Month: May 2022

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David:
This is the BiggerPockets Podcast Show 614.

Codie:
That’s why I like to buy instead of build as much as possible. And people are all like this, because the secret is we’re not that creative. Like venture capital startups and founders, they’re super creative. They’re coming up with the next Tesla. I don’t have that in me, but I can definitely take a business that creates financial models online, give it a new website and upgrade, some pretty lipstick on the pig and this thing can be a lot more valuable than it is day one.

David:
What’s going on everyone? I’m David Green, your host of the BiggerPockets Podcast, the best real estate investing podcast in the world. I’m joined today by my good friend and co-host, Rob Abasolo as we tackle a very interesting topic. It’s how to make money in business that is related to real estate, not necessarily just real estate itself. Rob, so glad to see you today. How’s your day going so far?

Rob:
It is going really great because for the last week or so, I was a little bit down for the count. A little under the weather, had a throat infection of sorts and I’m all healed. I went to the ENT, they did a procedure. They fixed me. I looked at my doc in the eyes and I cried and I said, “My wife and I will never be able to pay you back for this majesty that you’ve done.” I don’t even know if that made sense, but I’m feeling good. I guess I could have just said I feel good. I feel good.

David:
I recommend you go follow Rob on Instagram at Rob Built and look at… Did you post the picture of the two vials of fluid that they took out of your throat?

Rob:
No. No, I didn’t want to do that to my… I let people message me and ask. I was like, “If you want to see this, message me and I’ll send it.” And I was thinking, oh, it’ll be like three people. And it was literally like 50 people. They’re like, well, I stopped after 50. I was like, “I can’t do this anymore.” But I feel a lot closer and more connected with my followers now. So that’s good.

David:
Yeah, that’s a pretty intimate thing to see what they pulled out of you. And all jokes aside, that must have been horrible to have that much pressure on your throat. You couldn’t swallow, you couldn’t talk, couldn’t sleep.

Rob:
Yeah. It felt like I was swallowing daggers. And then the actual procedure, you’re just getting poked with needles and stuff and oh man, it was uncomfortable to say the least, but it was literally instant man. I was down for six days and then I went, soon as he did that, I was like, “Oh man, I have never felt so good in my life.” And he was like, “Well, take it easy.” I was like, “I don’t have to, I’m back. I’m back, baby. I can podcast again.” I was nervous we were going to have to postpone this.

David:
Well, speaking of never having felt better, today’s guest, Codie Sanchez, is an amazing business person who takes what she learned at Goldman Sachs and other private equity firms about buying businesses, evaluating businesses, analyzing businesses, and now practices that in her world. Now, Codie does own real estate and she often buys businesses involved in real estate, but she also buys and sells businesses that function like real estate. Meaning you look at it, you see what it cash flows, you see what the return on your equity would be, you see how much work it’s going to be and then you go forward.
So in today’s ever increasingly difficult market to find cash flowing properties, we brought you an alternative that is still related to real estate but not directly real estate if you’re looking to increase your cash flow. Rob, what were some of your favorite parts of today’s show?

Rob:
Well, Codie is like the queen of taking a very complicated, I don’t know, idea such as buying a laundromat or buying a car wash or buying a SaaS product and then doing it 26 times and then explaining it to us and making it sound very, very easy and approachable because she talks about her different systems, the questions she asks like, who should I hire? What can I automate? What can I outsource? That type of thing. But she also gives us a really nice perspective on you shouldn’t just be looking to acquire real estate, but maybe some of the companies that you’re already paying, think about acquiring them as well.
So for example, if you own longterm or short-term real estate, maybe think about acquiring the property management company that’s going to manage your real estate since you’re already paying them anywhere from seven to 30% of your revenue, depending if it’s on longterm or short-term. So I thought that was just a really nice, very clean perspective from her. And I honestly felt like we could do this. I’m curious, I sort of want to go buy a bakery now.

David:
Because you’re always talking about-

Rob:
Rob the baker.

David:
Because of our baker’s quadrant. So if anyone doesn’t understand that-

Rob:
[inaudible 00:04:27].

David:
… joke, people refer to a baker’s dozen meaning like 13 donuts. So the baker would throw in an extra one there to get you to come back for business. So a dozen is 12, a baker’s dozen would be 13. Rob, and I have a way of looking at investment property like a matrix that we look at it through where there’s five categories to it. We were trying to come up with a clever way of how we refer to five and quadrant has four. And so Rob came up with the baker’s quadrant and that to this day is one of the funnier things that ever come up.

Rob:
I feel that way about the baker’s famous four because we asked the four questions and then the last one is like, “Lastly, where can people find out more about you?” And I’m like, “Well, that’s not technically a question, but it is a bonus.”

David:
That’s right. Okay. Today’s quick tip before we get into the show, look for fax machines. You want to listen all the way to the end of the show because Codie talks about when she sees a fax machine, what that means to her and where she sees opportunity. Now, it doesn’t have to be a fax machine, but there are many things you can look for in someone else’s business that would indicate there’s an opportunity there. And if you know what to look for, you’re more likely to find it. So as you’re going through your day, if you make up your mind that you’d like to buy a business, figure out what the fax machines are in that business as the red flag that would dry you to that opportunity.
Same thing works with real estate. Same thing works at a lot of things in life. So you’re going to have to listen all the way to the show for this quick tip to make sense, but please do because it’s worth it. All right. Any last words before we get into the show, Rob?

Rob:
No, man. Like I mentioned, I almost didn’t make it today due to the sixth stuff, but I’m so glad I didn’t because I think a lot of people are going to leave this episode wanting to buy a bakery, I’m calling it. I’m calling it right now. We’re going to have a lot of bakers, a lot of real estate bakers.

David:
It’s a bakery revolution. Codie Sanchez, welcome to the BiggerPockets Podcast.

Codie:
Thanks for having me.

David:
Yeah. So you are a very interesting business person as well as human being from our interactions so far. I’m excited for today’s show. Can you tell our audience what you do to make money?

Codie:
Sure. I buy businesses, typically boring ones, things you wouldn’t think about every day, like laundromats, car washes, video production companies. And then I cash flow off of them. Sort of like a bond instead of a stock. I don’t buy companies that I think are always going to skyrocket. I buy a company doing a certain amount of profit, a certain amount of cash flow and then that I want to hold for a long time and continue to reap the rewards of it. So that’s most of what I do. Then I also run a media company called Contrarian Thinking, where we talk about all this kind of jazz.

David:
So it sounds like what you probably do is look for a business with some form of cash flow, much like real estate. You make an offer on it based off of its current cash flows but you see a way to add value to that business to increase it, which would also increase the value and then you have the opportunity to exit. Is that fair?

Codie:
Yep. That’s right. It’s sort of private equity 101, but this is called micro PE. So we do it on a little bit smaller scale and we don’t always have to grow them actually. Sometimes we just want to own them.

David:
Now, did you learn to think this way from investing in real estate? I know you own some real estate. Which came first, the businesses or the real estate?

Codie:
Oh, that’s a good one. No, at least from an investment standpoint, I was investing in businesses first. So I did the traditional route of like Goldman Sachs and how do you know somebody worked there? They tell you immediately within meeting them. But like Wall Street, a bunch of different alternative investment managers and in the private equity sphere. So I’ve done a lot of deals over my years. And I just saw that I was putting together these really big deals with some of my partners in varying PE firms or investment firms. And the main guys were taking home a ton of money and I sort of sat there thinking, wait a second, if they can do this for a hundred million dollar deal or a billion dollar deal, why can’t I take the exact same process, maybe a little simplified and apply it on like a 50,000 or a 100k deal and then scale up from there?
And so that’s what I started doing was just applying it, sort of in a real estate term, applying it on like maybe my first little tiny studio. And then I would go up to a one bedroom and then eventually I made my way to multi-family or industrial or whatever you want to call it.

David:
You know what this sounds like is when we would interview, there was someone that was a CPA or they were a bookkeeper and they worked for a big firm and they said, “Man, our wealthiest clients tend to own a bunch of real estate.” And that’s what got them wanting to get into it. It sounds like you were around people that were doing really big deals, pretty smart and weren’t intimidated by the thought of buying a business and you watched what they did and said, “Hey, I could do too.”

Rob:
Also, I want to point out too that you were like, “I went the traditional route of-

David:
Goldman Sachs.

Rob:
… working at Goldman Sachs and we were putting together billion dollar businesses and a hundred million dollar deals.” And I thought, why not do this on a smaller scale? Usually people start with the worrying businesses and maybe work their way up to something like that.

Codie:
Well, I like using house money, man. I was actually scared on my first deal. If I had to go out right now and I had never bought a business and buy a business, put down my own capital or hell, get a loan on it, it sounds scary I think. I don’t think it sounds as scary to get a mortgage on real estate. We’ve sort of normalized it, but we haven’t really normalized going to get a loan to buy a business with a personal guarantee on your assets. That’s scary. But because I did it first with house money, even though they were bigger deals, I couldn’t let… It’s not like they were like, “Well, I’m going to take your salary, Codie, if this deal goes sideways.”
I was like, “Maybe I could get fired, but I couldn’t lose everything.” And so that’s what I think, maybe not that scared about it. And that’s why we talk about it a lot publicly because I had one CEO who told me, “We get rich quietly here, Codie. We get rich quietly.” And I was like, “I think other people should know about this and now I can’t shut up about it.” And if you guys follow me on Twitter, apologies, you already know that.

Rob:
Can confirm, can confirm. I follow you on all of them, Codie. You’re very active on all the social medias. So I have a question here. When you’re evaluating these deals, obviously there’s like a very specific way to evaluate a real estate deal. If you’re looking at an Airbnb or a multifamily, you’re looking at things like cap rate, cash on cash return, there’s a lot of kind of standard procedures when you’re looking at an Airbnb, for example. If you’re looking at buying a car wash or a laundromat or something like that, is it the same scope of procedure? Are you looking at it the same way that you would any typical real estate deal? How does that differ?

Codie:
Yeah, there’s probably just slightly different terms depending on if it has real estate involved in it too. Lots of people use cash on cash return. So that’s pretty similar. Most people think about valuing a business on a multiple of profit level. So if I make 100k, I want to buy a business for anywhere from, let’s call it two to 7x, my 100k. So for 200 to 700,000. So those are sort of some of the main ways. Typically though, when I think about a deal, because businesses can cash flow more than real estate on the total amount that you put down or the total amount you buy the business for, I’m really more interested in, can this deal make me X amount of money that is worth my annoyance that running any business or buying any business or doing any real estate deal is going to do?
And so I usually think about it like, I need a deal to cash flow me at least a 100k for me to want to do it. In the beginning, that might have been like, I need a deal to make me 2K a month and that would be enough. So you can kind of figure it out this way. In real estate, I think a lot of times, yeah, you want the rent and certainly in Airbnb, you guys do really well, but oftentimes you want the appreciation too. I really just want the cash flow in my deals and I think of the appreciation as like the extra sprinkles on top.

Rob:
Yeah. Actually, that was kind of something I was interested in knowing more about too. Let’s say you buy a car wash, you’re obviously buying that business, but you’re also buying the lot in all of the materials and all the structures and all that stuff too, right?

Codie:
Typically, yeah. So for a car wash, you would. So that’s a pretty real estate or asset heavy business. A laundromat, for instance, you wouldn’t, you just want to lock in like a 10 or 12 year lease, a long lease because they’re expensive to build out. Most of my businesses, you wouldn’t own like real estate on them or you wouldn’t have to. You might own equipment like trucks or tools or machines. But I would say, like the asset heavy ones are things that blur the line like mobile home parks, car washes, RV parks, things that are pretty asset heavy as opposed to most of the businesses, you don’t have to buy the real estate.

Rob:
So on some of these you’re literally buying the business and then it’s just, you’re leasing out the real estate, but you have no association with the actual building that it’s in?

Codie:
Yeah, that’s exactly right. I have a couple friends and I’m sure you guys do that own commercial buildings. I don’t own any commercial buildings actually, but that own commercial buildings inside of them have seen sort of the profits that come from X, Y, Z company. And so then acquire some of those underlying companies as well or a percentage of them. So I think that’s interesting. I might do that if I already owned a commercial building. Basically say, “Well, I’m just going to also own the laundromat that’s in here as supposed to just get the rent from it.” And I might do that for multiple sites or maybe I want to own the, I don’t know, nail salon in there because I have a good operator that might run it.” I like owning those little type of businesses too.

David:
That’s exactly what I started thinking when you were describing this. That’s the perfect marriage is you buy a commercial building, one of your tenants is going into financial trouble. They’re struggling. You see they don’t have enough capital or they’re not managing things well. There’s some problem that you feel confident you can solve. You go in there and you buy their business at a discount and then you manage it. Is that more or less kind of the approach you’re taking?

Codie:
So that’s called a turnaround in my world and I actually think you should never do a turnaround for your first deal. And I think you and Rob could do it obviously because you’ve done a bunch of deals. You run a business like this one is. But for most people, I don’t like to buy other people’s problems. I’m like, I want to buy the nice-ish house on the nice-ish block. I don’t want to flip for my first one. I don’t want to fix because there’s enough margin in buying businesses that you don’t have to think about value add right away.
I actually think that’s one of the things that’s most dangerous if you do it is don’t try to go in and fix something. Because here’s the truth. There’s 2.4 to 2.5 million businesses for sale right now in the US today. Only one out of 12 businesses listed, publicly listed in the US will sell within any 12 month period. Imagine that in real estate that just, it doesn’t happen. That would be wild. If you were on a street, there are 12 houses for sale and only one of them sold, not going to happen. So there’s so many good small businesses, especially sub, let’s call it a million dollars in EBITDA or a million dollars in profit that I think what you should actually do is go out and buy like a kind of normal business. And you can do some value add on top of it but not a ton.
So let’s say, for instance, you own a commercial strip mall or something. Instead of you having to go fix a business, maybe you’ve just had that building for 10 years and you know that most business owners, something like, it’s a wild number, 80% of small businesses in the US that are for sale right now are held by baby boomers. And 50% of all small businesses in the US are held by baby boomers that are nearing or at retirement age. So there’s something like five trillion dollars in assets that are going to transfer from these small businesses to other people.
So you might just have like Dave’s, I don’t know laundromat. I need to use a different example because I don’t always think laundromats are the best deals.

Rob:
Dave’s Hot Chicken.

Codie:
Okay. Nope. Not restaurants. We don’t like restaurants.

Rob:
Okay. No restaurants. Dave’s-

Codie:
No Chipotle.

Rob:
… Car Washing.

Codie:
There we go.

Rob:
Dang it.

Codie:
Yeah. Dave’s Equipment Rental. I like that business. Dave’s Equipment Rental business, it’s in your commercial thing and the guy’s like 65, 70. He’s ready to retire. He’s a great tenant. They pay on time. You kind of see how he runs the business. It seems to be fine. You want to talk to that guy and just ask him, “Do you have a plan? Does your son want to play video games on Twitch all day or does your daughter want to be on TikTok instead of run your business? I could buy you instead. You know me, we’ve known each other for years and I’ll run this business on a go forward basis.” That would be the deal I would look for.

Rob:
Man. That’s super interesting. So I think you mentioned this before, not on the podcast, but isn’t there like a wild amount of people that are just going to close down their business and not even sell it just because they don’t know that they can sell it?

Codie:
Yeah. Everybody always says, and I’m sure people say this on the podcast. They are like, “The business is profitable. Why would anybody sell it? This never happens. People all get all up in arms when I share my deal details.”

Rob:
Oh yeah. TikTok comments.

Codie:
Oh yeah. I know it’s what you call it.

Rob:
Why wouldn’t the owner just keep it for themselves? [inaudible 00:17:14] you want to call it.

Codie:
Exactly. You’re like, “Do you keep every house that you’ve ever owned for yourself even though almost every house has appreciated over the last 20 years?” Probably not. Same thing. But these business owners, why I started is I have an uncle, uncle Eb, who’s since passed, but he owned a plumbing company. And why I started talking about this more publicly or thought it might be interesting maybe, maybe I thought people had thought, I think it was boring was because he had a business that was doing five million dollars in revenue and about two to three million dollars profit. And he had run this business called E B Holmes Plumbing Contracting in Phoenix, Arizona for like, oh you could look it up. It was like 12 years, 15 years, 25 years, a long time.
And basically he started getting a little sick, was looking to retire. He was in his 70s and instead of selling the business because he had no idea you could do that, he didn’t have a college degree. I was too young at the time to really understand this. He wound down the business. So he had an asset that was doing two to three million profit, which means he could have sold it for like six to nine million dollars and he just shut the business down. And that happens every day.

Rob:
That’s crazy.

David:
Yeah. So here’s what’s popping in my head. And you know what, I’m going to give you an example of what I see happening all the time. And then Dr. Codie, I’d like it if you could give me the prescription for this. I and many people I know, many of them work on my team. So they’re entrepreneurial minded. They’re people that like Rob and I, Brandon and I. They’re drawn to ways to make money. They’re not afraid of hard work and they see the value of, we’re going to call it passive income even though owning a business isn’t passive and owning real estate isn’t truly passive, but it’s not directly tied to getting paid per their time.
It’s more getting paid for their ability to make solutions. I think many of our listeners are like that. So that when they’re in real estate, they’re like, “I want to buy that house and that house and that house.” And they try to figure out a way to force that deal, that square peg through that round hole. And it very rarely works out. Well in business, I see it can work out. But then what happens is you’ve got six different businesses you own and you’re the only person trying to do it all. And you’re frantically running from one thing to the next.
To me, it feels like you’re in a submarine and there’s a hole and you stick your finger in the hole like in the cartoons. And then another one pops out over here and now you’re sticking a finger there. And then you’re sticking a toe over here. And then you’re taking a finger out of this one to put it in that one and then the water hits you there. That’s what it’s like when you’re running multiple businesses. And what you realize is I need more fingers. I need other people to sit here and help. And then you try. And then those people instead of plugging the hole or texting on their phone or they’re doing their own thing and you realize, it is freaking hard to find people to help me do this.
And then you’re discouraged because you feel like a failure. You don’t want to tell everybody because you probably [inaudible 00:19:50] on Instagram, tell them about this business that you own. You want to be a big deal and then you’re just getting stressed out and you hate your life and you’re going to bed with anxiety. It could quickly overwhelm you. And I don’t know many people that figure a way out of that. So is the problem that they shouldn’t have jumped in? Is there a approach that you like to take so you avoid that? Do you have a skillset other people need to build? How do you solve that problem of, I own all these businesses but I’m the only one that is doing all the work?

