\n
Ashley:
This is Real Estate Rookie, episode 254.<\/p>\n
Jake:
Yeah, I think another thing, not to just keep coming back to the networking idea, but finding out what other people are doing, that\u2019s a huge insight for me, is just continuing to talk to everybody in our group and seeing what everybody else is doing, educating yourself as much as possible. For those that are familiar with The Cromford Report, we follow that, they\u2019re very highly watching the Phoenix market in general. So just do your education, talk to people and just kind of stick the basics.<\/p>\n
Ashley:
My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.<\/p>\n
Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I want to start today\u2019s episode by shouting out someone from the Rookie audience. This person goes by the username, Mrs.WEXPAgent, but they left us a five-star review on Apple Podcast and the review says, \u201cFun and formative, and I learn so much about investing and what to avoid from Ashley and Tony. Thank you,\u201d with an exclamation mark. So if you haven\u2019t yet, please do leave us an honest rating review on Apple Podcast, Spotify, or whatever it is you\u2019re listening. The more reviews we get, the more folks we can help and that\u2019s always a goal here at the Real Estate Rookie Podcast.<\/p>\n
Ashley:
Tony, every time, I\u2019m so impressed that you just riff off that whole intro. All I have to do is say one line, is \u201cThis is the Real Estate Rookie Podcast,\u201d and the number.<\/p>\n
Tony:
And I just want to point out, she actually messed up on my name today. I was Tommy Robinson before the editors did their thing.<\/p>\n
Ashley:
Yeah, so we are live in Phoenix, we are recording in an Airbnb here with our producers. So much fun to be in person.<\/p>\n
Tony:
And I did a whole walkthrough so you guys can get my input on what my thoughts were on this Airbnb, so I should put that up on our stories.<\/p>\n
Ashley:
The toilet paper is not up to Tony\u2019s quality.<\/p>\n
Tony:
But it\u2019s a cool place. It\u2019s actually our first time in Arizona in general, really. Well, you said you\u2019ve been to-<\/p>\n
Ashley:
I\u2019ve been here.<\/p>\n
Tony:
It\u2019s my first time in the Phoenix area, other than a layover, and it\u2019s cool. I\u2019m excited to meet some folks tonight and see what the- [inaudible 00:01:58]<\/p>\n
Ashley:
Yeah, we\u2019re going to a meet up here tonight and we\u2019re really excited. We\u2019re doing a live podcast recording, we\u2019re bringing on some guests, and one of those guests is Jake Kain. So we\u2019re going to hear a little bit about his story. He is a local investor here in Phoenix and he\u2019s going to help us do some Rookie Reply questions.<\/p>\n
Tony:
Yeah. And it\u2019s really cool, Jake\u2019s had a great story. He\u2019s got this really cool superpower of his, of getting people together. So we\u2019ll talk about how he\u2019s doing that and then, we\u2019ll get into some reply questions. So we\u2019ll talk a little bit about what happens if you\u2019re flipping houses and can you use that income to buy your property. We talk about what to do if you\u2019ve got offers out on multiple properties and how to handle that, and a few other great questions as well.<\/p>\n
Ashley:
Jake, welcome to the show.<\/p>\n
Jake:
Thank you. Appreciate it.<\/p>\n
Ashley:
Please tell everyone a little bit about yourself and how you got started in real estate.<\/p>\n
Jake:
Yeah, so actually, it was around 2015, 2016, and I was working at W2 in the civil engineering field. I was actually in my ninth year, final year of my contract with Arizona Army National Guards. So I was kind of going through a pivotal moment of just trying to figure out what was next for me. And luckily, I had a buddy of mine that was kind of in a similar situation. And so, we were just kind of talking and he introduced me to BiggerPockets and the rest is history.<\/p>\n
Tony:
I mean, in Arizona, Phoenix is an inexpensive market, but you found kind of a strategy that\u2019s allowed you to add multiple properties in this market. So can you walk the listeners through that?<\/p>\n
Jake:
Yeah, so we, and by we, I mean my wife and I, I had a house that, when I found BiggerPockets about it in 2014, so I used my VA loan. We were already living in the home as I was kind of joking earlier, I was just bachelor patting it up and when she moved in with me, she was kind of like, \u201cWe\u2019re fixing this up, this isn\u2019t happening anymore.\u201d So that was our starting point. Fixed it up, sold that one, and that kind of gave the financial runway to get started. But that also was kind of our catalyst for, hey, we can really use this live and flip idea, and we just started growing from there.<\/p>\n
Tony:
