n
At the time that we bought it, at the month that we bought it, yeah.<\/p>\n
But even if we had bought it during a time when people visit Scottsdale, we still\u2026 Like the pool heater, we have to go replace and the water heater break in and the sport court that needs to be done. You can still step into this a couple hundred thousand dollars in the hole that you weren\u2019t planning on when you\u2019re buying a house this big in a new area. We were able to, because the stuff we had bought previous to this was performing so well that it bought us the ability to basically give ourself a huge windfall in the future. This is like you put a hundred dollars in your coat pocket and then 10 years later, you come back and you\u2019re going to find out that it\u2019s a hundred thousand dollars. It\u2019s a kind of situation like that. But if you don\u2019t have money to live on, you can\u2019t put a hundred dollars in that coat pocket.<\/p>\n
Yeah, yeah, for sure. Yeah. And when I say the time that we bought it in, I meant more like we bought it in June versus January. So now I\u2019m starting to get to that point where I\u2019m like, \u201cOh, hey, we\u2019re smart. Look at us. Look at this $7,000 reservation or this $10,000 one,\u201d and now people are contacting us for events and all that kind of stuff. It\u2019s just a little bit of a slow trickle. But like you said, we sort of planned our portfolios accordingly. I would never tell anybody to go and buy a $3 million property unless they had the ability to actually endure any kind of road bumps. But also just the financial aspect of having a portfolio that can be pick up the slack for you.<\/p>\n
You also would never tell anybody to just keep on buying $40,000 houses in the Midwest till you have 700 of them. That doesn\u2019t work either, right? So there is a progression of how real estate investing should change. You started with training wheels or a tricycle, then you get into training wheels, then you get into a bike and you kind of move through asset classes as you\u2019re learning. Keeping that in mind as you\u2019re building your portfolio will help you to weather the storms of life that come.<\/p>\n
It\u2019s true. And just let me just say, you did ruin real estate\u2026 How do I say this? You did ruin this for me in that when I wanted to go and buy 10, $300,000 houses, you were like, \u201cWhy would you do that? That\u2019s a job. Go buy a $3 million house.\u201d And I was like, \u201cUgh.\u201d And then we bought it and I\u2019m like, \u201cOh yeah, I shouldn\u2019t buy these $300,000 houses anymore.\u201d And so now I don\u2019t.
So now it\u2019s like I see these deals come across my desk all the time and they\u2019re good deals, but as I\u2019ve learned from you, it\u2019s just not scalable to keep buying these onesies. And so now I\u2019m very selective about the swings that I take in a bigger scenario. Right now, I\u2019m trying to do 50 doors at a time or trying to do luxury properties, or trying to do things that are a lot more meaningful to my time. So I guess thank you on both ends of that. Thank you for ruining it for me, and thank you for transforming me.<\/p>\n
You were a cat and you were hunting mice and you were getting all of your caloric needs met from those mice. But my friend, you have grown into a lion and now mice are unbefitting of a lion of your stature and you are now chasing gazelles, as you should be.<\/p>\n
So David, when it comes to portfolio architecture, can you give us some of the, I don\u2019t know, some of the pillars or some of the criteria that goes into actually assembling your real estate portfolio?<\/p>\n
Yeah. So when you\u2019re looking at your portfolio as a whole, there\u2019s five things that I like to try to create some kind of balance because these are all ways that you build sustainable wealth that you\u2019ll actually enjoy. It\u2019s a form of building like a financial fortress that will stand no matter what gets thrown at it versus a 3D printed home that you can just throw up really quick and scale fast, but when the first storm hits, it\u2019s going to fall.
The first is equity. You want to have a lot of energy in that portfolio. Like you said, Rob, if you come on hard times, you can pull it out. This is where the big upside is in your portfolio. You\u2019re going to build your biggest wealth through the equity that you create holding real estate long term. So that\u2019s one of the first things that you want to think about.
The next is cash flow. You need cash flow, not just to replace your income, but also to make sure you can keep the property for a long time. Because cash flows are how you make sure you can make that payment, which allows equity to even take place, unless you stepped into equity right off the bat.
The next is liquidity. That\u2019s not just in the portfolio but in your life. You need to have reserves. That\u2019s a form of liquidity, money that you can tap into. Can you borrow out of a retirement plan? Do you have HELOC set up on property? If you\u2019re in a pinch, if you get a good opportunity, do you have money that you can turn to right off the bat to go acquire a new property, fix something that went wrong, improve a property, whatever the case may be, that\u2019s in the best health of your portfolio as a whole?
The next would be ease of ownership. You\u2019re never going to build a big portfolio that does well if you hate owning it. If you\u2019ve got 40 short-term rentals and you manage all of them yourself, you don\u2019t have ease of ownership. That\u2019s not something that you\u2019re going to enjoy. If you\u2019re buying properties in terrible neighborhoods, even if you\u2019re getting great deals, you end up hating owning it and you\u2019re not going to grow up big. You\u2019re not going to get that equity or that cash flow. So you can have a handful of problem children in your portfolio. Sometimes they\u2019re worth it, but it can\u2019t be something where the majority of your portfolio is something you don\u2019t like owning.