Codie:
Well, one, I would say the most important thing is you need to buy a business that has enough profit for you to put an operator in if you don’t want to run the business overall. So if you are not going to be the one plugging the holes in your business, then you need to have, let’s call it, at least 100K that you can outsource part of the operations of the business to somebody else. And I like to have at least 100K because right around 100K, you can start to hire somebody really good who you can incentivize with equity on the way up or with revenue share or profit share.
And that person will help you plug those holes because they think of themselves as the CEO of the company. They’re operating it. And then you just have to do really good on your hiring. And what is annoying, I think is with all the whole plugging, that’s usually when you have sort of executioners, people who just execute on tasks as opposed to somebody who operates and thinks about the business from the highest level. And so that’s what you want. I sort of recommend that everybody mess around and get their hands a little bit dirty for their first deal in buying a business.
Because if you’ve never led a team before or you’ve never run a business, how are you going to know if you have a good operator or not? I think that’s really hard to do. So that’s what I would say is first thing, make sure you have enough profit to layer somebody on top of it. And then to your point, there’s two ways to play this game, decentralized leadership, which basically means you do a ton of work up front to hire the right kind of people and you put systems in place to monitor them. But mostly it is a ton. It’s like a colonoscopy to start followed by at the end, this person is massively trusted.
You’re not watching their every move. You’re not micromanaging them because you did a lot of the upfront work and now you just have systems in place with KPIs to make sure that they’re still running the company well, option one. Option two would be, you have a process whereby you have your hands involved in a lot of oversight. And that I think is where people get stressed out. Like my businesses by and large do not call me. And instead of calling me, they would call the COO who sort of runs the operations. I have now only two. I used to have three businesses I was actively involved in and now there are only two businesses that really take up my time during the day.
The rest of those businesses are like bonds. I don’t call to check if AT&T is going to pay me the right amount each month, they just pay me the right amount. Then that comes with hiring right and structuring the deal right in my opinion.

Rob:
I think you said a lot of good stuff there because a lot of people, they either want to get into a business or get into an establishing business like let’s say real estate, but they don’t want to work. And I understand that. But I also think that you have to earn your right to not work. And so I get a lot of people, like students of mine that want to start Airbnbs and they just want to go straight to a property management company. They want to hire someone to set it up. They want to hire someone for every aspect of it. And I’m like, “Dude, you haven’t done this yet. You need to learn how to fail several times and you need to fall on your face and you need to understand what it is to manage it, to deal with cranky guests, to deal with water leaks.
You need to do that for at least three months before you go and hire it out and pass it on because how can you communicate with the people that are running your business if you don’t even know how your business runs? So I like that you said that you should get your hands dirty because I think that’s pretty applicable to pretty much every facet of real estate.

Codie:
Yeah, I totally agree. The other thing is, quite honestly, I don’t know, it’s something about real estate and business is less I think because people know that there’s lots of levers you can pull. In businesses, there’s not as many levers you can pull to make changes good or bad or in real estate, I don’t know, correct me if I’m wrong, you guys know more about it than I do. But for some reason, I find sometimes real estate attracts people who are like, “Well, I just buy this thing and then I cash flow on it and that’s it. And then I never have to do anything again.” And I just think first of all-

Rob:
I sit on a beach.

Codie:
Yeah. I think that’s-

Rob:
I buy it and I sit on a beach.

Codie:
No, I think it’s so boring. You’d get so bored and you’re going to be boring because nobody wants to talk to somebody who does nothing all day. And so I actually think people don’t really want that. They just think they want it because they hate what they do. But then when you like what you do, I couldn’t pry you out of Airbnb some way, Rob, out of your cold dead fingers, you would be fighting me because you like what you do.

David:
I just had a very deep conversation with the COO of the David Green team yesterday about this topic. Codie, it’s funny you bring it up. So I realized about myself, I was a police officer. I liked the job. I did not like having to work 20 hours a day. Never having a social life, not being able to be fit, never sleeping. You can’t really have a family and have a good quality of life because your days off are Tuesday, Wednesday. It’s just, it’s hard. I was kind of sold this dream that you buy some real estate and then you never have to work again. Your tenants will fund your life and you’re going to travel, go on boats, sit on the beach. Just walk around with your chin up because I made it. I worked really hard for three years and I’m done.
And that seeped into my mind. I think it came from a lot of places, but overall it’s usually a dream you’re being sold as opposed to a reality because when we buy it’s a reality. And that’s what marketing is, it’s to make things look better than they are. When we take pictures of listings, we don’t show the bad part. You make the house look great. And so I started the David Green team and I figured out how to hire people. It was horribly hard. I got a system going where I had good agents. It became profitable and I thought I’m done. I’m just going to coast into the sunset.
And every time a problem happened that pulled me back in, I was resentful. In my head, I was like, “Why should I have to deal with this? I’m supposed to be over it.” But what I noticed was when you stop paying attention to an organization like that, they were drawn because of me. Your best people are like, “Well, David’s not really around. I’m not really getting the leadership. I’m not growing the way I thought. I’m going to leave.” Now, you got to jump back in because a really good person left or the person who is running it still sort of needs your mentorship unless they’ve done this before.
It’s hard to put on your resume, I ran a real estate team. There’s no college degree you get for that. So you kind of have to grow them from the ground up. And when they would need something and they could tell I was resentful, they didn’t want to reach out. And that’s been the case with every business I’ve had. I don’t have to do everything, but if you just completely turn your back on it, rental properties as well, they fall apart. Your property manager is trying to do the bare minimum that they have to to keep a check coming for themselves. They are never going to be as involved in your property as you would want to be.
And so I came to this epiphany that it was stupid for me to think I was never going to have to work because I made one or two good decisions. What I got was a better type of work. I’m not working 20 hour days. I can wake up when I want to. I can work from the gym. I can work from vacation. I can work with creative elements of my mind that are fun that release dopamine. I get growth. I’m not just stuck in a factory punching some metal like M&M and 8 Mile for the rest of my life. You’re not breaking your body.
There’s a lot of benefits to why to do this, but it’s not you’re just done working. And even if you bought a bunch of rental properties and made a hundred grand a month, you still got to pay attention to what’s happening in them. There’s still a form of work. You’re still going to have to solve problems. And when I accepted that life doesn’t work this way where you just do nothing but you can definitely do better, I got happy again. The resentment went away. I was excited like you’re saying. This became fun. I started like, “Ooh, that’s a really good person. I’m excited to help change their life and I want to see them grow.”
And you start thinking of things just like what you were saying. But there was this block that my expectation was ridiculous. It’s probably like if you’re married and you think, once I get married, I’m done. I don’t have to work anymore. Now I’m in a longterm relationship, I can let myself go. I don’t have to pursue this. It’s probably the opposite. You’re going to work in that relationship, but it should be work you enjoy because you like the person. Is that similar to the approach that you’ve seen?

Codie:
Yeah, totally. I think it’s two sides. What I’ve noticed is yes, I would be super bored if I did nothing. And so I think your reframe of, hey, every chance that I have to engage in this is actually kind of an opportunity is super important. There are some businesses. So I’ve had businesses kind of like the ones you talked about that really require a lot for me. I just sold one. I signed the deal yesterday actually, because it was too much, actually. It was like exactly what you talked about. It was not enough money for me. And then the guy wanted a lot from me. And so I basically said, “I’m out, you can buy me out or somebody else can, but we’re going to sell this side of the business.”
The flip side of that though is I found when you have really good operators and their incentive aligned, humans are like Pavlov’s dog. If you ring a bell and every time you ring a bell, you get a treat, it turns out like when we ring the bell, you start to salivate. That’s like what Pavlov basically taught us. And so I think it’s the same with operators and with people who run your business, you just have to do a ton of work to make sure that your property rental… So for instance, we have a property management company and we own a bunch of, not a bunch. We own some Airbnbs and they get a cut.
They get a cut of the rent or the total income just like most property managers do, but they also get a kind of cut of the overall portfolio. And they get an opportunity for us to put up capital and them to do new deals and them to get equity in those deals if they find the deals. And I learned this from my other friend, Alex, who runs the same thing and now has a commercial loan on his portfolio. And this guy who runs it is more like a CEO than just running a few properties as property manager. So I actually think the key is really finding good people that are better than you.
Like if he brought me in to run this property management company, I would be a mess. Definitely the business would not work because he’s better than me. He’s incentive aligned and he wants to keep making money and seeing this grow because the bell rings and the treat is there every time.

David:
Yeah. That’s such a powerful part of motivating people. I think one mistake that we make in business is we assume everyone’s motivated by the same things as we are, and that’s not the case. And the other part is you assume people… You underestimate the value of motivation. Like what you said is the condition, like when the bell rings, the dog salivates because it knows it wants food. It’s hard if you make someone delay gratification for too long. If you’re like just work and slave away and in five years, this will pay off, but they’re not seeing the milestones, they’re not getting that hit of like, ooh, we made progress.
Most human beings are not like us that are just going to grind away until we get there. You have to set it up to where… Have you noticed that as well?

Codie:
Oh, yeah. 100%. But I forget it all the time, to your point. I talk about all this, like yeah, I get it. But my usual sort of treat that I hand out is cash, right? I’m like, “Hey, if you make this much, here’s how the sort of milestones going to kick in and you’re going to make this bonus or X and X if Y happens.” And then I forget some people just want to go home at 5:00 every day and not have me slack them 24 hours a day. Then other people just really like what they do and want to make a good amount and don’t want to be scared that they’re going to lose their job.
And so I make everybody do those disk things. Not for them as much. It’s for me, it’s because I need to understand this other type of human that isn’t just a total animal nonstop obsessing about business.

Rob:
Yeah. I think you do that, right Dave? Don’t don’t you make everyone take DiSC tests too?

David:
I’m a huge DiSC believer. To me that was the Rosetta Stone that helped me understand why every human being frustrated me all the time is I did not know that I am a very rare profile and my communication style, it’s not like everybody else’s. And when I figured that out and I learned how to talk in their way, all of a sudden they liked me, we got along way better. Our relationship improved. Before that I was like, “Why is only 9% of the population get it and nobody else does?”

Codie:
Yeah. You probably intimidate them too. You’re a big jujitsu doing dude. So add that. I don’t think you’re a wallflower, Dave. I imagine you come out a little strong. Huh?

David:
That’s what I’m told. I probably hear four times a week I’m intimidating. And I’m always like, “Why? What did I do that was intimidating? But they’re too intimidated to tell me. So I still haven’t figured that out.

Codie:
20 years as a cop will probably do it too or however long you said.

David:
Yeah. I actually wrote an article about the DiSC profile on BiggerPockets. So if people search the blog, they can see an article about what we’re referring to. I’m curious, Codie, what are you? What’s your setup?

Codie:
Oh God, that’s really good. This shows a lack of self-reflection. So my profile, I don’t remember what I am. What’s the other profile? That’s like the-

David:
Myers Briggs.

Codie:
Myers Briggs, a 16-

Rob:
Enneagram?

Codie:
No, I don’t remember that one either. The 16 personalities one, I’m not a commander, that’s my husband. This is going to be a really great answer. I can’t remember.

David:
I think you’re a high D. Because a high D wouldn’t care-

Codie:
What’s D again?

David:
That’s the decisiveness. They make decisions really quickly. They’re comfortable in situations they haven’t been before.

Codie:
Yes. Yes. I’m that one, Dave.

David:
Yeah, because a D wouldn’t really care what the DiSC says. It’s too busy making money and making decisions to stop to. But you recognize you need to know for how you communicate with others because you’re a leader. And that typically ends up being… Ds usually end up in the leadership positions.

Codie:
That makes sense.

David:
So a quick rundown is Ds are very comfortable making decisions when they haven’t been in that environment before. They’re very decisive. Eyes are very interactive. Like Rob would have a very high I. They like people.

Rob:
[inaudible 00:33:57].

David:
They’re likable. They’re the most popular people in high school. The social butterflies.

Rob:
Stop. Stop. Stop.

David:
Yes. That’s it. That’s an I. Right? You want to get an I to like you if you compliment them on something or they can tell you like them, oh my God, they love you. If they think they’re not liked, they don’t know what to do. It’s really unsettling. Ss are your stable score. This is the pace that you like to live life at. They don’t like surprises. They hate change. They like predictability. They get the same thing every morning for breakfast. They want to come in the office. If something changes, the first thing they say is, “But I thought we were going to do this.” They’re like the hardest to get along with Ds like me or the Ss because we change everything like, “This is better. Let’s switch it.”
And then they’re like, “Well wait, wait, wait. I thought we were going to do something else.” And Cs are your conscientious score. This is your architects, your engineers, your lawyers, your doctors, the people that like everything needs to be perfect. They’re really good with spreadsheets and data and analysis.

Rob:
Hmm. Yeah. Okay. Yeah. First glance I’m like definitely an I I think.

David:
Yeah. I think you’re an IC because you’re also very good with detail. You catch a lot of detail in a lot of different scenarios.

Rob:
It’s not that I want to, it’s like I would rather hire someone or have someone on my team that’s good at the details because I really run free when I’m not having to be the one keeping track or keeping notes or keeping score. I just kind want to run with ideas. But as you grow and you’re wealthier portfolio, your business, you kind of have to start being more organized or else you’re going to stop making money and you’re going to start losing money. So I’m kind of at that point where I’m like, Ugh. So I’ve hired people appropriately to help me with that I think.

Codie:
Yeah. I think the hard part is for me, well, I just showed you guys, but I have a really bad memory. And so what I’ve realized is we have to have processes and procedures for everything. Otherwise, if you’re running a lot of businesses, you’re going to forget it. And so I’m really not very detail oriented at all and I have to hire for that constantly. Like my first hire is almost always a COO for any business or at least a chief of staff because I need somebody who’s the opposite of me.
Don’t worry about bringing in the sales, don’t worry about fundraising, don’t worry about the growth plan overall or hiring people, but do worry about making sure that we pay payroll at 12 o’clock on a Friday every week. So yeah, I think it’s really important for sure.

Rob:
So yeah, I guess I wanted to dive into that a little bit because I know you’ve bought 26 businesses, you mentioned, which is a lot. And from that you’ve sort of have baked your philosophy or your POV on this down to three questions that everyone should be asking when they’re buying these businesses. Is that about right?

Codie:
Yeah. Actually my executive coach told me these. It really comes down to not just buying businesses whenever you have a problem. I basically ask myself, “Who can I…” Instead of saying… Have you guys read the book, Who Not How?

Rob:
Read it? I own it. But no, I haven’t read it yet.

Codie:
I was going to say, is that better or worse? So none of these ideas are new or uniquely mine, but this Who Not How I think is an incredible… It’s a listen, you don’t actually have to read the book. I would recommend audio. But basically every time that I have a problem, I come into asking myself instead of how do I tackle this problem? I say like, “Who can I hire? How can I outsource this problem or individual issue? Who can I delegate to on this instead?” And I also ask myself, “Can I buy it instead of build it?”
And so we have these series of questions that I’m always asking myself, instead of how can I do this, it’s, can I buy it? Can somebody else run this business for me? Can I delegate this task instead? And I kind of go back and forth between those three or four questions almost every time.

David:
We interviewed the author of that book, Benjamin Hardy on episode 425, if people would like to listen.

Codie:
Oh.

Rob:
Man, you looked that up really fast.

David:
That’s my high D nature. Things have to get done quick.

Rob:
So we’ve talked about who to hire, I guess let’s talk about what can I buy or can I buy it? Because I know that’s something you and I have talked about several times where I’m like, “Man, I want to just go and build this.” And you’re like, “Well, can you just go and just buy something that even if it’s not nearly as good as what you want it to be, that you can make work?” So is there a reason here? I know there is, but what’s your personal reason for always just buying something that may not be working. And is it because of the value add component that you can add to increase the value of your business?

Codie:
I think I just don’t really like risk. So if I can buy a business, I already know that I’m operating with some level of profit or cash flow. And so people might think it’s risky to buy a business, but I actually think it’s much less risky because if I build something, I’ve got to put a bunch of money down on hopes of future dreams, right? I suppose it’s the same with real estate. It’s like, no, I’d rather buy this house that’s done. I could build it, which could mean that it’s cheaper, let’s say to do it, but it’s going to take a long time and maybe I don’t have all the expertise on it. And it’s the same for a business.
So like for instance, I want to own a bunch of financial models and tools for our main business, Contrarian Thinking. That’s the one that I play with the most these days where we basically go and we talk about how to become financially free, free in your mind, free in your bank account. And I want to own a bunch of models. So basically, here’s a due diligence checklist. Here’s a mobile home park model. And I would like to build out this suite of products. And so I was starting to think about, okay, well, I’m going to hire a bunch of my ex analysts. I’m going to have them build out a bunch of these models because I don’t want to do it all.
And then I’m going to put it here and we’re going to have this marketplace of stuff people could pick from. And then I was like, “Wait a second, there has to be some terrible website located on the internet that’s built in the ’80s that’s full of financial models. Those don’t actually change that much. We could slightly tweak them. Why don’t I just buy this business?” So I started reaching out to a bunch. I looked up this one company, I think it’s called E Financial Models, creative name, terrible website, terrible UI/UX. They wouldn’t let me buy it.
He’s based in Zurich, but if you’re listening, still interested, but then I found another business that’s similar to it. And it would cost me in time and hours probably, I don’t know, 100K in a couple months to build out what I want to build. And I think I’ll be able to buy this business for maybe 200K. So you save me three to six months on it. I pay a premium of like two, let’s say 2X on the business, but it’s rocking and rolling day one and it already has income coming in to start profiting off of. So that’s why I like to buy instead of build as much as possible.
And PE people are all like this, because the secret is we’re not that creative. Venture capital startups and founders, they’re super creative. They’re coming up with the next Tesla. I don’t have that in me, but I can definitely take a business that creates financial models online, give it a new website and upgrade, some pretty lipstick on the pig and this thing can be a lot more valuable than it is day one.

Rob:
So on that financial modeling business, are you actually planning to cash flow on that business or is that just like a value add that’s going to be part of the Contrarian Thinking brand?

Codie:
No, I’m going to cash flow on it. So this gets to the point where I guess we could talk about ecosystem or satellite businesses. So in my land, if we think about Contrarian Thinking, it’s a media company similar to BiggerPockets, right? Much smaller scale. But I don’t know if you… Dave, have you guys ever grown through acquisition at BiggerPockets? I know acquisition of real estate obviously, but anything media related?

David:
I believe in general, it’s typically in-house organic.

Codie:
Yeah. So I like to not do that as much as possible. It’s taken us a year and a half to build a 100k newsletter list. We have like 1.5 million social followers across the platform. That’s pretty fast growth, but some of that’s like, you can’t make that happen. You have to get lucky, you got to get viral, whatever. And so for Contrarian Thinking, we have this main newsletter business and this media around it, which is just social media and I’m trying to figure out, I want to own the entire ecosystem of small businesses. So when people think boring businesses, small businesses, I want them to think Codie Sanchez, Contrarian Thinking.
And the reason that I’m building a big social following is because I’m going to buy all the companies on the periphery that people are interested in if they’re investors in this space. So I’m going to buy this marketplace because then I have every financial model you could ever want to analyze any small business and I’ll charge you some percentage on them. I might even allow people to upload their own financial models and then I’ll just take a cut and then I wouldn’t have to keep uploading them. Somebody else could do that for me and I’ll become more of a third party marketplace as opposed to my own.
I also want to buy… Well, I think we just might have closed this yesterday. We’ll see once I get back to the email here. We’re buying like a chat bot service for small and medium businesses. It’s a business that’s been around for 25 years. And basically it’s like say you have a locksmith issue and you’re trying to get a locksmith at 2:00 in the morning. This could be like a real human that would respond to you and say, “Oh yeah, great. We’re going to connect you to Greg.” Whatever, sends Greg over there. It’s a customer service tool. And so I want to buy that company and stick it into my ecosystem.
And if I owned a bunch of real estate, I’d want to do the same thing. I’d want to buy companies surrounding my real estate so that I could increase my revenue and profits and diversify in non-recession or in recession resistant asset classes.