So as you think about what you\u2019ve built, you\u2019ve also stepped into the world of being an agent, now you\u2019re an investor. Pace and Jamil talked about this a little bit already, but just what\u2019s your quick insight on the market both from the agent side and as an investor?<\/p>\n
Jake:
So I think Jamil kind of touched on it. It\u2019s just obviously knowing your numbers, being more conservative, watching the market. I think another thing, not to just keep coming back to the networking idea, but finding out what other people are doing. That\u2019s a huge insight for me is just continuing to talk to everybody in our group and seeing what everybody else is doing, educating yourself as much as possible. For those that are familiar with the Cromford Report, we follow that. They\u2019re very highly watching the Phoenix market in general. So just do your education, talk to people and just stick the basics.<\/p>\n
Ashley:
Where do you see yourself going in the next five years? What is your long-term goal for real estate investing?<\/p>\n
Jake:
My mom\u2019s retiring in four years, so that\u2019s like a non-negotiable, so we\u2019re just continuing to scale. We\u2019re about to turn one of our long-term rentals into our first short-term rental. We really believe in the small multi-family game, maybe scaling up to some larger multi-family. But just growing our portfolio and really getting that cash flow to, I think Alex said, is just choose to work and not have to work.<\/p>\n
Tony:
So what\u2019s your advice? Because there\u2019s quite a few people in the crowd right now that don\u2019t have any deals. Just by show hand, who here is a complete rookie still working on that first deal? Clap it up for these guys for coming out, because that\u2019s always a hard spot to be in. So it\u2019s all those people that just raise their hands, what\u2019s your advice to them on what they should be doing to get started?<\/p>\n
Jake:
Alex already kind of touched on it, but take action, network, come out to these events. For me, it was kind of lonely. When you\u2019re in your circle of friends, you might be the only one that\u2019s excited about real estate, kind of getting into that uncharted water. So come to events, get around people that are doing what you want to do and plug into them. Bring them value, that way they can pour back into you and just keep networking and taking action. It might not be perfect, but just keep moving forward.<\/p>\n
Ashley:
Okay, awesome. And we have a question from the audience. \u201cI am a brand-new investor. I have enough funds to put 20 to 25% down on two to four properties. Would you recommend starting with one to two single family or going straight into multi-family if the numbers work?\u201d<\/p>\n
Jake:
That\u2019s a good question. I think it totally depends on your personality, also your comfortability with being a landlord, so it sounds like a first deal.<\/p>\n
Ashley:
Yeah, brand investor. Yep.<\/p>\n
Jake:
Yeah, so I mean, it\u2019s hard to say, but if it\u2019s your personality, if you\u2019re okay with just kind of the shotgun approach, I say go multi-family. We scaled up to multi-family. We started with single family, but I think it ultimately just depends on the personality and if you\u2019re okay with just jumping in and figuring it out, I think that\u2019s the way to go. That\u2019s the way I would go, but I also wouldn\u2019t get too caught up on, I don\u2019t know if this was the question or not, but getting too many deals right away. Just start, get one, figure it out and scale to the next one and just kind of grow from there.<\/p>\n
Ashley:
I think that\u2019s great advice, is don\u2019t get stuck in that analysis paralysis as to what is going to give me the best return. If it\u2019s going to give you a return and the deal worse, just take action on it. Okay, so now we\u2019re going to get into our Rookie replies. Our first question is from Tatiana Turner. \u201cI\u2019m curious to see how everyone handles if there are a few good properties for sale, but you know can only afford to buy one of them. The reason I am asking is because we made an offer on a condo 10K above asking price no contingencies. While we were waiting for a response, there was another great deal on a HUD home, but I decided not to make an offer on it as we are waiting to hear back from the condo. Fast forward to now, we didn\u2019t win our bid on the condo, nor did we get a HUD home because a day before someone made an offer on it. I am curious if it\u2019s possible to make few offers on different properties and then, back out using due diligence period, or is this not a recommended practice?\u201d