And you do have to consider that when you\u2019re building. And the last would be scalability. Are you doing this in a way that you can keep scaling and you can keep going? Are you buying 10, $300,000 houses over and over and over? Well that sounds great on a podcast when we say, \u201cOh, you can borrow money from investors.\u201d And we kind of construct the entire organizational chart of where every piece goes and it sounds great to an engineer, they\u2019re like, \u201cThat works.\u201d But then when you actually try to execute the play that you just drew up, you realize you don\u2019t have the skills to do it or it doesn\u2019t work in practice, like it did in theory.
So scalability is a super important part of your portfolio as a whole. And oftentimes, that will mean thinning out some properties that are too difficult to scale and replacing them with properties that are easier or moving from one asset class to another as long as your other four requirements are being met.<\/p>\n
Yeah, yeah, yeah. So it sounds like really what we\u2019re looking for is a balance of a bunch of different things versus really going into one aspect and that makes sense. You asked me how I\u2019m diversifying and I said, \u201cWell hey, I diversify in location,\u201d but that\u2019s actually not just the only way I diversify when I\u2019m like building my portfolio. I\u2019m actually diversifying the types of units that I\u2019m listing on short-term rental platforms as well.
So yeah, I\u2019ve got them across Arizona, Texas, California, and New York. But I also have really cool units that I just like to have fun with. And sometimes I\u2019ll buy a unit just because it\u2019s a cool looking property. So I\u2019ve got tiny homes, I\u2019ve got yurts, I\u2019ve got Airstreams, I\u2019ve got chalets, I\u2019ve got cabins, I\u2019ve got mid-century modern cabins, I\u2019ve got condos, I\u2019ve got a little bit of everything.
And it\u2019s really because I like to appeal to all the different types of audiences out there. That way, I know if something is trendy or if it\u2019s just not as hot, which like a tiny house for example, people always love those. People don\u2019t want to stay at tiny houses in a year or two, as much as they did this year. Well then I have all these other types of properties to meet all of that. So for me, I\u2019m always looking for balance in my portfolio in the actual types of listings that I\u2019m creating and the experiences that I\u2019m serving up to people.<\/p>\n
That\u2019s it. You got to be thinking like that. And when everything\u2019s going great in the market, we don\u2019t think about diversification. We don\u2019t think about what if something goes wrong. We just think what\u2019s the easiest, fastest and funnest way to scale what we\u2019re doing. And that\u2019s how you can build yourself a treehouse. You could build those really quick. In a couple hours, you can have yourself a treehouse set up, but it\u2019s not how you build a fortress that\u2019s going to withstand the test of time.<\/p>\n
Well I\u2019ve been working on my treehouse village in Gatlinburg, Tennessee for about a year and a half now, but I just got the update on that today. And I actually think we\u2019re breaking ground in like a month and it\u2019s going to be four dome treehouses that are in the air, as I guess pretty standard for a treehouse, and then a tiny home, a tiny a-frame treehouse too. And so that also goes into how I\u2019m diversifying. I want to go more into unique stays. But yeah, just so that I understand kind of your parameters for portfolio architecture, I just wanted to recap it for the audience. We\u2019ve got equity, cash flow, liquidity, ease of ownership and scalability. Did I miss any? And with those five things, we want a good balance.<\/p>\n
That\u2019s it. And you want that\u2026 so each of those things should be making up for the weaknesses in the others.<\/p>\n
Okay, awesome. Well this has been really good. I regret to inform everybody that we rift so much on the first half of this that we\u2019re going to give you another\u2026 I guess, I don\u2019t regret, I am excited.<\/p>\n
No. Two shows.<\/p>\n
Yeah, we\u2019re giving you a part two of this where we get into some much juicier, maybe even profound questions. What are the actual challenges that we\u2019re going through in our businesses, some of the pitfalls? If we were to actually lose it all tomorrow, how would we rebuild our portfolio starting from scratch with $0? That will be on the next episode of BiggerPockets. I\u2019m really excited about it because I don\u2019t know if I have the answers yet, but we are going to find out what they are soon.<\/p>\n
It should be very fun. These what would you do if you started over questions are always some of my favorites, because it forces you to pull things out of yourself that you normally wouldn\u2019t have.<\/p>\n
That\u2019s what it\u2019s like every single time that you have your profound genius systems. And I\u2019m like, \u201cUh-oh. I know my answer is nothing like that.\u201d That\u2019s good. [inaudible 00:52:49]\u2026<\/p>\n
That\u2019s why I would [inaudible 00:52:50] second because I\u2019m a jerk.<\/p>\n
I know, I know.<\/p>\n
All right. Well, thank you, Rob. I appreciate some of the insights that you shared here and you also asked some really good questions, so thank you for that. I wouldn\u2019t be able to give good answers if I didn\u2019t get good questions.
And to you listeners, we hope you enjoyed this episode about all the things that can and do go wrong in real estate and what we do to mitigate that risk. In the next show, we are going to get into what we would do if we started over to help prepare for things going wrong, because wise investors don\u2019t prepare for everything to go right. They make plans for what they\u2019re going to do if things go wrong, and they prepare accordingly.
If you like this show, please do us a favor, give us a five-star review wherever you\u2019re listening to the actual podcast, whether that\u2019s Apple Podcast, Spotify, Stitcher, whatever\u2019s your favorite. Just take a quick second, and please give us that review so we can stay the top real estate podcast in the world. And if you\u2019ve got some time, listen to another one of our episodes. This is David Greene for Rob, has one t-shirt, Abasolo.<\/p>\n