David:
Let’s say there’s a real estate investor who’s doing pretty good with real estate investing or they… Maybe I could say it like this. A lot of people get into real estate investing because they think it’s going to be passive income. And once they get there, they realize to be good at this still takes a skill. Now some people are good with bookkeeping. Some people are good with operations. Some people are great at negotiating. Others find the deals. So whatever your natural skills are, they show up in this world. This isn’t just a cookie cutter type of investment like buying a stock.
So I feel like there’s a lot of human beings that will get pretty good at this but will realize, you know what? I don’t want to have to keep doing this element of the business. I really like this one. Those people will be naturally drawn to owning a business that sort of focuses in that area. What are some ancillary businesses that you think that real estate investors could look into buying to help supercharge their own business and increase cash flow?

Codie:
Well, we have a group called Unconventional Acquisitions, and there were, I would say there were like 10 or 12 guys that started who were all real estate guys. One’s name is Lloyd and he owned a bunch of multifamily units. I think it’s in South Carolina, somewhere where there’s a lot of weather basically and was having to do a lot of roofing repairs continuously to his relatively large portfolio of multifamilies. And so anyway, so he started talking to us about, how do you do this? And we were like, “Well, I’d like to do something called a personal P&L review.”
So basically I say, for yourself personally, where do you spend money every single month? Sort of track any of those businesses that are small enough for you to get to the CEO. And then for your business, do the same thing. Where does your money go? What are the owners that you could actually get to out of your P&L? And so he was like, “God, I’m spending a ton of money on roof maintenance a year.” He’s like, “Why don’t I reach out to this guy and see if he’ll let me buy his business.” And I was like, “Okay, definitely could do that. But Lloyd, you’ve told me before you don’t want to work a ton more and you don’t want to operate this business.”
And he was like, “Yes, both of those things are true.” I’m like, “Okay. So instead, why don’t you reach out to this guy and say, ‘Hey, I calculated that I give you, I don’t know, $200,000 a year in revenue from my properties. I also have friends that have properties of X, which would equate to Y of total revenue for your business. What I’d like to do is I’m going to buy a roofing company. It could be yours, it could be somebody else’s and I could buy one outright or I could invest in yours. And I could invest in yours on a discounted term because I’m already giving you $200,000 in revenue and I could bring you these additional people.
So I’ll put some money on the table, but also give me an earn out for all of the new business that I bring to you and a discount for all the business that I already have with you.’” And so he did that and now he owns part of the roofing company without having to run it. So that would be a lazier person’s way to do a deal like this. And the only thing you want to make sure of is that you’re able to track the financials. I require that I can see into the financials or my CFO can see into the financials of all the businesses we own a certain percentage of so I make sure nobody’s skimming off the top. I’m sure they still are, but not too badly.

Rob:
Yeah. That’s actually really smart. And I think you even mentioned this earlier about you kind of own your own property management company. And that is starting to make a lot more sense to me where I am starting to hire more people in the Airbnb businesses like interior designers or property managers. This is a whole rabbit hole we can go down towards, but it’s starting to make a lot more sense to just absorb, not necessarily companies, but freelancers that have their own business in becoming like, it sounds sort of like what this guy’s doing, like a super affiliate where you do own part of it but you’re the one that’s fueling all the leads that come into that business. And thus you get a payout from that. Is that sort of what this roofing company is?

Codie:
Yeah. I call it a rev share acquisition. So basically you buy something meaningful to you, 30 to 40% of a business, let’s say, and you buy it through the revenue that you’re already giving the business and through because you have a giant marketing bullhorn in your industry through your additional distribution. And usually for small businesses, what is the one thing most small businesses are bad at? It’s usually sales. Distribution is always a major pain point. So you can get access to a business sort of two ways without giving capital. One would be get them more customers so they’ll give you a percentage of the business for the additional revenue or help them cut costs.
Helping them cut costs is I think never as fun and it’s sometimes harder to do. So I like, if I’m going to do a rev share deal with the business, I’ll do it based on how much business I could bring in with them. We just did a deal the other week where we’re investing as, we’re not a majority investor, but a minority investor in a company and they are raising capital and we wanted to be meaningful in it. But the level that they’re raising capital at, the valuation right now is like, yeah, buddy, I want that too for you, but it’s not going to happen in this world.
And so I said, “Hey, listen, we’ll invest in you, but we’re going to invest in you at the last rounds valuation, not this one. And the reason why you’re going to let us in there is because we’re going to be a bullhorn for you. We’re going to be a foghorn for you. And we’re going…” Is bullhorn a thing? I don’t think that’s a thing. Is that? Anybody know?

David:
I don’t know if foghorn’s a thing either though.

Rob:
No foghorn is like the [inaudible 00:48:50]. Isn’t it? [inaudible 00:48:52].

Codie:
That’s [inaudible 00:48:53].

David:
Yeah. A bullhorn is, I think what you talk into and it amplifies your voice.

Codie:
Oh, so both work.

Rob:
No, that’s a megaphone.

David:
So a bullhorn is what, it makes a bull sound when you blow into it?

Codie:
Maybe it’s just the horn of a bull. I do live in Texas.

David:
Yeah. That actually makes a lot of sense, Codie.

Rob:
Okay, got it. You’re right, David. It is an electronic device for amplifying the sound of the voice. I apologize for calling you wrong-

Codie:
[inaudible 00:49:19].

Rob:
… on national podcast.

David:
Because I’m such a big person, I will forgive you for that.

Codie:
Literally and figuratively.

David:
Bring a full circle there, Codie, next.

Codie:
That is exactly right. Anyway, so I think that’s what I would do. I love those rev share deals for people who haven’t done a lot of buyouts because it’s less scary. You’re like, “Oh, I don’t have to give you a lot of money. Just future potential money, that makes it less scary I think.

Rob:
That’s sort of where I think, I’m figuring out where I want to be entrepreneur wise and real estate investor wise, influencer, all that kind of stuff. Because I even… Forget I said that. Editor, takeout that I called myself an influencer. No, I’m just kidding. In this space where I’m at, my platform, it does seem like there are a lot of businesses that I want to build. And I understand that there’s so much time involved with doing that in the real estate space.
Like thinking about a short-term rental product, like a service product and this and that, but it makes so much more sense to just use my platform to be sort of a super affiliate for businesses that I really, really, really believe in because then I don’t have to build the business. I can just send the leads and it’s so much easier to do that kind of in my stage right now.

Codie:
Yeah. Agree. I just wouldn’t use the term affiliate because you want ownership. You guys know this, the hardest dollars are the first dollars. And so even if you’re not materially changing the outcome of a business to like 100x, if you are taking somebody from a business that does a million dollars to two or three, that’s really, really meaningful. And so I think the problem with affiliates just categorically is you get somebody into somebody’s ecosystem but you normally don’t get paid for the lifetime of that client. And for the reciprocal of the one client who talks to somebody else who talks to somebody else. So I really think you want to get actual ownership.
You want equity ownership that pays dividends on an annual or quarterly basis on the same rate as the rest of the owners so they can’t cut you out of deals. Like if they’re paying themselves, they’re paying you too. That’s what I would say. I don’t do affiliate deals for that reason kind of exclusively.

Rob:
Yeah. And I agree, let me clarify. It’s more like, I call it super affiliate, but what I really mean is like, hey, once I get you to X in revenue and if that matches kind of where you’re at, that’s when I’m sort of brought in as an equitable partner in that company or fund or whatever.

Codie:
Yeah. I like it.

Rob:
So we talked about the roofing company, if you’re a real estate investor and you’re looking to broaden your horizons, is there any kind of other real estate niche or anything that they can jump into and diversify outside of something like buying an actual company that you’re spending a lot of money on?

Codie:
So do you mean types of companies or structures of deals or both?

Rob:
Yeah. Both really. Anything in the real estate space.

Codie:
Yeah. There’s a ton of sectors, I think that make sense for real estate. I think you should just go from proximity bias. So like closest to real estate would be normally some of your biggest expenses. So property managers, let’s say, then it might be owning the mortgage company. Then it might be owning the marketing company that does all your social media marketing for your company overall. Then it might be the HR recruiting company that recruits for your underlying real estate company. So I think you kind of go out from like, what’s closest to your business and move that way.
I have another guy that owns commercial property and buys landscaping companies. He’s bought like two or three, sold one for 10 mil. And it’s because they serviced all of his commercial properties. And so he got to know the guys, they showed up all the time on time. They were underpriced often. They weren’t automated. They had no bad systems. My favorite businesses, like every time I see a fax machine, I just get all hot and bothered. I’m like, “Oh, this is going to be so good because they’re still using a fax machine. I can only imagine what their Yelp profile looks like.” I’m real fun at a party guys is what I’m trying to tell you. And so anyway, so-

Rob:
Is that a fax machine back there?

Codie:
No. Nobody’s invited her again. So I like those businesses that you can add just a little bit of technology to that are close enough to real estate. So that’s probably where I’d go first. Last diatribe here is I also might like, you know how, you guys probably just see it. You know how you can see a property probably online or you could drive by it and you’re just like, “That’s a good property. I bet this person does X with that.” I don’t have that muscle for real estate because I don’t see as many deals as you guys do. I’ve sent Airbnbs to Rob and he’s like, “Nope, 30 seconds, let me tell you why.” I’m like, “Oh, okay. Cool. Got it.”
So you get that with deals after a while. So what’ll happen is the second you start thinking, how can I buy the solution to this problem instead of build the solution to this problem? You’ll start talking to other owners and they’ll be like, “Yeah, I’m retiring. I don’t know what to do next. I have this business. I’ll probably hand it off to the grandkids and they’ll burn it to the ground.” And you’re like are on them like white on rice. So it doesn’t always have to be exactly real estate related. It could just be in real estate, you guys know so many people in the community. Use that to your advantage.

Rob:
That’s really great. Well, there’s a couple ways we can go with this. We can actually jump into the deal deep dive and talk about one of them or you can also rip apart one of our deals. What do you think, Dave?

David:
Let’s go to the deal deep dive. I want to hear about a business that Codie has bought.

Codie:
Yeah. Well, let’s go with the recent one. I’m going to pull up some numbers here so I’m not lying to you guys because that’s not a good way to start a relationship.

David:
So we will ask you questions. Codie, we’ll fire them at you and you can just fire back.

Codie:
Oh, I like it. Let’s go.

David:
All right. Question number one. What kind of business is this?

Codie:
This business is a SaaS services business. So it’s a business that does like templated processes for hiring.

Rob:
And how did you find it?

Codie:
A lot of the reason I am so much on social is so that people will send me deals. So this one, one of the people that follows me on social sent me this deal.

David:
Next question. How much was the deal?

Codie:
This business was $120,000 with an additional $135,000 of earn out. So $255,000.

Rob:
Wow. That’s a good deal.

David:
Yeah. 1600s back when it was a Louisiana purchase. That’s funny.

Rob:
That’s a historical deep cut is what we call that.

Codie:
Yeah, that’d be great for TikTok.

David:
That should probably go down as the best real estate deal of all time. Have we ranked best real estate? The Louisiana purchase has to be up there.

Rob:
I think that’s up there. I don’t-

Codie:
Oh, it’s got to be up there.

Rob:
I don’t think that one’s up for a contention. How did you negotiate it?

Codie:
So this one was relatively easy. This business, they’ve been in business for six years. It’s one of the guy’s projects. He has multiple projects. So it’s getting kind of no love and it’s a really cool interface but no distribution on it. So I found it because we used the tool in one of my businesses to hire people and then just reached out to them and was like, “What are you doing with this? What’s happening?” Got to know the guy. I never really just usually reach out to people and say, “Hey, can I buy your stuff? That doesn’t usually work out as well. I just say like, “Oh, I’d love to talk to you. This is a cool business.”
I get to know the guy and he tells me, “Yeah, it’s just one of the things I run, but I’m really focused on this AI such and such.” I’m like, “Great.” And so I ask him a little bit more about the sort of numbers on the business. He tells me and then we start talking sales.

David:
Okay. When you decided to buy it, how did you fund it?

Codie:
This one I bought with cash. Not much. It wasn’t a huge capital outlay and I wanted it to close quickly. So 120k down. And then the earn out is that additional $135,000 that he will get but he’s funding me in seller financing over the course of, I believe it’s two years.

Rob:
Okay. And what did you do with this business?

Codie:
Haven’t done anything yet except started to take over the business and run it. It’s a profitable business. It’s not huge. It probably does something like eight to $13,000 a month in profit. And this business is one that what I want to do is plug it in with this other company that I’m going to buy. And I already have the operator that’s running this new business and he’s going to run both of them and then I’m going to integrate it into everything else that we do.
So it would be like, I guess if you had like a lead gen software or something like that or a hiring software or something like that for your real estate company. I just want to plug it into my ecosystem, make it easier for my company to grow and then I’m going to distribute it through our social and media following.

David:
Awesome. All right. So far, what has the outcome been?

Codie:
The outcome here has just been… Sales are standard. I got this deal at… So if we’re making, let’s split the difference and say we’re making $10,000 a month just to be even across the board. That’s 120k a year and that’s essentially what I put down. So I bought the business for 1x down what the total value of the business is, or I’m sorry, what the total profits of the business is. And then let’s call it another two point, I don’t know, 1x on the, I’m sorry, another 1.1x on the future revenue of the business. So right now we’re profitable buying this business inside of two years if nothing grows.
At the end of two years, every dollar that we make on top of it is gravy. So that in itself would make me happy. But the thing that we’re going to do is connect it with this other company. And then I think this thing could be worth a few million dollars. My target for it, I modeled it out and thought we could turn this into a 5.7 million business sort of with our ecosystem and not buying any other companies. So we’ll see.

Rob:
5.7 million, oddly specific, but I love it. Last question for you, what lessons did you learn from this deal?

Codie:
Couple things. I don’t know if I learned from this one in particular, but first would be keep the deal terms really simple. So this is an older gentleman that was running this company and he didn’t want a bunch of… I wouldn’t give him a full term sheet. Basically I typed out bullet points. So this is what we’re going to do. Nothing else besides these main terms will get snuck in there. And that allowed us to turn around the deal within like 48 hours. And then we papered it with the attorney. So I would say keep it really stupid simple and you’ll close a lot faster and not scare the seller off.

David:
Awesome. All right. Well, thank you, Codie. We don’t get to hear every day about… You know what, let me ask you one last question before we get out of here. If somebody is interested in either buying a business or selling a business they have, how do you find the equivalent of a real estate agent to handle that transaction?

Codie:
Yeah, it’s called a broker. There aren’t really brokers for you if you’re buying a business, you can get on the Rolodex of a bunch of cell side brokers. That’s the norm. So any broker is almost always going to represent the seller. There’s not like buy side brokers unless maybe you’re really big and then you bring them in house. And those are usually called business development guys. So the way that you find them is you go to somewhere like Quiet Light Brokerage, you could go to E-Commerce Flippers, you could look on BizBuySell and they’re going to have a lot of brokers listed that you could work with that are repping deals.
And then you start to develop a relationship with them. Like, “Hey, when you next get a seller that’s doing X, Y or Z, call me if it’s these parameters.” And I do like to develop relationships with them. They’ll give you, especially if you buy something from them once, they know you’re a player, you’re not going to waste their time. They’ll give you a lot of deals.

David:
So would you just Google like business broker?

Codie:
Yeah. Well, I would go to those three. If you’re going to buy online businesses, I’d go to Quiet Light Brokerage or E-Commerce Flippers. But yes, you could just Google business brokers. I would try to be more specific. I might say like, business brokers in this geography. I might say, HVAC business brokers, laundromat business brokers. Kind of like narrow down what your specific segment is because there’s oftentimes specialists and support groups, industry specific groups basically.

David:
So when are you going to buy a business brokerage to make money from businesses that are sold and then get the first shot at businesses that are coming available [inaudible 01:02:03] of the world.

Rob:
Boring business inception.

David:
Yes. Boring business inception.

Codie:
Now everybody knows. Nobody’s listening. Well, funny story actually. So when I was first starting to do this, this is only funny to a nerd, but I reached out to this company called BizBuySell and they have this terrible interface. It’s super 1980s. It’s not optimized. There’s a bunch of trash on the website. And I’m not a billionaire, but I reach out to these people and I’m like, “Hey, has anybody ever spoken to you about buying your business? I’d like to buy BizBuySell.” And I don’t get a response and I kind of like try to get a bunch of different ways.
And then I Google who the parent company is and realize that they’re owned by Core-Mark, which is like a 47.3 billion company. And so I have tried to buy business buying sites, but the really good ones are very valuable. I bet that company’s worth 60 to 160 million, something like that. I’d still buy it at those terms if they would sell it actually. I just need other investors, but I might invest in two smaller marketplaces that I’m looking at right now. There’s not great options to go up against them. We need a Zillow or Redfin for businesses that’s really well done. And it just doesn’t quite exist yet for hard asset businesses. For online businesses, there are some options.

Rob:
I wonder if there’s anyone on this podcast that’s capable of taking that on. I don’t know.

Codie:
Guess we’ll see.

David:
I would like to talk to them because this is an issue that I often have. You know what, here, Codie, I’m going to tie this together. What I love about this and why we wanted you on the show, well, first off you’re awesome at what you do. It is very rare you come across someone that can do what you do. And it also is personable enough to explain it. Typically, the people like you are very hard to understand. They can’t articulate what’s in their head. It’s, you know what I’m getting at. But in this era we’re finding it harder and harder to find cash flowing real estate.
It’s getting increasingly difficult because in general, owning real estate is less work than owning a business. So all this money’s been printed by the government. It falls in the hands of smart people. They have to deploy it. It’s usually less risky and less time consuming to go buy a bunch of real estate than it is to go buy a business where you have to, like you were looking at, you have to oversee it, make sure people aren’t skimming off the top. It’s a little more labor inducive. So that has created this really big bubble in the real… I shouldn’t say bubble, because it’s not like it’s going to pop.
It’s created a very hot market where it’s harder to find real estate deals, but business deals are everywhere. Like you’re saying, there’s all these baby boomers that are aging out. There’s an epidemic of fax machines that are screaming, “Come buy me.” So this is a way that if you’re into real estate and you want to work in this space, that you can become an owner of a business and still find income coming in from something without just buying real estate. So I want to thank you for sharing this. And Rob, for you, how do you guys know each other by the way? I never asked that.

Rob:
I don’t even remember.

Codie:
How did we meet?

Rob:
How did we become friends?

Codie:
It had to be online.

Rob:
Oh, you asked me to come on your podcast like a year ago, I think.

Codie:
But did I just meet you online? Was I just following you?

Rob:
Yeah. Yeah. I think so. You were like, “Oh, this guy builds tiny houses. I’d like to have him on my podcast.

Codie:
Yeah. That’s true.

Rob:
And then I think I ghosted on accident. I was busy.

Codie:
Did you?

Rob:
I was busy learning who I was. And then you emailed me like three more times. I was like, “Fine. I’ll do it.”