Okay. So first I just want to clarify before we go into the question what a HUD home is. So it\u2019s the Housing and Urban Development organization and it\u2019s where they take properties and when you purchase these properties from HUD, they usually go through a period where it\u2019s only owner occupied can purchase the property. So you must live there for a certain amount of time. And then, if nobody purchases the property during that window of time, then it gets opened up to investors where they can purchase the property. The reason behind this is that they want people to fix up the property, live into it, and not just have those properties sold to investors. So Jake, what is your recommendation on this as to putting in different properties, backing out?<\/p>\n
Jake:
I would suggest that honestly, if you were the intention to buy multiple properties, then I don\u2019t see an issue with it. However, if your intention is to only buy one property, then I would probably recommend you not go that route just because it\u2019s kind of just an ethical kind of way of doing business. If I had a client that wanted to do that, I would probably talk to them a little bit about maybe tiptoeing around that.<\/p>\n
Tony:
Yeah, so that actually happened to me when I bought my first deal. So my very first real estate investment, it happened almost the exact same way. I put in an offer on a property. I think this one was a probate or some other thing that I took, I think it was a short sale and those take months to get approvals or whatever. So I submitted an offer on the short sale, never heard back. So I\u2019m just still out there submitting offers, looking for that next deal, and I end up finding a property. The offer gets accepted and then, literally maybe two or three days later, that short sale comes back and Hey, your offer was accepted as well. I didn\u2019t have the DTI or the capital or actually it was a good loan. I didn\u2019t have the DTI to get approved for both of those loans.
So what I did was I found a partner and that was what prompted me into my first partnership was I got this great deal, but I can\u2019t take it down by myself. Do you want to join me? And if it really is a good deal, if you have this HUD home, that was a fantastic deal. Even if that first one got approved, if you could bring someone else in to take that HUD home with you, I\u2019ve got two deals under your belt instead of one.<\/p>\n
Ashley:
Yeah. What I think about this is maybe when you are putting in offers is put, the offer is good until date. So this way the seller cannot just take their time, make you wait forever. So when we do a letter of intent on commercial properties, we put that this offer is good until a certain date and time. So if you are afraid of running into this situation again, put that your offer is only valid for the next 24 hours or something like that too, is another way you could kind of handle it.<\/p>\n
Tony:
Yeah, I think the other piece too is really\u2026 And obviously you don\u2019t want to make it habit of doing this, but it depends on how you initially set up the offer. Sometimes when you submit an offer to a seller, you actually fill out the purchase agreement. And then, when you get it back, it\u2019s just the countersigned purchase agreement. Now you guys are officially in escrow. Other times it\u2019s your agent just kind of reaching out to them saying, \u201cHey, here\u2019s what our offer is.\u201d Almost like a letter of intent like what you talk about Ashley. And if it\u2019s a verbal-<\/p>\n
Ashley:
A verbal offer.<\/p>\n
Tony:
If it\u2019s just a verbal offer, even if they come back and say yes, you haven\u2019t contractually gotten yourself into anything. And if you\u2019re really in a pickle, even if you have signed that purchase agreement, if you have another better deal that came in that took the place of this deal because the waiting period was so long and you don\u2019t submit your EMD, typically that that\u2019s going to cancel the contract anyway. So there are ways to step backwards.<\/p>\n
Ashley:
And in New York state too, you have to use attorneys for closing and there\u2019s always an attorney approval before you\u2019d even do your inspection period or submit your earnest money. So that would be another period where you could back out if they did take too long to come back to you and you found another deal.<\/p>\n
Jake:
I was just going to say that for my answer, I think I would have to have two parts to it because I have a realtor answer and then, I have an investor answer.<\/p>\n
Tony:
Sure. We\u2019re listening.<\/p>\n
Jake:
My realtor answer is pretty much what I said, be careful with it. Obviously, there\u2019s codes of ethics and everything, but as an investor you also have to do what you have to do and sometimes it gets a little\u2026 But there\u2019s some gray areas that you can take advantage of.<\/p>\n
Ashley:
Okay, so for our next Rookie Reply question, this question comes from Kyle Moore. Remember, if you guys want to submit a question, you can post it into the Real Estate Rookie Facebook Group. You can send a DM to Tony or I on Instagram and we may add it onto the show and answer it for you. Okay, so Kyle\u2019s question is, \u201cHow do lenders treat house flipping income? Let\u2019s say I made 50K last year from flipping and reported all of it on my taxes. Do lenders consider this 50K into my debt-to-income ratio when deciding how much of a loan I can qualify for?\u201d<\/p>\n
Jake:
Just from my experience, if you\u2019re running your flipping business like a business and you\u2019re calculating that as business income and you can show the past two years of tax returns of that is your business income, then I would understand that it would be considered part of your DTI.<\/p>\n
Tony:
Yeah, I understand as well.<\/p>\n
Ashley:
It\u2019s income and you\u2019re reporting it on your taxes. So it would be included in your debt-to-income ratio-<\/p>\n
Tony:
But to your point, you want to see at least a couple years. And I think some lenders, even if maybe that flipping income wasn\u2019t part of both years, so you just had rental income in year one and then you added the flipping income in year two, they would take an average of both those years, something like that. All right. So just one other thing to add on to this, Kyle, and this is maybe more advanced in what we need to get into, but maybe it\u2019s worth sharing. So we\u2019re talking a lot with our CPA right now around how to manage the income coming into our business from our flips. So we have rental income, which is considered more passive, so we get taxed way higher on our flipping income that gets as active than we do on our rental income. So what we\u2019ve set up in our business is a separate LLC.
So we have Alpha Geek Capital, which holds all of our short-term rentals. Then we have agency AGC home buyers which does all of our flipping. And in that flipping entity, all the flips are handled inside of there. And then, we essentially are invoicing our rental entity to our flipping entity for the work that we\u2019re doing for managing those projects. And I\u2019m not a CPA, so don\u2019t ask me why we\u2019re doing that, but there\u2019s some way that we\u2019re saving on self-employment taxes by doing it that way and kind of keeping everything separate. So if flipping is going to be a big part of what you\u2019re doing, there\u2019s definitely a financial incentive for you to separate it out as its own thing, and that way you can save on the self-employment taxes.<\/p>\n
Ashley:
For our next question, it comes from Dwight Goldson. \u201cHow do you guys go about finding a contractor that will show up when you are ready to start swinging hammers? I have contacted a number of contractors using my own home def project as the litmus test. I get a number of contractors that have not shown up, never given estimate or give estimates with only a final number and no details about the job. Estimates that aren\u2019t going to pass the test when using hard money loans and draw request, what am I doing wrong? What are you doing right?\u201d He must be talking to you, Tony, because I am not doing anything in closer hands.
So real quick, actually when I did a Rookie Bootcamp call, I had somebody that was saying her husband was a contractor, and the reason they don\u2019t give detailed estimates is because it is so time consuming. She said, \u201cBut if somebody offers to pay him to do that detailed estimate without knowing for sure if they\u2019re going to get the job or not, then he will do it.\u201d But she had said that was the main reason, so first thing is maybe offering to pay the contractors a fee to actually do the detailed estimate.<\/p>\n
Jake:
I just want to piggyback off of that because honestly, sometimes obviously you want to get an estimate, you want to get a detailed scope of work. But also, we\u2019ve had a contractor that was too attentive, they were texting us too much, giving us too much information, which ended up being a red flag and he didn\u2019t show up. So I think it kind of goes both ways. To me, I almost see it as a sign that if you\u2019re having a little bit of a hard time getting stuff out of your contractor, they\u2019re busy. It\u2019s probably somebody that\u2019s at least somewhere to start.<\/p>\n
Tony:
That\u2019s a great point. And I think the last couple of years that\u2019s what we\u2019ve seen where all the good contractors have been super busy. So if you do find a contractor that just has nothing to do, that could also be a red flag, and that\u2019s literally what happened to us. So we have our main crew that we work with, but he was I think at that point managing four rehabs for us and I was like his capacity. So we had to find another, we had a decision, we could either wait for him to finish one of those jobs, which is going to be another six to eight weeks, or we go out and find another crew to take on this job so they could start on day one. We went with the ladder option where we found another crew, they were free, and I was like, great.