Codie:
Ah, I love that.

Rob:
And then I was like, “Oh my gosh, he’s so cool,” once we actually did the podcast and then we’ve been buds ever since.

Codie:
Yeah. And then you came and spoke at my conference, which was rad.

Rob:
That’s right. Ah, man, that was really, really fun. Thank you for having me up.

Codie:
You’re a killer speaker. That’s good.

Rob:
Oh, stop. Stop.

David:
Yeah, you should be on a podcast or something. All right. Well, this has been mind blowing. I love talking this stuff. I hope we can have you back on, Codie, again, to talk about it in a little more depth because I think with the market we’re in, it only makes sense for real estate investors to sort of broaden their perspective, look around a little bit and say, “Hey, I still want to buy real estate, but I could buy some of these businesses that compliment real estate.” That’s a big thing Brandon and I talked about was the synergy, right? If you’re flipping houses and then you go to the burst strategy, it’s not a huge jump. You’re not doing something completely new.
If you run a glue factory and then you want to go start like a lumberjack business, that’s a really bad idea. There’s no congruency between the two things. So what we’re talking about is if you already love real estate, you already know how to value it, you kind of get how the world works. Why not consider running a business that’s in that world? It’s not a huge jump. So thank you for that. All right. We’re going to move on to the last segment of our show. It is the world famous, Famous Four. At this segment of the show, Codie, we ask every guest the same four questions. And I will start. Question number one, if you have one, what is your favorite real estate related book?

Codie:
It’s so cliche to say, Rich Dad Poor Dad. That’s actually terrible. I don’t have any real estate books that I would read besides Rich Dad Poor Dad or actually know where I would go? Dale Carnegie’s biography. Not exactly real estate, but one of the largest real estate owners in the country at his time. And I think anytime you can read the biography of great men who have amassed massive wealth, you walk away learning a ton. I think Walter Isaacson wrote that book, who’s also an incredible biographer, but check my facts on that one.

Rob:
Okay. Question number two. Favorite business book.

Codie:
Ah, this is also a little controversial. It’s not for the political leanings, but Dave, you already know that I like to be controversial, so we’ll just throw it in there. We’ll get everybody canceled early. There’s a book called Atlas Shrugged that lots of people talk about, another one called Fountainhead. And the reason I like those books, they’re novels written by a woman who came over from communist Russia to the US. And the reason I like them is because they were the first books that I ever read that make me feel like it made sense when you love business. I don’t know if you guys or anybody listening relates that like some people just, their eyes glaze over.
And I would love nothing more than to talk business all day. I don’t care what’s on TV. I don’t care about your kids. I don’t want to hear about the dog. The weather’s out of the question, but if you want to talk business strategies, I’m there for it all day. And that book made me realize, oh, maybe there’s other people like that. So I really like that book.

David:
I think that’s what Rich Dad Poor Dad did to a lot of people when it comes to finance and real estate is it was, that is what I’ve been feeling this whole time and now I don’t feel crazy. There’s other people out there that feel it too. And those are always impactful moments when you have that, like, yes, now it makes sense. That’s what the DiSC profile was for me with communications. Oh, that’s how you got to do this. So these are powerful books.
Even if you end up not agreeing with everything that’s in the book, I don’t think there’s anything wrong with reading it, trying to understand the viewpoint of the person that wrote it and seeing if those principles might apply to some other part of your life even if it’s not business.

Codie:
Yes. Agree.

Rob:
Yeah. Actually I will say credit to your conference. When I was there and I was in the green room with all the speakers, that’s how I felt. I was like, “Oh, this is how other entrepreneurs think.” And they all like the [inaudible 01:09:04] were going. Everyone’s talking about the game plan, everyone just super, super successful. And I was like, “Wow, this is…” I felt very elevated being in a room with other people that were like same mindset.

Codie:
I love that.

Rob:
So when you are not buying 26 businesses and working them and hiring the team and operators and doing all that whole thing, what are some of your favorite hobbies?

Codie:
You brought up jujitsu earlier, Dave, but my husband’s really into jujitsu. I actually really like Muay Thai. So we do a lot of Muay Thai, a lot of yoga. I think our saying at Contrarian Thinking is civilize the mind, make savage the body, build the bank account. And so I try to do things every single day that I think are hard physically. That’s maybe one of my favorite things because it makes everything else easier. Then it’s like, oh, we lost some money this month. Okay, whatever, is anybody going to die?
So I would add MMA. I would add yoga. And then I would add, I’m really into lately saunas and cold plunges. I think that’s become a thing now, but those are some of my favorite activities.

David:
So pretty much anything you can do that is hard.

Codie:
Yeah, I don’t like heights. Does that count? Yeah. That’s not my favorite.

Rob:
All right, let’s go skydiving. Set it up.

Codie:
I’ll do it. I just won’t like it, Rob.

David:
All right. In your opinion, what makes successful investors different from those who give up, fail or never get started?

Codie:
Ego. It’s all about the ability to ask questions. I used to think that I had to be really smart. Private equity is a weird world and lots of people are not the nicest in that space. And so for a long time, I was really quiet and just would nod my head like, “Of course I know what pari passu means.” And then I’d go Google like pro rata, pari passu. What’s that mean? And then I realized, wait a second, none of these people actually know. And the thing that is their Achilles heel is that they’re all pretending that they know everything so they sound smarter than everybody else.
And I realized the smartest investors were like, “Explain that to me like I’m a toddler.” And they had no… It didn’t mean that they weren’t smart. They just didn’t care if they didn’t know all the answers. And so I’m a former journalist and that really opened up my eyes to a lot. I was like, “Oh, if I just ask the right questions, I can get any answer. I don’t have to have all the answers.”

Rob:
I love that. So former journalist, Goldman Sachs ex worker/crazy business owner with 26 owners, really quite the resume, Codie. Thank you so much for joining us. Can you tell us where people can find out more about you on the interwebs?

Codie:
Yeah. I’m Codie Sanchez pretty much everywhere. We’re pretty big on TikTok and Twitter and Instagram. And then Contrarian Thinking, if you want any of the business breakdowns, that’s where those will be.

Rob:
Yeah, definitely go follow her on Instagram, TikTok. Literally Codie went from like, I don’t know, it was annoying. 150,000 followers to like 800,000 followers in like a week. And I was like, “Dang it. Now I’ll never catch up.”

Codie:
That is not going to be on my tombstone. I don’t know that we’re going to care about that in a year or two. So I think you got that. Don’t worry about it.

David:
But we care about it now, Codie, especially Rob.

Rob:
Yeah. That’s right. I won’t sleep until I beat you.

David:
This was always what I had to feel when Brandon was on the show is he would be like, “Hey, follow me.” And he’d get 9,000 followers and I’d get like four, mostly the four people that felt bad, like, oh, but what about David? Just give him a pity follow. And what people don’t realize is I am perfectly fine with the pity follow. I’m not above that whatsoever.

Rob:
True. He is.

Codie:
What, give me the money.

Rob:
We’ll want to say one quick warning to everybody, go follow Codie, go follow, foto or follow me at Rob Built, David at David Green 24. What’s going to happen is you’ll follow us. Immediately upon following us, you’ll probably get a robot that follows you back.

Codie:
Oh yeah.

Rob:
Don’t fall for the robot, guys.

Codie:
Don’t fall for the robot.

Rob:
They’re out there. We’re all working on the blue checks. I don’t know, Codie, you might have a blue check, but me and David are working on it.

Codie:
Yeah. None of us talk about crypto. So there’s your first trigger. They talk to you about crypto.

David:
Yeah. That’s exactly right.

Codie:
Although I hate to say it-

Rob:
You shouldn’t have said it. Now that you said it, it’s out there now.

Codie:
Oh, wow. Also, I think there’s a little bit of Darwinism happening here because I’m like, you guys, if you’re falling for these bots, maybe you needed to once because you’re never going to fall for it again. This is like your Nigerian [inaudible 01:13:24] from Africa calling.

Rob:
You do like some controversial things.

Codie:
Yeah, come on, guys. You got to get smarter than the bots.

Rob:
Yeah. I have a lot of people that will send me the screenshot and they’re like, “Hey, this is Rob [inaudible 01:13:33] 45678. Is this you?” And I’m like, “No, you’re messaging me. This is me. We’ve established that this is my account.

David:
[inaudible 01:13:41] you get is that you, did you make up another fake account, spell your name wrong on purpose, copy all the same pictures from the one you had to the other one just to message me from that one? It’s understandable that they’re confused. It’s just funny that’s the way that they phrase the question to [inaudible 01:13:58].

Rob:
I’m not kidding you. I get minimum, minimum 30 to 50 of those messages a day.

Codie:
Oh yeah. Ditto. The same. My favorite thing is just, I go on another account just because they block you from seeing them. So I can’t ever see my scammers.

Rob:
Yes. They do. It’s annoying.

Codie:
Yeah. So I go to this other account and then I just do a screen share of like the 452 versions of Codie, which is funny because nobody even cares about the one Codie. I don’t know why they think the 400… But somebody out there’s fallen for it. So you got to wake up because if people don’t buy this stuff anymore, I think the scammers go away and then we’re solved. Wait until I get scammed, then I’ll come back on here and you guys can ridicule me mercilessly.

Rob:
Well, everybody cares about the one Codie. All right, let me clear that up for everybody.

David:
Yes. And on that note, thank you so much, Codie, for being on the show, for sharing your expertise, for giving us a new perspective on how we can make money through real estate and enjoy what we do. Again, what’s your preferred method for people to reach out if they do want to talk to you?

Codie:
Where we usually do the most engaging is probably Twitter. So get at me on Twitter, I respond to all the comments on our tweets and I think Twitter is actually pretty fun and you can engage with humans very easily. TikTok, forget about it. I don’t, no promises.

David:
What’s your thoughts on a business person in Elon Musk buying Twitter? It was a good buy?

Codie:
I think you probably know where I’m going. I think he’s crazy for doing it. You couldn’t pay me enough money to buy Twitter with all the nonsense that goes on from there, but I think it’s good for the platform.

David:
Okay. Do you think it was good for him as a business? Do you think that made sense?

Codie:
No. No. I don’t think it’s… Maybe he’s a rocket scientist, so he actually knows how to do a much more difficult problem, which is send rockets to space. I think he can probably figure out how to stop people from corrupting our free speech problem here in the US. So I think it probably makes sense to some degree, but-

David:
I’m curious what type of synergy there is between his goals and Twitter. Because as we were just saying, you buy a business if it’s related to something you already do. So there’s some angle I’m sure Elon Musk is seeing, would you agree?

Codie:
Well, he kind of said when he set out to create Tesla and SpaceX, he said they’re really hard problems to solve. I think we have about a 10% chance of solving them, but they’re worthy problems of solving. So I’m going to start it regardless. And so I think he probably feels the same. Free speech is worth saving. It’s a hard problem, but it’s worth trying to do. And then he said, “It’s not in my nature to give up.” And so that makes me think he’ll probably be successful with Twitter just like everything else.

David:
That is a good point. Rob, what’s your preferred medium where you’d like to be contacted.

Rob:
Oh, YouTube. You can follow me on YouTube at Rob Built or Instagram at Rob Built.

David:
Alrighty. I’m at David Green 24. Facebook Messenger is probably the best way to get ahold of me if you have something important. I’ll give you guys a little secret there. It’s not a secret now that I’ve said it on the podcast, but-

Rob:
Good take.

David:
… Instagram, we get like 700 messages a day. Facebook Messenger, I get two. So if you really want to get a hold of somebody important, that’s the best way to go about it assuming they have the app on their phone. That’s my go-to move if I ever want to get in touch with somebody famous or something is until I have a blue check mark, they don’t know which of the David Greens it is. So I use Facebook Messenger. And then you could follow my YouTube at David Green Real Estate. Very boring just like me. Codie, any last words before we get out of here?

Codie:
No, just go diversify. Try to buy something even if you don’t use money.

David:
There we go. Rob, anything from you.

Rob:
Mm-mm. I’d say go diversify and go make money, oh, even if you don’t have to spend money.

Codie:
Sounds smart.

David:
All right. Well, I’ll get us out of here.

Codie:
Thank you guys.

David:
This is David Green for Rob copying Codie’s ending line. Abasolo signing off.

 

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Last week, the Biden Administration unveiled the Housing Supply Action Plan (HSAP), a new proposal that aims to make homeownership and renting more affordable. The median home price in the United States has risen nearly 47% since April 2019, and rents have increased by over 21% over the same period, according to BiggerPockets’ internal data. 

There are a lot of elements to this proposal, but together they aim to increase housing affordability by reducing the housing shortage in the country. Each piece generally falls into one of four categories: Zoning Reforms, Financing, Owner Occupancy, and Cost Controls. The plan, if enacted, would pay for such proposals with a combination of existing funding (largely taken from the bipartisan infrastructure bill passed last year, as well as Department of Transportation budgets) plus new spending proposals. 

Estimates of the size of the housing shortage vary depending on the source. On the lower end, Moody’s Analytics says it’s about 1.5M units. On the other end of the spectrum, the National Association of Realtors estimates it’s about 5.5M. 

Regardless of which estimate you look at, a housing shortage is a problem. First and foremost, it creates a situation where many Americans find it increasingly difficult to find a place to live, and existing housing units go up in price, straining budgets. It’s simple economics—if supply cannot meet demand, prices will rise. This dynamic has played a significant role in the rapid property value increases over the last several years. 

Of course, many other factors have recently pushed up prices, such as super-low interest rates, demographic demand shifts, inflation, and low inventory. But the lack of supply is one of the long-term trends impacting the housing market since before the pandemic and is poised to continue to impact the housing market for years to come. 

As a country, there simply has not been sufficient building since the Great Recession: 

This proposal aims to correct that. While none of these proposals have gone into effect, and many more details are needed to understand the impact fully, we can examine the information we have so far.

Zoning Reforms 

Zoning in many areas restricts the building of high-density developments. Think of places where only single-family homes can be built, where height restrictions exist, or municipalities that prevent the construction of Accessory Dwelling Units (ADUs). Any real estate developer or builder is likely very familiar with many of these restrictions that make it difficult to build a bunch of units quickly. Proposals in the Housing Supply Action Plan aim to reward municipalities that reform their zoning and land use laws to encourage more building and higher density. 

As an example, some independent analysis by the Urban Institute suggests that these types of reforms, along with the improved financing proposed in the HSAP could lead to the construction of 1 million additional ADUs in the next five years. ADUs are an attractive option to boost residential density, as it allows homeowners and smaller investors the chance to add units at relatively low costs, with relatively less permitting and risk. 

Financial Reforms

There are many federal programs that can help fund new housing, but the programs are disparate and difficult to navigate. The HSAP imagines streamlining these programs to make it easier to build affordable housing. 

Specifically, one proposal calls for $25B to be distributed to state and local governments to create up to 500,000 housing units designed to meet the local community’s needs. 

Additionally, the proposal aims to finance the building of 800k new rental units for low-income tenants and expand financing access for building ADUs. 

Owner Occupants

Recent data shows that investors, mainly institutional investors, have accounted for an increasing share of home purchases. To help owner-occupants, the plan will instruct the Department of Housing and Urban Development (HUD) to sell their inventory of properties, which is estimated to be about 125,000 units, to would-be owner-occupants rather than investors. Currently, investors can buy HUD homes if no owner-occupant bids are accepted. 

Cost Controls 

Amid the backdrop of high inflation, the HSAP is looking to curtail the skyrocketing prices faced by builders and developers. 

The first part of the plan calls for partnerships with the private sector to improve supply chain efficiency and eliminate any disruptions resulting from the COVID-19 pandemic. 

The cost control proposal will promote the construction of modular and manufactured homes, which have become far more cost-effective in the last several years, and could help to bring the average cost of building a new single-family home or small multifamily down in the coming years. 

Conclusion

At this point, the HSAP is just a proposal. Many elements of the plan will likely change before implementation if implemented at all. Even if these policies move forward, none of them offer a quick fix. 

The plan is likely to evolve over the coming months and could take years for full implementation. The main takeaway is that there is a concerted effort in the White House to address the housing supply issue and improve affordability.  

To stay on top of this news and other investing-related news, check out BiggerPockets’ newest podcast, On The Market, where Dave and a panel of expert investors debate the latest real estate trends, news, and data. 

Ashley:
This is Real Estate Rookie, Episode 185.

Alicia:
I could spend $300,000 to go to school, or I can work your exit strategy today from a beach. Let me decide. I think it was then when I fully committed to initially it was going to be some passive income to help while I was in dental school, but then it just became my exit strategy in general. What I did was I took that exit strategy and just moved it to be my primary focus instead.

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

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we give you the inspiration, information, and education you need to get started as a real estate investor. Ashley Kehr, what is going on? What’s new?

Ashley:
Well, I have two exciting things to share with you, as I’m sure you know, from BiggerPockets, but before we get into that, it is snowing outside. Today is what? April 19th, and it is a snow storm outside right now, so if you wanted to go ahead and recap how beautiful the weather is in sunny California, now is your chance.

Tony:
But what’s funny, Ashley, is I’m actually going to be in your neck of the woods in four days, so I guess I get to-

Ashley:
I know-

Tony:
… experience this terrible New York weather firsthand.

Ashley:
Yeah. I actually found out my new car has made it to Buffalo, hasn’t made it to the dealership yet, but I’m hoping that it makes it here in time to come visit you so I can road trip with it-

Tony:
You can road trip with it-

Ashley:
… for a couple of hours-

Tony:
There you go.

Ashley:
… to come see you when you go to New York.

Tony:
Yeah, that’d be perfect, and you can drive me around.

Ashley:
Yeah. Then if not, I’ll just have one of my personal chauffeurs that have been driving for the last month take me.

Tony:
Take you where you need to go.

Ashley:
Yeah. Though, there’s two call outs I want to do real quick on BiggerPockets is first, the new podcast that has come out. It is called On the Market. It’s one my great friends and my recent joint venture partner, On a Flip James Dainard as one of the hosts, Dave Meyers, who we had on a couple episodes. I highly recommend you guys to go check it out. They also have a YouTube channel too, where they’re posting the podcast episodes and also extra YouTube videos for you guys with what’s going on in the economy, what’s going on with the market.
I was just watching a video this morning about some of the top housing markets, what their picks were for housing markets across the country too. Then the second thing that I want to point out is a BiggerPocket’s money episode I want you guys to listen to. If you are looking to get lending from a loan officer and what it takes to get a pre-approval, or if you need help preparing to get pre-approved, you want to check out episode 303 of the BiggerPockets Money podcast. They have a former mortgage lender that comes on and talks about how to check your credit score, how to build your credit. You’re not just quite hitting what you need for pre-approval, some tips and advice you can take away from this episode to actually get pre-approved for a loan.

Tony:
Yeah. So if you guys haven’t yet, make sure you go check out both of those, again, On the Market, great, great, great new podcast. I think when it launched, it was number three on the podcast charts for business, so there was a lot of, lot, a lot of good response so far, so you’re missing out if you haven’t checked it out yet. Can I share just some good news, Ashley? I’m excited because this is something I’ve been working on for a while, but I’ve talked in the podcast that we’ve been wanting to buy a resort. That was the space that I wanted to move into was to pick up a resort or a boutique motel or hotel. Well, we finally, finally, finally have one under contract. It’s a 23-unit cabin resort in Big Bear Lake, California. We’re looking to close, I think at the end of June, but I’m super excited for this project to finally take hold.

Ashley:
Tony, I am so happy for you. I know how hard you’ve been working on this deal. I’m so excited to do a Rookie Reply to actually break down how you made this deal happen, because I know you went back and forth with the seller multiple times. So you guys watch out for that Rookie Reply that will come out probably July. We’ll do it once you close on the property and work through the numbers. Yeah.

Tony:
Yeah, but it’ll be fun. It’ll be my first time syndicating a big deal like that, so there’s some lessons to be learned there. We’re going to be turning it into a really cool wedding space, so we’ll have some wedding revenue in addition to the short-term rental stays, so just a really tremendous amount of upside with this project. I’ll be excited to share the journey with you guys.

Ashley:
You know how many women are going to be pushing to get engaged now, Tony, just so they can get married at Tony Robinson’s-

Tony:
At Tony Robinson’s-

Ashley:
… venue?

Tony:
Yeah. Maybe, maybe, we’ll see. Maybe it’ll be the other way, all the men watching want to get married because it’s …

Ashley:
Yeah. They want to go and get a glimpse at Tony Robinson and maybe get some real estate advice. Yeah.

Tony:
Advice on their wedding day.

Ashley:
Okay. Today, we actually have a BiggerPockets employee on the show, so this is so exciting to me. I’ve always been a BiggerPockets groupie, still am, a diehard, bigger packets fan. I love all of the people at BiggerPockets that put everything in place, including this podcast episode. Tony and I show up here, we don’t do any of the behind-the-scenes stuff, and so we’re very fortunate to have a great team at BiggerPockets. Today, we get to highlight and bring on the community manager at BiggerPockets and talk about her investing and what she’s done so far. The first thing that she points out is I failed the first time. It didn’t go great. It didn’t go how she expected, but she started over again and she took more time to research what failed last time and learn what she needed to do to make it different, and she is succeeding.

Tony:
She also shares some really amazing tips on how to build relationships with both private money lenders and how she went about finding contractors in a new market. So if you’re struggling with either of those two things, make sure you listen to the end of the episode.

Ashley:
Alicia, welcome to the show. Thank you so much for joining us today. Can you start off with telling everyone a little bit about yourself and how you got started in real estate?

Alicia:
Sure. Thank you so much for having me. I got started in real estate first by being an accidental landlord in about 2011. That didn’t go so well. I ended up selling the property. I came back and started doing it intentionally in late 2019. I started with a multi-family property in Detroit, which I know a lot of people are scared of, but I lived in Detroit previously and started with that one and then expanded to Texas. Right now, I’ve got five doors, one live-and-flip that may be a failed live-and-flip and about six more under contract.

Ashley:
Wow, so you’re busy. You got a lot going on-

Alicia:
Just a little bit. I’m also the community manager for BiggerPockets, so I get to interact with [inaudible 00:07:05]

Ashley:
You have an insider here.

Alicia:
You have an insider today.

Ashley:
Yeah.

Tony:
Alicia, for folks that maybe don’t know what that means, just quick rundown, what is it that you do at BiggerPockets? What does it mean to be the community manager?

Alicia:
I joke that for those of you who like Dr. Seuss, I’m the Lorax of BiggerPockets. I speak for the people, and so if there are projects or products, things that need to be shared with the community, then that becomes my job to find out what they need and get it back to our product team, and also to hear what they’re missing or what the product team has in development and how or why it would benefit our members. I get to talk with people, understand their real estate journey. By me being an investor myself, it’s a huge help, because I’ve been in their shoes. I’ve dealt with the same struggles, and I can also see where there’s some gaps that maybe someone who isn’t an investor might not realize so that we can deliver the best products and experience possible.

Ashley:
That’s why BiggerPockets is so great. It’s not only the greatest software platform forums out there, but it’s also very investor friendly. We preach all the time, find an investor-friendly agent. Well, here we have Alicia, an investor-friendly community relations person. Alicia, let’s go back to the investing, though. The first thing you mentioned was that you failed in 2011, so how was that and how were you an accidental landlord with that property and how did that property fail?

Alicia:
It didn’t necessarily fail, it just was in Indianapolis, and it was the time coming out of the 2008 crisis where Indianapolis hadn’t quite recovered as some of the other ones and my ex-husband had a job transfer. W we were trying to sell it, had to drop the price, weren’t really comfortable with the price we wanted to drop it to. A friend of ours was a property manager and she said, “Hey, I usually do large multi-family, but if you want to rent it out,” she said, “I’ll give you a great deal and we can go ahead and do it that way.” Unfortunately, I didn’t have a great experience. It was a remarriage with five kids that very quickly dissolved in a matter of a few months; pets, that weren’t supposed to be there, drama, drama, drama. So thankfully, we relisted it after she moved out and were able to sell it, but trying to do that out-of-state, not choosing to do that and not really having a partner that supported that journey was especially stressful.

Ashley:
What made you decide that, “Okay, that didn’t go well?” What made you decide to try again, because I think a lot of people where they have something like that happen, just be like, “Okay, that’s not for me. I’m going to invest in something else?”

Alicia:
That experience, I actually learned a lot from it. It was something that I see people around me that were having some success with. Like I said, I didn’t have a partner that was supportive of that, and so when I no longer had that constraint, I started looking at ways to be able to leverage what I had because my divorce left me with half of what I was expecting or far less, but it didn’t change my goals and it didn’t change my outcome that I wanted for my future. So I had to start looking at more creative solutions to be able to get to the point that I wanted to be without being able to have the large income.

Tony:
Alicia, can we just talk really quickly? You touched on it a little bit, but what are some of the lessons that you learned from that accidental landlording experience?

Alicia:
Number one, if your heart isn’t in it, you should probably just step away and decide to do something else. There are a lot better ways to just accept the loss and move on if it’s going to be too stressful. I also learned that staying in communication with your property manager and having a property manager who is definitely solution focused and keeps you informed is a game-changer, especially if you’re doing long distance, because you don’t know what’s going on. I did have the advantage of still being friends with my neighbors, so they filled me in, “Hey, the police are at your house.” Oh, yay, things like that. But it was really important to make sure that we stayed in connection so that we knew the right steps to take. I had to lean a lot on that property manager, because I had no education; whereas this time around, I had used BiggerPockets before gaining my first rental.

Ashley:
Alicia, based on those lessons learned, and you said that you went to BiggerPockets to learn how to research it, do it better the next time around, what’s some advice you can give to our rookie listeners about looking for those solutions to certain problems you ran into?

Alicia:
I would say number one is, you’re always going to need more money than you think. I run across this when they’re like, “I have X number of dollars to get started,” or, “I have this much for a down payment.” I usually tell them, Great. Did you consider closing costs? Did you know that right now it’s really hard to find things in stock? My flip is going to cost more than I projected even when I started a month-and-a-half ago,” so making sure that they understand they need a bigger cushion than they expect. They need to have multiple exit strategies ahead of even starting a project or deciding to get it under contract, because things don’t always work out.
So I think that’s really important, especially if you’re a newbie, you don’t have a lot of money to make mistakes with, so not being afraid, but definitely taking those fears and creating solutions around it before you even start. I’d say also, getting a partner or someone that you can mentor with is huge because they can help you foresee some of those challenges, but overall, just making sure that you have your exit and you reverse engineer to get to, “How much should I offer? What should I have for my bid? What contractors should I look for? When is DIY D I don’t?” All of those different things that can help you be successful, so you want to do it again, and you really get excited about that check at the end, or the monthly income you have.

Ashley:
Alicia, can you give us an example of one of your properties where you purchase the property and you’re like, “Okay, here are my different exit strategies,” and go through how you plan those out?

Alicia:
Sure. We just started a project. It’s My First Flip. I typically try to do buy-and-hold, because I want the long-term gains and I like the monthly income coming in, but I need cash to be able to move on to the next project. I partnered with someone that I happen to meet on BiggerPockets. He’s a fantastic partner, and we decided to do this flip of a two-bedroom, two-bath, 850-square foot pretty simple project. What we did there was looking at the numbers, first, is there room to actually rehab at the way it should be because it’s an older home, and there’s lots of things that can come up in those? We needed to also look at what’s our sale price? Does it make sense to step in, and if it can’t sell or if we choose not to sell, will it still cash flow as a rental in case something happens with the market?
I know that my partner, this is his first foray into investing and he was nervous about the climate that we’re in. He’s like, “What if 2008 happens again?” I just spelled it out. I said, “2008, in the worst markets, were dipping about 25%. We could dip 20% and still make profit off of this. We can still cash flow.” So even taking those most catastrophic kinds of things that we may have experienced already and putting them in perspective to make sure that we can move forward with the deal and it still be a good deal was really important.

Tony:
I love the way you break down all those excellent strategies and think in the worst-case scenario. Ashley, and I talk about that as a way to beat the fears. If you can deal with the worst-case scenario, then there’s no reason not to move forward. Alicia, I want to talk a little bit, because I’m really glad you brought this up, but you said that you found your partner through BiggerPockets. If we can, let’s go down that rabbit hole a little bit more. How did you find this person exactly? How did you vet that the partnership would be a good one?

Alicia:
That’s a great question. So I started out in some conversations and noticed we were following certain threads on the forums. He happens to live locally, but also is from Indiana and in the same area, and we’re both looking at investing in both places as a long-term strategy. So we got to talking and I told him, “Please come out and check out what I’m working on right now,” that way he could see, just get a feel for if it was something that he wanted to do or not. He came out to a project that was completely gutted, and now he’s seen that we just finished it a few weeks ago and seen the transformation. We said, “Let’s keep each other in mind if something comes up.” I happen to find this property that was undervalued on the MLS that hit a nice sweet spot, that honestly we could lose everything and it wouldn’t break us.
I messaged him and said, “Hey, are you interested in moving forward, because this is a great property.” We started working together and we decided to intentionally make it a flip. I joke that we are on a very strong third date, so we’re deciding, “Should we move together and move forward, or should we just flip the sell, go our separate ways and remain friends? I think that’s a great exit strategy for people who are just getting started is to have a very clear end game, not something where you’re tied to “We bought a package of 15 houses, and now we are stuck for the next five, 10 years,” so we have a chance to feel each other out. We also made sure that our strengths and our weaknesses were counterbalanced of one another. You don’t need a duplicate of yourself, you need someone who can step in and fill those places where you’re not as strong or to hold you accountable on those places to keep you moving.

Tony:
Alicia, I know the next question from our rookie audience is going to be, how did you structure the partnership? What are the roles and responsibilities? How are you guys splitting the equity, the profits? So walk us through that piece.

Alicia:
For our partnership, we decided to do a joint venture agreement rather than going through all of the expense and everything of opening up a separate LLC between us. We also were looking a lot at risk mitigation between us joining in a partnership. This is my first partnership to do aside from having a private lender, which I’ve done previously, but we decided to do a joint venture between our LLCs and just drew up a document, had it notarized, and we are good to go.

Tony:
That’s awesome. Now, in terms of how you guys are splitting duties and responsibilities, what does that look like?

Alicia:
I already have a crew working in the area, and so his contribution is some of it is research of things I don’t have time to research. He’s working on finding a few of the subcontractors that we need to be able to get things done on time. I’m managing the crew and then we’re each bringing 50/50 on the expenses.

Ashley:
Alicia, one thing that, myself included, and Tony, I’m sure you do too, is finding contractors. How did you find your subs and how is your partner going to go and find out some subs too? Do you have any advice for that?

Alicia:
I found my contractor from a tenant. I had a partner that was supposed to be going through on a project that I purchased that didn’t work out, and I suddenly found myself with this mortgage on a hard money loan and plans to get this thing rehabbed, because this duplex had not been updated, no joke, since 1967 to ’68, and then the person who was going to help and contribute the labor backed out. So I’m like, “Great. What do I do?” I had a tenant who said, “Hey, I have a guy who can come over and bid everything,” so I tested him out. We needed the exterior painted, so I said, “Let’s start with that. I want to see your quality of work. I want to see how we work together. If you deliver on what you say you will,” and he did all of those.
Now, we have what I joke is my rag tag crew, so we’re rough around the edges, but we get the job done and they show up for work. They have never worked for a woman before, which has been interesting, so we’re just moving along from project to project. I will say for those of you who do have contractors that you’re using regularly, respect what they know. Respect that they have experience that you don’t have, but also know that there is a line where you, as the paying person, needs to make the decision to say yes or no, but treat them with respect. Pay them on time, and treat them as a professional, just as you’re a professional investor and you’ll have a great relationship going forward.

Ashley:
Alicia, how are you managing the contractors? Do you have any software or anything that you’re using? Are you using Excel? What does that look like?

Alicia:
Managing my contractors, I’m typically running through texts, so I have a general contractor and we have three guys that are on that crew that help out. I don’t have to check with the crew very often unless they’re working on a separate property or they have a question. Other than that, I’m communicating with the general contractor regularly. I’m going down there once a week. The property’s about 40 minutes south of me, so I check on everything, check progress. I get regular text updates. Because we’re a small crew, and because I don’t have the financial capacity at this point, we’re doing one project at a time, so it’s really pretty easy for me to manage and get started, especially because BiggerPockets is my full-time job. So my evenings, weekends, lunch breaks are spent managing this project, as I’m sure everybody here has probably been in at one point. So communication with them, it has to happen when we can.

Tony:
Alicia, you made a really good point. I want to make sure that we don’t gloss over that, and what you said that when you hired this contractor for the first time, instead of giving them an entire rehab to do, you gave them one small job, and that was to paint the house. Through that small job, you were able to see, “Okay, do we work well together? Do I like this contractor’s work?” Is there a good fit here?” You did the same thing with your partnership with the other investor as well, where instead of saying, “Hey, let’s go out and buy multiple single-family houses or this big apartment complex, we’re just going to do one flip together, and that flip has a really clear and easy exit strategy.” That process you’ve developed, whether intentionally or unintentionally of starting small with your partnerships, I think is a really important lesson for all of our rookies to follow as well.

Alicia:
I definitely agree. Some people are the kind that jump into the deep end of the pool, cannonball, ready to go. Then, there’s some of us who step in, test the water a little bit so that we can decide, “Are we going in or are we getting out?” Everybody is different, but I think giving some caution can help mitigate some of those potential issues that you might come up with or really sour your feelings towards investing.

Tony:
Alicia, we’ve talked a lot about the flipping, but I want to go back just a little bit, because I think there’s an important piece to your story that we’re missing here. You had this initial start as the accidental landlord in 2011 and you picked back up, you said, in 2019. In those eight years, that’s a decent amount of time to wait, what was it that made you say, “Okay, I think I’m finally ready to go?” The reason I’m asking this question is because there are so many rookies that are listening that I think are on the fence about getting that first deal done, but for whatever reason, they’re not pulling the trigger. What was it in your mind, what was going on that made you say, “Okay, I’m finally ready to make this happen?”

Alicia:
For me, going through a divorce or a major life change, there’s a lot of stepping back, reanalyzing, reassessing what you want, what your goals are, and I took several years to just get my financial footing again. Initially, I was working in the dental space and I was working with a lot of dentist entrepreneurs. I thought, “Maybe, I want to go to dental school,” and I started working towards that goal, but talking with all of these dentists, I learned a lot of them wanted to get out and what was their exit strategy? So many of them had real estate as an exit strategy, and they’re like, “I want to retire off my investments and things.”
So I’m thinking, “I could spend $300,000 to go to school or I can work your exit strategy today from a beach. Let me decide.” I think it was then when I fully committed to initially, it was going to be some passive income to help while I was in dental school, but then it just became my exit strategy in general. What I did was, I took that exit strategy and just moved it to being my primary focus instead. I think a lot of it was having to get up self confidence after having big life changes and also making sure that I had good financial footing that I could go forward, because I had kids at home that relied on me.

Ashley:
Alicia, you bring up such a great point about that dentist, or the ones you worked with, how they wanted to get out of being a dentist and were trying to find those other financial goals to get them there. When I graduated college, I worked at a CPA firm and I was going to be a CPA. That was what I went to school for. That’s what I was working for. The day that I quit, where I couldn’t take it anymore, couldn’t sit at a desk, I couldn’t do the same things over and over again just for different companies, I told the manager there that I was putting in my two weeks notice. She said to me, “I don’t even make the money that I want to make here. You should be happy with the money you’re making,” because that was part of it was I expected to be making a lot more money than I actually was and she said, “This is just the way it is. I wish I was making more money too. You just don’t here.”
I have always thought about that, and that really triggered me. Well, how is that going to convince me to stay, is you telling me that you’ve been here so long, you’re a managing partner of the business and you’re already complaining that you don’t make enough.” For me, I was like, “This just confirmed that I’m making the right decision by leaving,” I think that’s very powerful that especially anyone that’s young listening to this, if you are going to college to be something, to get into a career, talk to people that are in that career and see what it’s actually really like. Yes, you could be making tons of money, but do they have huge student loans? Are they having to dump a lot of stuff into their practice or their business? I think it’s really important to talk to these people that could be mentors to you as to see what it’s really like being in that field or that career position.

Alicia:
I was going to say too, for the rookies, there’s a great BiggerPockets Money episode. I’m not sure on the number, but I’m sure we can put it in the show notes about the value versus your major, specific to schools for college education. That was huge because as my kids are in high school, now they’re looking for their careers and making decisions. Does that $60,000 a year school really get you ahead versus the 25,000 a year school, and is that career what you really want? How can you transition out of it? Because I started out as a performer and in acting in theater and things, and I’m not doing that today as much, but that doesn’t mean that you can’t take those experiences and move it into a different career path. But sometimes you get those golden handcuffs, if you go for the money or the ultimate goal of the title where you may not like it and you’re stuck. I think real estate investing is a great way to get unstuck. It just takes time and patience.

Tony:
Yeah. I think what I love most about real estate investing, this goes back to what you said, Ashley, your boss, the one that you mentioned at the CPA firm, she was unhappy with the amount of money she was making. It’s because she wasn’t in control of what that number was. That CPA firm got to dictate what her value was in the marketplace, and that’s true for anyone that has a regular W2 job. Your employer is going to dictate how much value they feel you bring, even if you’re in a sales position. No salesperson is getting 100% of the commission.
The company’s going to take something, so there’s always some level of the company dictating what value you bring. But when you become an entrepreneur and you go to business for yourself, you go to work for yourself, you get to prove to the marketplace how valuable you are. As a real estate investor, the more units you can accumulate, the better rental product you can provide, that’s what dictates the value that you have in the marketplace. I think that’s what gets me so excited about being a real estate investor is that, ultimately, I’m in control of what that number is.

Ashley:
Tony, you hit another point there too is a lot of time, it’s the value of your time, so working at that accounting firm, you had to clock your time, what client’s project you were working on, and then you were paid based off the hours that you put in. If you wanted to make more, you had to work more. You had to put more time, where with real estate investing, there’s so many different ways to build passive income or make money other ways without giving up as much time as these other careers force you to do. Alicia, that episode that you’re talking about, I know every single BiggerPockets Money episode out there, and that was Episode 251. Then, upcoming is Episode 293. That will be focus more towards getting your master’s degree, and first one was for undergrad. Alicia, let’s go into a deal and break it down. Did you have a deal in mind that you wanted to share with us today?