They were like, we can start tomorrow. I was perfect. Turns out that was a bad decision for us because the quality of work, the relationship, just everything wasn\u2019t there. So we initially paid them to start the job. Luckily we only gave them, I think a 25% deposit upfront to get started. We had to pay them to start and then, we had to stop them because it was just too much of a headache to manage them. So then we had to pay our other crew to come in and finish the job and the job end up taking even longer.<\/p>\n
Ashley:
And probably to correct what they had done wrong.<\/p>\n
Tony:
Yeah, it was just so many different things. So sometimes it is better for the property to sit vacant for a month if you can get a crew in there that she know is going to do the job versus having someone that can start on day one that you know got to correct their work, you got to bring another crew in and it ends up costing more money in the long run.<\/p>\n
Ashley:
And another thing that we actually started doing is building our own scope of work and then, having the contractors build their price off of that. So they go in and can fill in, here\u2019s the bathroom, the different pieces of bathroom, this is how much it\u2019ll cost. Things like that. Instead of them having to do the line detail, we\u2019re telling them what we want out of it and kind of building it that way and then they just fill in the blanks.<\/p>\n
Jake:
I think probably the obvious answer too is just going back to just finding the contractor, I think would be obviously asking your network and asking for referrals from other investors that are doing what you want to do or finding your unique strength or your unique advantage. The one thing for us was my wife worked in commercial general contracting. And so, we basically made relationships with guys on her job sites and they would either come do side work for us or they knew somebody that did it that could help us out. So that might not be Dwight\u2019s situation, but that could be somebody else\u2019s situation or that kind of gets that creative flow of figuring out other ways of finding people.<\/p>\n
Ashley:
That is a great point because my newest business partner that I took on last year, half of the contractors that we use now, maybe even more, are from his network. He worked construction, he did Mason work on big buildings and just having those relationships with other people that were working on the job site too.<\/p>\n
Tony:
Let me ask this, if you\u2019re going into a new market, you knew no one, what would you do to find that crew?<\/p>\n
Ashley:
The first thing I would do is join the Busy Bee Neighborly Facebook Group, because at least where we invest now that\u2019s half of the posts are about I need this work done, then people will comment all of their referrals from that. And then, I guess, whoever else I\u2019m building my team off of, ask for recommendations, agents, even lenders.<\/p>\n
Jake:
That that\u2019s exactly what we did. So we just did a flip this year down in Casa Grande, which is about an hour south of here, and we had no contacts down there. So I mean we were close enough to where we could head down there ourselves, but we had to kind of, I call it our training wheels flip out of state flip because it\u2019s far enough away where we didn\u2019t want to be down there, but if things really hit the fan, we could head down there. But we did exactly that. I called an agent that I had a previous relationship with and I knew he was working that market and I just said, \u201cHey, we had a guy bail, who do you have?\u201d And I just kind of started there.<\/p>\n
Tony:
Yeah, exactly. Those two things, like the referrals and the Facebook groups I think are such an underserved place to go. The BiggerPockets forms another great place. So I think finding that community of where people are hanging out in that city and then, trying to infiltrate that and find those recommendations.<\/p>\n
Ashley:
The hardest part is getting other investors to give up who the contractors are that you use. That\u2019s why you got to go to the Facebook groups who are just people with their primary residents where they got the remodel done, they\u2019re happy and they don\u2019t need any other project done.<\/p>\n
Tony:
But if it\u2019s flipper who\u2019s like, this is their bread and butter. They\u2019re going to be like, I actually do all my flips myself. I do all the work myself. There is no contractor.<\/p>\n
Ashley:
Okay, so our last question today comes from Julian Beaks. \u201cHi, I\u2019m looking to purchase my first property in the northwest Indiana region, but the problem I\u2019m running into is whether it\u2019ll be better to flip or fix up a rental. My question is how do you determine whether it\u2019ll be better to flip or have rentals in your area? Where is the best place to find information needed to make this decision?\u201d<\/p>\n
Tony:
Yeah, I can talk about this because we have a flip right now that we\u2019re literally having this discussion on. I think a lot of it comes down to, okay, so first let me say part of it is like do you need the capital? So we sold some flips we did last year, some turnkey short term rentals because we needed that capital to fund purchases of other properties that we felt were better investments for us at the time. So I\u2019ve been talking about this cabin that were closing on with the indoor pool. We funded that purchase by selling turnkey short term rentals in Joshua Tree. But that pool cabin in Tennessee is probably going to produce more revenue than those properties that we sold in Joshua Tree because it\u2019s got an indoor pool and it\u2019s brand new and all these other things. So I think that\u2019s the first thing is do you need the capital, and what\u2019s the best use of that capital?