Alicia:
Sure. We can talk about the rehab that I just finished.

Ashley:
Okay. Yeah. Great. I’m just going to ask you a couple of questions about it real quick and we’ll go into rapid fire and then you can go ahead and go into the story of how the deal happened. What was the purchase price?

Alicia:
Purchase price was 95,000. I know some people are going to say, “I wish.”

Ashley:
How did you find the deal?

Alicia:
I actually found this deal because it was a block up from a duplex that I was currently working on. I happened to see it and it was from a wholesaler that didn’t get the contract completed, so I asked once that fell out of contract, “Hey, would it be stepping on your toes if I contact the seller directly,” and said no. I walked down there and I put my card on the door, never heard anything. Skipped traced, wrote a nice little handwritten note. Didn’t hear anything. Saw a guy mowing whenever I was down there checking on my other project and flagged him down like the crazy woman that I could probably appear. He said, “Oh, I’m cutting the yard, but here’s the owner, and here’s his number.” I called the owner and finally got ahold of him and went to take a look at the property.
Everything looked good. He had just done some HVAC. He was starting to work on it, but really was looking for a place to move his money, and so he wasn’t sure about me. This is a pretty small town, so it works a lot by who you know. “He said,” I don’t know you from Adam.” I said, “I totally understand that. Let me have my contractor pop down here. We’re working the next block up.” This is where having a good local crew is a great thing, because they sold it for me.
They were the ones who helped me close that deal because they walk up and they all had known each other basically all of their lives. He said, “Hey, is she going to do what she said?” “Absolutely.” They said, “How is it working for her?” I remember my contractor said, “Well, she’s a great boss lady.” I took that with a lot of pride, but they helped close the deal. Now, they’re even helping me find leads because they want to keep working. They don’t want to have to drive the 30 minutes to get into the next larger city to be able to keep working. So they said, Oh well, so-and-so is getting ready to sell their house,” or, “So-and-so just inherited a house,” or they’ll be driving around, “Oh, this neighborhood has some overgrown hedges,” things like that. Having a great, consistent team can even help you find deals.

Ashley:
Okay. The next one is, how did you fund this deal?

Alicia:
I found my private lender through going to a meetup and meetups, networking, whether it’s on BiggerPockets, whether it’s in-person, meetups it’s so important to being able to build that team of people you can call on. I happened to meet this woman at a Hard Money Lender meetup, and she and I work well together, and so I found this and I took it to her. She ended up funding the deal for me, but she’s also mentored me through this project, so that’s been a double blessing.

Tony:
Alicia, again, I know the question from the audience is going to be, “How do I get myself one of these?” Everyone wants a private money lender. So walk us through, because obviously people go to meetups all the time, but how did you start building that relationship to the point where this private money lender knew you, liked you, and trusted you enough to actually give you the funds that you needed for the project?

Alicia:
I would say absolutely first and foremost, be a person who’s trustworthy, say what you’re going to do, do what you say. It’s really pretty simple, and I also think that building genuine relationships with people is a huge difference. People can spot a fake. People can spot people who are trying to network for the wrong reasons. You have to understand that you are bringing them an opportunity just like they’re going to bring you an opportunity, and being able to respect that and feeling like you can work together, that you have the same goal in mind and making sure that expectations line up. That’s true with any team member that you have. Does your expectation line up with what their expectation is, and if not, you need to get on the same page or go separate ways. I found that that’s a huge difference in being able to make sure that we can continue to have a good working relationship is because if I say I’m going to do something I’m going to deliver, and that builds trust in her that she wants to invest with me again.

Ashley:
Alicia, what were the rehab costs for this property and did your private money lender pay for that too, or did that come out of your own pocket?

Alicia:
My ARV initially, was 185. Thanks to this great market we’re doing even better. That left me a max of 70% LTV for the deal, so I was able to get the rehab set in. One thing that I really liked with this lender, and this would be great for rookies to know is a lot of the commercial hard money lenders will lump it all together in one big loan.that means that your closing costs are going to go very high because they’re basically putting all of your rehab into escrow, so you have to be able to front that money. Most people don’t have it. This private lender was able to set it up as two separate loans.
One is the purchase price, and one is the price for the rehab portion. That meant that my overall closing costs were about $9,000 less than what they would’ve been had. I used a commercial lender who was going to lump it all and escrow out the money that I basically already paid. She gave a max of 70% LTV. That worked out to be about $30,000. I’m going to go about 38, so that section I have to do. Of course, now because the market is doing well. My ARV is closer to 200 to 215, so I’ll be able to pull all of my cash out. I’ve been really fortunate that I make smart deals. I don’t make a lot of deals, so I have had infinite returns on every single purchase I’ve made to date.

Ashley:
Congratulations. I like that last little line that you said, “I don’t make a ton of deals, but I make smart deals.” I think that’s where a lot of people get caught up is, “I need to grow on scale. I need to buy, buy, buy, do all these deals,” but you can be just as successful doing a smaller amount of deals by just making smart deals and being picky and choosy, and just spending your time. I have a friend, Laka, out of Seattle where I think last year she did four flips and she made a crazy amount of money.
It was because she focuses on those and she puts time and effort, and does the little details in each flip that she does, where a flipper who’s doing several a month doesn’t have that time to put in the little touches and the details that she does, and they probably end up making about the same return, so I think that’s really smart. That’s one way that rookies should look at doing deals too, is writing out your criteria and really going after great deals instead of worrying about getting all these deals that probably add up to one nice, big, smart deal.

Tony:
Alicia, it sounds like this deal overall worked out pretty well for you, so give us the final numbers. Where is this thing going to land? And sorry, the exit strategy, are you flipping this? Is it going to be a rental? Let us know how you plan to finish this thing off.

Alicia:
This is going to be a rental. I did a value add, which really helped what people didn’t realize on the wholesale deal was that there was another room connected to one of the bedrooms. It had been an old converted bathroom, and so I was able to give a new opening, close up that wall and turn it into a three bedroom, one bath to give me additional value. I’m going to go ahead and rent that out. It’ll rent for approximately 1,400 a month is our goal. I’m planning to refinance it once my seizing period is up, which should be around July.

Tony:
That’s awesome. Then, what do you plan your net profits to be on that $1,400?

Alicia:
That’ll depend with interest rates and everything coming up, but I’m hoping to cash flow about 250 a door, and that’s with having a property manager in place. Originally, I was going to try to manage everything myself, but the property I just refinanced with, because I’ve been doing this for less than two years, they did make a requirement that I have a professional management company. Because they’re only a block apart, it makes a lot more sense for me to just pay it instead of saving the drive and the trouble.

Tony:
Okay. Awesome. Well, congratulations, Alicia. Everything from finding the deal, you hustled really hard on that one, to getting your private money set up. You’re just proof that when you build the right network and you connect with the right people, your ability to succeed as a real estate investor really, really goes up, so kudos to you for knocking it out the park. Let’s move on to our next segment, which is the rookie request line. For all of you that are listening, if you guys would like to get your questions featured on the show, just give us a call at 888-5-ROOKIE, and if your question is good, we’ll put it on the show. Alicia, are you ready for today’s question?

Alicia:
I’ll do my best.

Ken:
Hello. My name is Ken Holly. I live in Portsmouth, Virginia, and I recently sold one of my rental properties and I made 66,000, and I immediately used that money to invest in another property. At the time, I didn’t know about the 1031 forms and stuff you should fill out. I was wondering how do y’all guys go about capital gains tax? I don’t hear that mentioned too much, but I’d like to how we go about dealing with the capital gains tax. I’ve had some of my landlord friends that just say whatever it is, they just pay it, and I said, “That’s fine too,” but I’d just like how do you reduce the load?” All right. Thank you.

Alicia:
First, I’m sorry that you didn’t think about that exit strategy, lesson learned, and I know that you’ll go forward and know how to do those in the future. There are some great places on BiggerPockets that do 1031 exchanges that I would say for sure check there. We also have a lot of really great accountants and tax professionals in our forums that can answer questions like that. For me personally, I do sinking funds every month, so a portion of the rent that comes out goes towards my CapEx expenditures, my taxes, anything that could be overages.
In that case, I would say set some money aside. You don’t want to necessarily leverage it, because especially putting it into the markets with some volatility and things, you don’t want to possibly lose that or make a ton and then have an even bigger tax event happen for you. I would say definitely setting that money aside, keeping it safe and secure, talking with a tax professional as to approximately how much you may owe and what those steps are that you can prevent it, or maybe some potential ways that you can leverage some other properties that you have, or other investments to be able to bring that overall amount down and to keep more money in your pocket.

Ashley:
Yeah. One thing to add onto that one way to reduce your tax burden is to purchase something else, such as equipment, or a vehicle or something that you can write off on your taxes. Just as Alicia said, consult a tech professional and make sure that it’s something that legitimately can be attacked right off to you. Okay. So on to our rookie exam. Alicia, here’s our first question. What is one actionable thing a rookie should do after listening to this episode?

Alicia:
Network, network, network. Get on the forum, start talking to people, build relationships. If you’re not in a meetup, go join one. If you’re already in a meetup, go join another one. Start talking to people, tell people what you’re doing and have something to offer when you come to meet them. It’s not all about take. It is a give and take relationship with people, so making sure that you’ve done the hard work to answer the most basic of questions so that when you get to that more experienced professional, you’re leveraging their time well, and they’re going to see that you actually put in some effort to do your own work and you weren’t waiting to be spoon fed the information.

Tony:
Amazing answer, Alicia. Let’s move on to the second question, which is, what is one tool, software app or system that you use in your business?

Alicia:
I tend to do my layout for my rehabs and everything on Asana, and Asana works really well for me because I can move columns around. I can put links in there, and it’s really easy for me to share with my partner or with my contractor. I can upload links to say, “Okay, here’s our joint agreement, and I can import that from DocuSign.” It keeps everything there ready for me. And we can also set due dates and things, so we’re all on the same page for what happens and get those reminders.

Ashley:
Lastly, where do you plan on being in five years?

Alicia:
In five years, I will be an empty nester, which is both sad and exciting, so I’m not sure where my journey is going to take me as far as real estate investing. I see that I will have a lot more flexibility in my time so that I can leverage that for bigger deals, because I don’t have the responsibility of motherhood anymore in that immediate day-to-day sense, I think that I would like to look into doing more in the syndication space and scaling that way. I’ve met a lot of great people who are willing to take me in as mentorship in those syndication spaces and starting to learn a little bit more about that so that I can leverage my time a little more efficiently than those single-family and small multi-family deals that I’ve been doing.

Tony:
All right, Alicia. Well, I am no professor, but I would say you aced that exam. Thank you for sharing all that good information with us and the listeners today, so let’s keep rolling. We’re going to go into our Rookie to Rock Star. If you want to be highlighted as a Rock Star, get active in the Real Estate Rookie Facebook group, we’re on the BiggerPockets forums and that’s where we pull these kind of stories from, but today’s Rookie Rock Star is Beth James. Here’s what Beth had to say, “There’s proof that you can still find BRRRRs if you keep at it. My husband, Tyler and I bought this house out of an estate for $115,000.” They put another 24,000 into it and an appraised for $200,000. They were able to pull out all of the cash they invested and still cash flow at $360 per month, so with that huge success, Best says that they’re on the hunt for door number three. So congrats, Beth, to both you and Tyler.

Ashley:
Well, Alicia, thank you so much for joining us today. Can you tell everyone where they can reach out to you and find out some more information about you?

Alicia:
Sure. You can find me on BiggerPockets forums. I’m always in there as well as the Facebook groups. I do help to run those groups as well. You can also reach me at [email protected], or my Instagram, which is plan_deviation. I’m not on Instagram as often, but follow along if you want to see great pictures of my dog.

Ashley:
Well, makes you guys check out the Real Estate Rookie Facebook group, if you’d like to interact with Alicia or a ton of other rookie investors. I think we’re at what, 40,000 people in the group and continuously growing. Well, Alicia, thank you so much. I’m Ashley @Wealthfromrentals. He’s Tony @TonyJRobinson on Instagram. We’ll be back on Saturday with a Rookie Reply.
(singing)

 

 

Airbnb’s are all the rage in investing right now. For a good reason too. 

Short-term rentals cash flow beyond belief and make the numbers work in just about any market. I’ll admit that I own five myself and have a few in the works.

So why am I telling you not to buy them?

Airbnb’s are fantastic as long as all the variables work. I have opinions about properly mitigating risk and lived through 2008, so I speak from experience. Many real estate investors have become extremely wealthy over the past 10 years and cannot fathom a recession. 

Recessions aren’t pretty, and many newer investors have a hard time believing that the real estate market could be upended and crash, but it’s possible.

Airbnb properties are an excellent investment given the right circumstances. In this article, I’ll give you five reasons not to invest in Airbnb properties.

Reason #1: The Numbers Only Work As An Airbnb

As a seasoned investor, I’m a huge fan of having various strategies to pivot in every market. 

If I buy a property for $400K and can make $6,000 per month with Airbnb but only $1,200 per month as a long-term renter, I open myself up to some risk. 

When times are great, I’m cash-flowing and loving life. However, if the regulations on short-term rentals become restricted as they did in Nashville and Austin, I need to pivot. My best option is to find a long-term tenant, but $1,200 or even $1,500 each month won’t cover the bills. If I decide to sell and the market goes down, or the pressure mounts because I am out of cash reserves, I’ll need to exit at a loss. These scenarios give real estate investing the reputation with some folks as being “risky”. 

You need to strategize ahead of time. If that means you lose a deal, it is better than losing your shirt.  

I recently had this situation occur with a lakehouse in Arkansas. I was denied the right to own an Airbnb rental unexpectedly by the city. Luckily, I planned well and was able to place a tenant that more than covered the mortgage and expenses.

Reason #2: Not Enough Cash In Reserve

Like I’ve said, when Airbnb’s are good, they are perfect for cash flow! 

It’s an expensive proposition, though. Furnishing a home can cost thousands. Even if you buy a furnished house, no one could have predicted COVID-19 or even a slow month! 

If you earn $7K per month on a property and pocket half, you have $3,500. Say, however, you only gross $3,500 one month for no apparent reason. Suddenly, you’re not making money.

Short-term rentals offer no guarantees. Most vacation rental owners anticipate slow months based on seasonal conditions. But, in one of my own cases, my Airbnb in a residential neighborhood saw a slow month, and there were no factors to predict the decline in revenue. 

Case in point, you need ample cash reserves. Having cash on hand to pay for unforeseen expenses or slow months is a must, especially when playing with high overhead. 

If your home is costly to run, a decline in revenue for a few months could create a hardship if you are running lean on cash. If you get caught in this situation, I recommend taking on a partner and cutting them into the profit. Or, if you have enough equity, sell the property. Hopefully, you can offset any sizeable tax gains. 

Reason #3: Luxury Rentals Are The First Sacrifice During Poor Economies

It feels like I’m that bearer of bad news, but someone has to say it. Real estate is not always a winning game and Airbnb has higher stakes for higher rewards. I want to make sure you are considering these variables. 

These days, a very popular strategy is buying a huge home and renting it out for sizeable short-term profits. Luxury vacation homes are the first thing people stop going to in a slow market or a recession.

If you are banking on luxury short-term rent payments every month, you might have to sell at a loss because you simply cannot cover the bills. 

Remember, with short-term rentals, you are responsible for the cable bill, gardener, pool or spa maintenance, utilities, and water. You are responsible for that bill regardless of whether or not a guest is occupying the place.  

Reason #4: Overhead Expenses and Property Management

You can easily manage your Airbnbs even if they are out of state. However, you may not have time to handle the booking inquiries and manage the cleaners and repairs. 

In this case, you’ll want to hire a property manager. Many do a great job but charge 25-30% of gross revenue. At that point, your numbers might not look too good. 

This means you’ll have to be fully prepared to self-manage or find deals that will allow you to hire a property manager for the right price and still net enough income each month.

Also, because your Airbnb is a business, you may have incidental expenses. 

I once had a guest spill red wine on my table, a $300 replacement. I filed a claim for reimbursement with Airbnb, and I’m still waiting six weeks later. I also had a cleaner forget to clean a bathroom. Seriously. 

Yes. I offered the guests a free night and prayed they did not post the photos (they didn’t!). The incident set me back $350 for the night, and getting the new cleaning crew set up was another day that needed to be blocked out. 

With quick turnovers and wacky schedules, the world of Airbnb leaves room for all sorts of scenarios that cost money. Sometimes, a lot of money. 

Reason #5: You Don’t Have High Stress Tolerance

The stories and reasons above are all part of being an Airbnb owner.

If you fall into the category of “life is too short,” or you despise managing these sorts of situations, or don’t need the money that badly. Then pass on it. There are many other ways to make money in real estate that doesn’t involve the madness of an Airbnb.

All that said, I do have Airbnb properties that have never had any major issues. The easiest ones tend to be for longer rental terms, such as out-of-state workers or traveling nurses. Not allowing pets alleviates other obvious issues but does lessen the booking pool.

Closing Thoughts

If you still think Airbnb is for you, always do the following.

1. Make sure the numbers work straight out of the gate with all real estate. 
2. Budget the furniture expense as part of the money out of pocket.
3. Make sure you track AirDNA and data.rabbu.com to get a realistic amount of income you can expect monthly. 
4. Estimate the lowest amount to ensure my worst-case scenario works. 

Don’t feel like you have to follow the herd. Follow the numbers and your sanity. If Airbnb doesn’t feel right to you, find another strategy in real estate to make money.

Whatever you do, don’t walk away from real estate investing altogether if one course of action does not work for you. There is a way in for everyone. Airbnb may not be the investment for you, and now you can justify the reasons why. 

In the last couple of months, we have seemingly started to come down from the peak of our recent housing rally, at least in southern Ontario. Now, as we enter a new period, many investors are reevaluating the current conditions with some even asking the question: Are we finally seeing the housing market crash? The reality is, however, that our current market conditions are far from what constitutes a “crash”. Rather, what we are now experiencing is merely a correction, which is its own distinct phenomenon.

How can we tell it’s only a correction and what do investors need to know when navigating these changing times?

To answer that question, we spoke with Christelle Mwamba, a mortgage agent with The Mortgage Scout out of Toronto. According to Mwamba, it’s crucial that investors understand the difference between a crash and a market correction so they can properly respond to a changing market.

According to Mwamba, right now “we are seeing a market correction as there are fewer transactions in real estate sales and volumes in the housing market.” Citing a recent report from Sagen, Mwamba points to a 27% drop in sales from February to March, an 11% year-over-year drop in new listings and a 6% lower inventory level than last year, all of which point to a slowing and cooling market. She further points to a prediction from Oxford Economics, calling for a 24% price correction in Canadian housing by 2024.

“A lot of the values that we have been seeing appreciate year-over-year are a by-product of the fundamental low supply in the market that just can’t fulfill the demand for housing,” said Mwamba. “It was also fuelled by a low rate environment which was a by-product of the pandemic. People were buying because it was cheap to borrow. That artificially drove up the values of real estate. However, as we see the overnight rate going up, bond yields increasing, and the cost of borrowing going up, these changes are having an impact on the true cost of funds and forcing stress test figures higher as well. That means low purchasing power for the consumer, lower capacity, and higher cost. All of these factors result in limiting those speculative buyers who only bought because money was cheap. That will have a softening effect on the market, but not a crash.”

It should also be noted that market corrections, as well as market crashes, have been observed many times throughout history. For those looking for a hint to where things may head now, it is worth looking at where we have gone in the past. Mwamba draws comparisons to the housing crash of the early 90s, noting that conditions now are quite different. Not only that, but the government has learned from the past, instating financial policies to help prevent a repeat of past events.

“The difference between what is happening now in the housing market today versus in the 90s is supply,” she explained. “In the 1990s the problems were that banks didn’t have control over developers which resulted in overdevelopment of some subdivisions. The government didn’t control how much was being built and that drove values lower because they had excess supply. That, paired with higher mortgage rates, resulted in the market crashing and a lot of people losing money. Having said that, now the Canadian government has learned a lot of lessons from historical market trends. Fundamentally, the Canadian government and Canadian economic infrastructure are very structured and backed up with strong policies. There are a lot tighter controls in the development of real estate, making sure that builders have sold enough inventory to proceed with their projects. There are a lot more checks and balances in place as financial institutions are financing these projects.”

Overall, Mwamba stresses that a market crash and correction are two very different things. While one is a significant loss in values due to “a fundamental failure in governance policy and systems,” the other is merely a response to artificially inflated prices. In some sense, a correction can be a good thing in the long run as it brings the market back to a more balanced and sustainable state.

“Investors need to understand that you are not going to lose your investment, but you may see a loss in value which is what we are seeing today. It is important to understand the difference because an investor may park their intention completely to the sideline thinking there is a crash coming and that there is going to be a great buyout opportunity. But, the fundamental measures of government policies are very sound. Chances are, those great buyout opportunities will be difficult to time.”

“I think buyers first and foremost need to get past the headlines,” Mwamba continues. “Don’t just read the headline and think that you are informed. Not everything that is being published is factual and a lot of people have formulated opinions based on social media. Being informed is very important as an investor and sometimes people have to put their current situation into a historical context.”

Understanding that we are experiencing a correction is one thing, but many people may still be wondering exactly how they should move forward given that fact. Though it does not mean that real estate has gone bust, a correction may still necessitate some changes to your investment strategy. Mwamba offers advice on how best to operate as a buyer, owner, or seller during a market downturn.

“As a buyer, if you know a market correction is coming, the key is to be patient and buy when the market is correcting and transact when you believe you are getting a good value for your dollar. If you are not sure how to determine whether something is of true value, this is where it has never been more important to make sure you have the right qualified real estate agent on your side. For owners, you have to think about what exactly your intentions are. Look at your current and future needs and access to capital to try to figure out what you need to do. If, as an owner, there is no reason for you to sell, then just stay put and ride out the fluctuation. If you are looking for an opportunity to capitalize on a correcting market, I would refinance and secure a line of credit to create some solvency and wait for the correction to start to transact.”

“As a seller, if there is no subsequent purchase then you need to cash out when the value is high which means you are selling today,” Mwamba continues. “Now, if as a seller, there is a subsequent buy, you can actually mitigate any value losses because that loss in value can also result in a similar drop in value where you are purchasing. If you don’t time it right, it is not a big deal because though your value went down, what you are buying in value went down too.”

Overall, the message is that a correction is a temporary period in the market and the smart investor can make the most of such a situation, even to their own benefit. For those looking to find their way through changing times, Mwamba stresses the importance of consulting the right advice.

“It has never been more important to have a financial professional like a mortgage broker or agent like myself in your corner who can explain your mortgage options and the driving factors behind the rates. In times of uncertainty is where advice and professionalism matter the most.”

David:
This is the BiggerPockets Podcast show 613. The 10-year from now version of yourself can either say thank you 2022, David, for making the decisions that you made that made me more physically fit more financially fit, better relationships, happier person, better life, better family; or you can look back and say, “Man, I wish I would’ve done something before.”
This is the same thing if you start right now and you look back at 2012 version of you. Are you really glad with the decisions you made, what you committed to, what you invested in? Or are you kicking yourself saying, “I should have bought more real estate, I should have started investing, I should have gotten more serious, I should have dove in deeper?”
What’s up, everyone? My name is David Greene, and I’m your host of the BiggerPockets Real Estate Podcast, here today with my co-host, the amazing, infamous and talented Rob Abasolo. Rob and I are teaming up to bring you an episode specifically directed towards newbies.
On today’s show, we’re going to get into the five mistakes and six steps, making 11 things that you need to know to make money in real estate. Rob, welcome to the show. How are you today?

Rob:
I’m doing good, man. I’m excited to get into this because I’m really at the helm of today’s ship of the proverbial podcast ship, really taking us through the journey here, hopefully helping some newbies out and nudging people along. That’s what today’s episode is. It’s like, hey, I know it’s a little scary to get into real estate but let’s freaking do this thing, man. This is what life is about, taking risks and working towards that financial freedom.
For those of the people that get caught up on the analysis side of things, we’re actually going to even be analyzing a deal in a very, very hot market today that, I don’t want to give too much away, but it opened our eyes a little bit to that specific deal.

David:
Yes we are, and we’re going to get right into today’s show. For our very quick tip, I’m going to tell you, listen to the entire episode where you are going to get a discount code if you would like to save money on a pro membership and get committed into real estate investing yourself.

Rob:
Hey, let’s just do quick tip number two here. If you’re too antsy and you can’t wait to become a BP pro, then you can just go ahead and use promo code REPOD22 to save 20% off of your pro membership. You can do that by going over to biggerpockets.com/proupgrade.

David:
All right, without any further ado, let’s get into the show.

Rob:
All right, so today we’re going to be talking about six foolproof steps to get started, five common newbie mistakes that we see investors making all the time, and then hopefully provide the audience with a few tools to help them get started on their path to financial freedom and building their real estate portfolio.
I think the reason that a lot of people want to get into real estate, and David, you can feel free to give your POV here, but I think at the end of the day we’re all looking to build wealth in some capacity or another, and that means a lot of different things to a lot of people. I think the big four components of building wealth in the real estate game is typically going to be cash flow, appreciation, tax benefits and low pay down. When you add all of those different components together, it is sort of what goes into this idea of building wealth through your real estate portfolio.
Did I miss any pillars there? Is there anything else that you think might contribute to that wealth building goal that a lot of us have?

David:
I think you hit right on the head how real estate helps build wealth. I think the only pieces that might have been left out is that you can use different skills to do this in real estate than you can do it in other means, like day trading or starting a business. There’s an element of real estate that once you start doing it, it gets easier and easier and easier and it gets better in time. I think that’s very appealing to people. It’s not the same work over and over and over. Once you start to get more properties, they become easier to manage. The act of managing real estate gets easier the more you do it.
I think there’s also an element of creativity where you are like the captain of your own ship. You can make things happen that you may not like… I don’t know. It’s probably tough to be creative if you want do day trade stocks. It’s very analytical. You’re researching. You can’t go into that company and add value to it like you can with real estate. And so, real estate is more fun because you get to add a creative element of yourself.

Rob:
Yeah, 100%. I mean, these are honestly. the four pillars I just gave, they’re very tactical. These are very tactical goals that you can set. You can set a cashflow goal, you can set an appreciation goal and you can map out what the tax benefits are going to be. But ultimately what I think a lot of this culminates to, at the end of the day what we’re all trying to get here is financial freedom. I think that’s what wealth really is. We always say we want to achieve financial freedom so we can go out and live on a beach, whatever that means to that person.
I consider financial freedom the same thing as wealth, because wealth gives you options. And so for me, I hit financial freedom probably about a year ago. I think what financial freedom truly is for me, it’s not like it’s over. A lot of people think, oh, hit financial freedom. I’m going to drink on my tie on the beach and hang out and it’s over.
I don’t really think that’s what financial freedom is for a lot of people because we work so hard to get there. It’s not like you can just turn it off. I think financial freedom is, well, for me personally, you’re stressing on how to make more money versus stressing about making money. That’s a very, very small but very important detail. For me I’m like, okay, how do I keep expanding the empire? How do I keep building my portfolio? How can I take care of my family and my brother in law and my best friends and how can I help them achieve financial freedom versus a year or two ago I was just like, how am I going to make money? How am I going to do that to actually achieve financial freedom?
I think there’s a little bit of a myth. I mean, of course I like going to the beach and of course I like to get my tie, but for me financial freedom, it’s the freedom to not stress about the paycheck coming in and the freedom to really take big swings in my real estate portfolio, which is something new and I just did recently even with our Scottsdale property.

David:
It’s absolutely true. There’s a certain point in life where something hit me that you are going to have stress in one way or the other. You’re going to have stress from problems that come from business; what property should I buy, how am I going to fix this, how am I going to fund this, whatever; or you’re going to have stress from I got a flat tire and I don’t have any money in the bank to fix it; or someone is sick and I want to go be a caretaker, but I have to be at my job where I’m going to lose my job and I can’t make my payments. You have it in one direction or the other.
What you and I have chosen is to have a better kind of stress. You’re going to have problems in life, we have a better kind of problem. We have more flexibility, we have more autonomy in our lives, we have no limit on ourselves. But that doesn’t mean that we don’t have problems or that life, all of a sudden we found the cheat code to where nothing’s difficult ever.

Rob:
No, no. I think you nailed it on the head. It’s a better kind of stress.

David:
I’m curious, when do you feel… I mean, you’ve probably been in this stage a lot longer than me, but was there a point for you where you’re like, “Oh, I’m financially free?”

Rob:
I’ve done it. I’ve arrived.

David:
Yeah, it happened quicker than I thought. At the time $5000 a month meant I was financially free. That was all that I needed to live on. I luckily had the foresight to see that inflation was coming and the money that I was making every month wasn’t going to be what I could coast on for the rest of my life, so I kept going.
But I remember it was a point where I’m like, “Hey, I have eight rental properties.” I really wanted one of the Corvette’s, the Stingrays when they first came out. I know that makes me sound like an old man, but they were a cheap car and they were fun and they were fast. My plan was I’m just going to buy one of those, I got the house I live in, I got eight rental properties. I’m good. Something inside said, man, you’re selling yourself short by doing that. The goal is not to not ever have to work, the goal is to work on things that I enjoy or make me grow.
And so, to me it wasn’t that I needed more money, it was that I wasn’t going to become the best version of David if I just hung it up and said, “Okay, I’ve accomplished what I wanted to accomplish. I’m finished.”

Rob:
Yeah, yeah. For sure. I think as I ask a lot of people about what financial freedom means to them and getting into real estate, I don’t know, I see the same problem with a lot of people. Because we all want the financial freedom, the autonomy to live life on our terms. I see a lot of these things, a lot of reasons or apprehensions are very commonly expressed by a lot of people that follow me, that DM me on Instagram. And I think the big one, there’s two big ones for me, people are very unsure of how to become an investor.
The listen to BiggerPockets, they watch the YouTube videos, they read the articles but it’s very tough for them to tactically actually execute that because it’s hard to apply that to their specific situation. And so, they lack the knowledge and the tools to be able to begin their journey, which I think is very solvable. That’s the good news for a lot of people.
The other thing which relates to the first thing is that it’s very confusion. They’re not sure what steps to follow. If you watch, for example, my YouTube channel, I put a lot of Airbnb content on there and I teach people how to do that and I teach people how to start their businesses, but it’s not linear. I don’t necessarily, like A to Z here’s how to do it on YouTube. It’s just whatever I’m going through or struggling with or however I’m living my life. Whatever I feel like making a video of, and I’ll teach someone through that.
And so, for people, I think that’s what research is, they’re watching and they’re listening but it’s never really linear. And so, not having the A to Z steps put in front of them prevents people from ever getting started.

David:
Yeah, and that’s the problem. Because most things in life, time in the market, time on task is what makes you better. I think it was Malcolm Gladwell that talks about the 10,000 hour rule that it takes to become an expert in something. I don’t know if everything is the same where it always takes 10,000 hours, but the idea of doing it over and over and over is true. You get your black belt and a martial art by performing a technique over and over and over and over until it becomes second nature. That’s how a lot of things in life are. And so, the sooner that you start, the sooner that you’re going to get there.
I’ll also say that with most things in life, and real estate is no exception, the hardest day is the first day. Everyday gets a little bit better than it was before. And so, the investors that are hanging out on the background, looking in through the window, “I would like to get started, but I’m not ready yet,” they don’t realize that they’re setting their future self back super far because it gets easier when you start doing it more.

Rob:
I feel a very grandiose analogy coming here about ticking away at it little by little. I mean there are so many things that I feel are floating around in David Greene’s head right now.

David:
Well here’s probably the best way that I would compare what success in real estate should look like. First off, people have to get out of their mind that it’s different than anything else. Whenever you are sold on this idea that you can make money here easy, or you can get fit easy, or this is the secret to avoiding the uphill battle in life, that is always a sales technique that is meant to get your money. They’re appealing to your worst nature that’s looking for a get rich quick scheme or the way around the struggle. It does not happen at anything in life. You don’t ever skip the work and just get a result.
You have to resign yourself to the fact that this is a journey you are taking. This is a path that you are going to walk. It is going to be uphill the majority of the time and there are going to be things that can go wrong. Just like everything else that you want to do, being a parent, getting in shape, saving up money itself. All of it works the same way.
And so, what I like to think about is how financial freedom is really a result of being financially fit, being disciplined, being good at money, understanding how to do what you’re doing. And so fitness itself, physical, is the closest example that I can provide to people that helps them understand what it’s like being fit. I’m not fit right now, but I’m trying to get more fit and I think many people go through cycles-

Rob:
Oh, that’s not true. I saw you the other day. I was like, “Oh, homeboy works out.” You work out a lot more than me.

David:
Oh, I appreciate that. Is it that the camera adds like 15 pounds, is that the problem?

Rob:
No, I had you on a wide-angle lens so you look nice and skinny.

David:
Ha, ha. Well, thank you for that. The journey of fitness, though, is a journey. You don’t get fit and stop, okay? Many of us have done that where we got fit. We’re like, “Cool. I’m there.” I stopped working out and I stopped looking at my diet and what do you know? You end up not fit. That’s how it works.
The process of creating habits that are a lifestyle fitness, and people that are into this understand it. They buy their food at a healthy place and they prepare it ahead of time. They put effort into having food there to eat, they don’t just leave it up to happenstance. They put it in their schedule to go to a gym. They probably are in a group with other people that are into that same thing that helps them stay accountable and helps them be supported. They talk about that kind of stuff. It is in their heart. It is on their mind. The more that they stay in that community, the better off they’re going to be with their fitness.
Real estate is the exact same thing. If you’re not in a community of other people that are doing this thing, you’re going to fall out of shape. If you’re not putting it on your schedule to go and do certain tasks like go to the gym or go for a run or go run upstairs or whatever the case may be, you’re probably not going to do it if you’re just waiting for an opportunity to come your way. If you don’t have a membership at a gym, the odds of you just remembering to wake up and work out in your own living room are very low. People tend to not work out very hard when they work out at home.
Think about, Rob, everyone you ever met that bought some exercise equipment and put it at their house.

Rob:
Guilty.

David:
Right? Were their intentions good when they bought it?

Rob:
Always, 100%.

David:
Okay. You did it. Was your intentions good?

Rob:
Yes, every time.

David:
But how often do you use that equipment?

Rob:
Well, okay, for the sake of your metaphor, never. But last night I finally got on the spin bike that I bought my wife a year ago for the first time literally ever, but I see your point.

David:
You’re proving my point. You used it one time in a year, right? It becomes like a towel rack-

Rob:
Literally one time.

David:
… is what this stuff turns into. But if you actually get your butt to the gym, you’re probably going to, “Hey, I’m already here, I might as well work out.”

Rob:
Oh, yeah, 100%.

David:
Would you agree?

Rob:
Oh, yeah. Yeah. By the way, this is exactly what I envisioned for this metaphor. We need to add a feature on the BiggerPockets website that’s like the David Greene Metaphor Encyclopedia so we can just reference all the metaphors you’ve ever done.
Okay, we’ve talked about the two problems that I think a lot of investors face, the two apprehensions that they have. But now I want to get a little nitty gritty here and actually talk about the top mistakes that investors make. We see investors come to us all the time and retroactively say, “Hey, how can I fix this?” It’s like, “Well, you made the mistake, but that’s okay. You’re going to learn from it.” There are five here that you and I have penciled out that we think are very, very common that we see people doing all the time.
First one here is going to be buying the wrong deal. Have you ever bought a wrong deal before? Would you say you’ve ever gone into something that you’re like, “Uh-oh, this one didn’t turn out as good as I had hoped?”

David:
Yes, that’s happened.

Rob:
Yes, same. Same, but it’s a mistake and you always learn from your mistake so it’s not like it’s over. Ideally you’d like to avoid the mistake, but sometimes you have to make the mistake and it’s a little expensive and it’s an expensive version of college tuition.
Number two, they analyze the deal wrong. This is something that I think… I mean, we could talk for hours on this, but I just had a student of mine, he analyzed a deal. He brought it to me literally yesterday and he was like, “Rob, will you partner with me on this? It’s a 50% cash-on cash return. I was like, “Yes. Yes, I will partner up with you on it. Let’s talk about it.”
We hopped on a Zoom, he talked me through all the financials and I said, “Well, what about the CapEx? What about the cleaning fees? What about the utilities? You only have utilities here at 2000. It’s going to easily be $7200 on this.” I literally ripped apart every component of the deal. By the end of it, it was a 12%, which, you know, not the worst deal in the world but it wasn’t the 50% that he thought he had uncovered.
I was like, “So, what did you learn here?” He was like, “Okay, I may have underestimated the cost associated with this deal.” He analyzed the deal wrong and I told him, “Look, I think it can still work in certain circumstances, but if you’re analyzing this conservatively, it’s not really going to work out for you.”
And so, this is one of the main thins, I think. There are a lot of tools out there that can help people analyze deals, and we’re going to actually talk about that a little bit later. But we all go through it. I mean, at this point I imagine you’re probably not struggling with analyzing your deals, but maybe young David, right?

David:
No. I would probably… Let me bring some clarity to that. I don’t struggle with analyzing deals when they’re in an asset class that I know very well, that I’m familiar with. That is something I put in the 10,000 hours that’s very comfortable. But the deal that you mentioned that didn’t turn out like I thought it would was my first venture into a new asset class. I did not have a tool that would help me analyze those properties, and it was a different type of skill. Kind of like switching from one martial art to the next. I had an idea of how martial arts works, but these are completely different techniques and you’re using different muscles and you’re using them in different ways.
To your point, I would say it’s when you are either learning a new asset class or learning real estate investing in general, that having the right tool to make sure you’re analyzing correctly is extra important.