I think the second thing that we look at is if we were to keep this as a rental, how will they cash flow compared to the capital that we could make? So given where interest rates are right now, how much margin you have between what your project costs are and what the ARV is, all of those things factor into you how much cash flow you\u2019re going to get on a regular basis. And if the cash flow is great, then maybe it does make sense to keep it right because you\u2019re going to get that long-term appreciation, you\u2019re going to get the tax benefits. But if the cash flow is slim but the capital you get from selling is pretty big, then maybe it makes more sense to flip. So those are some of the things we look at in our business, try and make that decision.<\/p>\n
Ashley:
Yeah, I think the best thing is run the scenarios, just like you said, look at what the numbers are today and then also how you expect the market to be. So if you\u2019re going to be doing a flip, what is it going to look like after you finish the rehab? Is the market going to be hot? Do you expect the market to be going down where maybe it\u2019s not going to benefit you to sell the property and to keep up. But keeping those exit strategies, I mean, I think it\u2019s great that you have those two options at hand. Sometimes people get into a property where they don\u2019t have the option of turning a flip into a rental because they would have to leave so much money into the deal. So I think it\u2019s great that you\u2019re in that situation where you have two different exit strategies at hand.<\/p>\n
Jake:
I think just adding to that, kind of going back to the flip that I was just talking about, we kind of had the same scenario and kind of took the approach that you were talking about where we looked at it as a rental and as a flip and the cashflow that we were going to make as a rental just didn\u2019t make sense with where the rates were going. How much money we had to trap into the deal, and then, what we could have done by just flipping and selling it. Also, I think the thing is when you\u2019re looking at that and you\u2019re running those numbers, you\u2019re really looking at highest and best use as well. And so, when we were looking at how to flip it or keep it as a rental, what level of renovation were we going to be putting into that? It didn\u2019t make sense for that property being where it was to have high-end finishes and take out the carpet, put tile in and everything like that. So I think just knowing what your end use is, running those numbers and then, making your strategy based on that makes sense.<\/p>\n
Ashley:
Okay, you guys, those are the four Rookie Reply questions we have for you today. Jake, thanks so much for joining us.<\/p>\n
Jake:
Thank you. I appreciate it.<\/p>\n
Ashley:
Yeah, it was awesome to have you here. Jake, can you let everyone know where they can find out some more information about you?<\/p>\n
Jake:
Yeah, you can find me on Instagram @jake_kain, K-A-I-N, and on Facebook, BiggerPockets. And if you guys wanted more information about our monthly meetup, just shoot me a DM.<\/p>\n
Ashley:
Well, thank you so much and we especially appreciate you coming to meet us in person too.<\/p>\n
Jake:
No, this is a unique experience, so I really appreciate you guys.<\/p>\n
Ashley:
I\u2019m Ashley @wealthfirmrentals and he\u2019s Tony @tonyjrobinson, and we\u2019ll be back on Wednesday with a guest. We\u2019ll see you guys then.<\/p>\n<\/div>\n