Rob:
Okay, cool. Yeah. Let’s move on to the third one here. A lot of people let the lack of money stop them. Honestly, kind of guilty here because you see a deal and the first thing you think is how am I going to fund it?
I mean, just even reading The BRRRR book, the book that you penned yourself, my friend, that already starts opening my mind to, oh, okay, well, I don’t necessarily have the money, but I can go and get hard money and fix up a property and then do a cash out refi. I think there could be more education on creative financing out there if there is a lot of people just have a hard time really comprehending that.
Was there a moment for you that you’ve ever let the lack of money stop you or do you feel like you’ve always been pretty good at overcoming the financial hurdle for most of your deals?

David:
Well, I will say that I was blessed to be in a situation different than probably the majority of our listeners because I didn’t get married, didn’t have kids, had a strong work ethic, was very driven. I bought almost all my deals with my own money. I just saved up a lot. I did the old-fashioned, really difficult way.
I recognize not everybody’s in a position where they can do that, but there was a handful of times where circumstances came about where all my capital was deployed when an opportunity came around or I was waiting on a refinance but I had to close before I could get the money out.

Rob:
Yeah, that’s a big one.

David:
There are periods in my career where I’m like, ugh, I’m jammed for cash. It’s not that you don’t have the money, it’s just you don’t have it liquid at that time. It’s in a different accounting section on a spreadsheet somewhere.
Every time that’s happened for me, what I’ve typically done is gone to a friend who is a fellow real estate investor, a fellow business person, a person that I had a preexisting relationship with, not a stranger and said, “Hey, I have no experience investing, but can I get a hard money loan or a private loan from you?” That’s really hard. I went to people that were in the business already that knew me, that knew how I worked, that trusted me and that knew if I’m going to buy this deal it’s going to be good. I borrowed money from them and just paid it back. Whenever my funds came my way.
As you’re saying this, I’m realizing it was my commitment to a community that brought those opportunities. Basically, if I would’ve waited to try to build a relationship when I needed the money, it was too late. That was something I had started years before so that when I was in need, I had people like, “Yeah, I can wire you some money.”

Rob:
Yeah. Yeah, that’s… Yeah. I’ve also now realized investors that I’ve worked with or talked with, they’re all very flaky. Not all, but a lot of them can be and I, now as an investor, understand that 90% of the time that that happens is because their money is tied up.
And so, when you’re talking to an investor it’s like, you have to take the money right then and there. If you say, hey, give me two months and then I’m going to come to you with a project, they’ve likely deployed that and it’s very hard to close that deal two months later.
Little things I’ve learned along the way is when I see a creative financing option or an investment money coming my way, I hop on it as soon as possible because, you’re right, real estate is not the most liquid industry out there. It can be, but it’s not always the most liquid.
Moving on to the fourth mistake here. This is a big one. This is perhaps the biggest one, listening to other people’s negativity. If I had a dollar for every single time that I’ve almost had a friend invest in real estate, either with me or just pushing them to do it themselves and they were amped up about it and then the next week they came back to me and said, “You know, Uncle Ben or Aunt Tia said the housing market’s going to crash,” this and that. “Don’t do it,” and then they got scared, oh man, I’d have enough money to buy a house. That’s for sure. I mean, people just get-

David:
You wouldn’t need their money.

Rob:
I wouldn’t need it. Exactly.
The negativity out there from people that don’t actually invest in real estate, a lot of the time tends to trump the actual experience and insight that a seasoned real estate investor can give you.

David:
Yeah, and that is a tough situation to be in when you’re the investor because you have me and you and Brandon Turner and people on BiggerPocket saying you should do this, and then you have people that you love and you trust that have looked out for you for your whole life saying don’t do it. It’s a very difficult situation to be in. I can acknowledge, it’s not as simple as like, “Ah, don’t listen to them,” because how do you know to listen to us? You don’t know us.

Rob:
Right.

David:
Whenever I’m in a situation like that, I step back and I say, how does this work at everything else in life? Because real estate shouldn’t be different rules than everything else. So, if you wanted to go start going to the gym and lifting weights, let’s go back to that analogy, there is a chance that you could get hurt if you do that. You could drop a weight on your foot, you could pull a muscle, in the beginning your form isn’t going to be perfect so you’re probably going to get hurt. You’re going to make a couple mistakes. But not going to the gym at all is probably the riskiest thing you could do because your overall fitness is going to go down and then you’re going to have heart issues later and like health related issues from not being fit.
So, you have to understand that when someone is telling you don’t do this because something could go wrong, I often look at that like don’t go to the gym, you could pull a muscle or you could drop a weight on yourself, you could get hurt. But not going to the gym at all would be the riskiest thing I could possibly do, and you got to remember that also.
So, what I tend to do is say, all right, who do I know that’s going to the gym? I should ask them, “Hey, you’re really good at this. I see you lift weights and you’re very physically fit. Should I do it too?” Because that’s a person who’s in that world that will tell you yes you should or no you shouldn’t, as well as here’s how you should do it.
I would much rather ask a person that’s in the industry that I’m considering getting into, would this be good for me, than ask someone who knows nothing about that industry if this would be good for me.

Rob:
Basically, if I’m trying to bulk up, I should go and ask Tony Robinson what his workout routine is?

David:
Yeah. I mean, he’s a great example. Because if you say, “Tony, I want to look like you,” Tony’s going to tell you, “All right, well, you’re going to give up all these foods, you’re going to work out this many times a day, you’re going to have to be disciplined in all these areas. Your social life is going to suffer in this,” and you’d be like, “Oh, never mind. I don’t actually want it that bad. This isn’t for me.”
If you go ask someone who doesn’t understand Tony’s regime and what he’s doing, do you think I should go do that, what value is their advice going to be when they have no idea what that’s actually like?

Rob:
Yeah. Yeah, and I think this gym metaphor actually makes sense because you’re saying you have to basically go and work out and get started and nick away at this little by little, which leads us to the fifth and final giant mistake that most investors make. It actually is a very common… The famous four is the last question, right? People just quit or never get started along the way. And so, this big mistake is never taking action.
If you don’t ever take action, if you don’t ever sign up for the gym membership, there’s literally no way for you to go to the gym. If you don’t ever make an offer, there’s literally no way for your offer to get accepted. You have to start throwing some Hail Mary’s out there, if you will, and hope that they land. And then boom, you’re in the real estate world.
That wraps up these five. Obviously there’s 20 top mistakes that investors make, but I think it really does boil down do these five for most people, especially this last one

David:
I would say are the most common things that stop somebody from getting in the gym and getting into being fit. Because the reality is, most people listening to this, it’s not like they’re not interested in fitness. They’re at the gym, looking through the glass in the window, seeing the people inside thinking, “I wish I could be them.” Then they leave and they’re like, “Man.” They look at their stomach, or they can’t see their feet because it’s in the way, or they’re huffing and puffing when they try to climb stairs or tie their shoe. They are aware. I’m not financially fit, I don’t like my life., I don’t like this job that I have, or I don’t like whatever. Then they go back to the gym and they look in the window.
These five things are like the invisible barrier that keeps people from beginning inside. That’s what we want, is for people to get a gym membership, get inside. Maybe start slow. Don’t just run in there right off the bat, but get around the people that are doing it so that they can show you how to use the machines; go with you; workout with you; spot you, get you some momentum, like you said; and then you get sucked into that lifestyle.

Rob:
Yeah. I guess, with this in mind, what I want to do is, considering, for me, the big mistake here is never taking action and getting started, how about we actually run through a deal here? I would like to actually run through a deal and maybe just put some tangible insight and advice on how you could actually get started today by analyzing your first deal. Is that cool?

David:
Yeah. Let’s take our listeners through one of our workouts.

Rob:
In the spirit of never taking action and getting started, I think we should put this into tangible terms for everyone out there right now that does want to get started. I think we have a pretty solid six-step process here for anybody.
If you were looking to get into Airbnb, if you’re looking to get into long term rentals, multifamily, whatever your niche is, if you follow these six steps, then it’s going to be a lot easier than if you’re just trying to go after the big goal at once, right? I think breaking it up into small bite-size, baby steps that you can take, one step a day for example, it’s not going to be quite so stressful as just figuring out, oh man, how am I going to get into a hundred-unit syndication deal? You don’t do that. You do real estate. You get into real estate by biting off small bites of your sandwich, David. By the end of the day, the sandwich is gone.
So, step one here, commit. I know this seems like very, very simple, like, oh duh. No, I don’t think so. I think you have to actually tell yourself that you’re going to do this. You have to really… I don’t even care if you look in the mirror and say, “Today’s the day. I’m going to do it.”
That was me yesterday, literally, on the bike. I wanted to go run yesterday because I haven’t really ran in years. I was taking care of the kids and I was like, “Dang it. My window is closed, the kids are asleep.” I was like, “You know what? No, I’m going to do this. I’m going to find a way.” I committed, I walked up, I got on the bike. Boom. That felt really, really good.
So, committing can be many different things. It can be like buying a book. For me, I always tell people if there’s a way that you can financially commit to something, go buy a book. That’s 12 bucks. The stakes are low here but you can go and read that book however you want to commit. Whether that’s you telling yourself that you’re going to commit, whether it’s you looking in the mirror and poking yourself and saying, “This is the day, Bob,” or if it’s buying a book or any kind of curriculum or whatever it is, just figure out a way that gets you excited to actually get started.

David:
Well, here’s why that’s important, you’re going to fail at your first try at anything. Going back to our gym analogy here, you go to the gym, you are going to try to figure out how to use a machine or do a workout. It’s going to feel weird, you’re going to do it wrong and the thought is going to go through your head, “This is stupid. You shouldn’t do this. Anyways, this isn’t for you. ”
Or you’re going to see another person that’s stronger or fitter or in better shape and you’re huffing and puffing and they’re fine, and you’re going to think, “Why did I even come?” If you’re not committed the second that happens, you’re done. You’re going to leave and you’ll say, “That wasn’t for me,” and you’re going to go back to dancing with the stars. If you’re committed, your brain’s going to say, this doesn’t feel good, how do I copy what they’re doing? How do I find another person to help me?
You’re going to look for a solution. That’s why committing is so important because if you’re not committed, you look for way out; if you are committed, you look for a solution. It’s literally two roads that you can take. One of them takes you to financial freedom and the other doesn’t.
I wanted to ask you a quick side question here, and you can be honest. You recently went running and now you’re riding a bike. When you and I were in Scottsdale, you saw me going for a run and you mentioned it. My understanding is you weren’t running before that. Is there any connection to you saw me doing something and then put the thought in your head, “you know, I really should start doing that too.”

Rob:
Yeah. You inception me, man. After that Scottsdale trip, I was like, “Something’s not right. I need something. I saw someone running, oh, David Greene. I want to be more like him. I should run.” So yeah, man. You can take all the credit for what will soon become-

David:
No, that’s not what it was. I knew you’re going to go there. I don’t want to take the credit for why you’re doing it, but I do want to highlight that that is a part of when you get into community of people, they influence you. Because I was only running because I saw somebody else that was in my community that was running, and it put the thought in my head.
There’s absolutely something to be said for not just looking through the window at the gym or watching or thinking I should do it, but getting around people that are doing it will make it so that you want to do it.

Rob:
Yeah. Yeah. Actually, I think this leads into step two here. I think, here, this is where a lot of people get this wrong. Step two, learn and plan. All right? A lot of people want to start with learning and planning and then commit. But guess what? If you learn and you plan, there’s a lot of information in literally any niche or industry that you want to get into, it can scare you away. And so, if you’re not committed to it, the moment you start learning and planning, quote-unquote for everyone on the podcast, you’re going to get scared and be like, “You know what, maybe I’ll commit later.”
So, for me, I like just jumping in. What this means is maybe that means putting an offer on a house and then figuring out how the heck I’m going to flip it from across the country. That’s actually something I just did a week ago. I put an offer on a house. It’s in Virginia. I don’t really have any houses out there. I was like, I love this house, I’m going to figure it out. I will learn and plan and find my contractors and find the team and research and reread the bird book afterwards. Because if I start trying to figure that out before I’m even in the deal, I’m not even going to get into the deal.
So, I think it’s very important to just jump in and then learn and plan because there’s so much that learning and planning can do. It can really teach you, it can enlighten you but it can also lead to analysis paralysis, in my opinion.

David:
I agree.

Rob:
Step three here, get leads. All right? This is a big one. If you’re looking to flip a house, if you’re looking to get into an Airbnb, if you’re looking to invest in a fund or a mobile home park or whatever, whatever respective real estate niche you want to get into, deal flow is super important. Not only deal flow but actually assembling the team that you need. You’re going to need, we all know, very basic real estate transactions here. You are going to need a real estate agent, which, if you’re in need of a real estate agent, a small little plug here, the agent finder on bigger pockets can get you hooked up with literally anyone in the country. But we know that you need that and we also know that you need a mortgage broker and we also know that you need, if you’re going to do an Airbnb, for example, cleaners and handyman and contractors.
And so, if you can assemble your team and really start figuring those crucial teammates that you’re going to need to execute a deal, a lot of the times the leads are going to come in, like finding a good realtor, if you tell them what you want. If you show them that you’re looking for a flip or that you’re looking for some kind of investment property or an Airbnb, and you show that realtor that you’re very serious, there’s a very, very high likelihood that they’re going to be sending you those deals.
If you’re looking to get into a flip, maybe this means getting in contact with the wholesaler and finding an off market deal that you can then go and flip and rehab and maybe even execute the burst strategy.
How’s your deal flow these days, by the way? Do you feel, now that you’re established, that the deals just come daily for you or do you still have to actually go out and find them?

David:
It depends on what avenue they’re coming to me from. I have deals that will just come to me from the agents that are on my team. They’ll say, “Hey David, this is one that you might like,” or “Hey, our client can’t close on it. Do you want to buy it instead?” That will happen.
I will get random deals in my inbox from different Bigger Pockets listeners in different areas, and so I don’t have to go looking for those. But if we’re talking about deal like that exact type of property I want to buy, those are not just finding their way to me. That’s something I still have to go hunt down.

Rob:
Yeah, but you have a network, right? I think that’s what I’m getting at, is obviously those deals are going to come a little easier to you and me, but platform aside, I think that if you establish a network and people know what you do and you put yourself out there, you put yourself out there on social media, on Instagram, on Facebook, and you proclaim to people that you’re a real estate investor, the chances of these leads coming across your desk more often are going to be a lot higher, I think personally.

David:
Oh, that’s a hundred percent. Yes.

Rob:
Now, I actually want to get into what I think is going to be one of the more useful segments of today’s show. I actually want to analyze a deal because I think here’s where the analysis paralysis sets in. People get really good at analyzing the deal. Even if it’s a really good deal, they still get scared and don’t want to do it.
I think this would actually be in a very appropriate time to use the rental calculator from the Bigger Pockets website to actually take a real-world deal and see if it pencils out.
I’m in Texas now. I’m very partial to Texas real estate here, so I want to just maybe pick a very hot market. What’s a hot market right now? Austin. Everyone wants to move to Austin. Okay, so we’ve found a deal here in Austin, David. I think this one… I mean, who knows? On the surface, I think it’s going to pencil out, but the calculator is the crystal ball that tells all. So, put the address here-

David:
Well, what I liked about this deal, initially looking at it, is it is in a very hot market so people are going to be drawn to wanting to invest there. It has some value-add opportunity. When you look at the pictures of it, you can tell this isn’t completely already done up. There are some ways that you can rehab it, fix it up, make it look like more. It’s currently being used as a rental, so there’s an opportunity that if you like the tenants, you could keep them, but it’s already been a rental property so it’s appealing to investors. And it’s a decent size. It’s not a terribly small home that has what we call functional obsolescence. If it’s too small, the floor plan is too weird, if there’s a bathroom right next to the kitchen. Those are all less valuable. So, at the first glance, this looked like an opportunity that might be worth jumping on.

Rob:
Yeah, yeah. Honestly, 515,000 for Austin, Texas seems like a decent deal at the moment. So, we’ll just pop the address in here. We’ll do… All right, in Austin, Texas 78749. Purchase price $515,000. Purchase closing cost, I mean, we’re typically budgeting about two percent for this, right?

David:
Mm-hmm.

Rob:
That’s going to be about $10,300. Will we rehabbing this property, David?

David:
I would say, for this one, that’s probably budget about $25,000 for the rehab.

Rob:
Okay, so about $25,000 to repair and then our after-repair value. So, after $25,000 of repairs, tentatively for the ARV, we’re going to put about $585,000 here. Obviously, we can get more granular with this but I think, for the sake of this example, this should work-

David:
Based on some of the other houses that we looked at that were in a little bit better shape, 585 seemed kind of conservative.

Rob:
Right, right. Agree. Okay, cool. So, let’s go to the loan details here. We’re probably going to do a 20% unless your lender is a 25%, but I know that there are a lot of investment loans out there that will do 20% down. If that’s the case right now, what are you doing over at one brokerage right now for interest rates? Are we in the sixes right now for interest rate or in the sevens?

David:
No. For investment property, a lot of them are coming in kind of the mid-sixes.

Rob:
Okay, cool. Yeah, that’s what I’m seeing too. Points for this?

David:
We do no points there.

Rob:
No points. Hey, that’s not bad. Then loan term, are we going to be at a 20 or at a 30 for an investment loan?

David:
Thirty.

Rob:
Okay. Cool.

David:
We’ll go 30.

Rob:
Actually, one of the really nifty details here, whenever you actually put the address of the house into the rental calculator, the BiggerPockets tool here will actually spit out what the gross rental income estimate is for this property. So, the median rent for this property would be $1,760 per month.
Now, let’s hit our expenses here really fast. I know in Texas, I believe the property taxes here are like 1.25% annually?

David:
No. I think it could even be higher than that in some places. I think we should be conservative and probably use about two percent for property taxes.

Rob:
Okay, so two percent’s going to be $10,300. I just math that out really fast, and also that was our closing cost, so I’m really not that smart but it sounded cool. And then insurance, annual on a property like this? I mean, I don’t know. That could be anywhere from 1,200 to $2,000 is my guess. I mean, I guess it could be up to $2,500 depending on the Austin market, but what should we input for that?

David:
Yeah, it depends how high you put your deductible. I think 1,200 a year would be good.

Rob:
Great. Repairs and maintenance, vacancy, capital expenditures and management fees. What do you typically budget for your repairs and maintenances whenever you’re doing this?

David:
We usually go 5% for repairs and maintenance, 5% for vacancy, 5% for capital expenditures. Management fees can be about 8% and then the rest of these, electricity, gas, water, sewer, those are typically tenant paid.

Rob:
Right, right. Exactly. Cool. So then, we’re going to finish the analysis here and it should calculate for us exactly how this deal would perform for us. So how does that work? All right, so according to the calculator here this deal is actually in the red. It is a negative $2,206 per month in cash flow. You’re losing $2,200 a month on this guy.

David:
Yeah, and you probably wouldn’t have known that if you didn’t have a calculator like this that would get you this information really fast. Because at first glance this deal looks pretty promising. It’s got a lot of the things you hear us talk about on the podcast; it’s in a great market, it’s in a great neighborhood, it’s already being used as a rental and there’s value-add opportunity. This is some of the big stuff that you’re looking for. A lot of people would pursue this deal, put a lot of time and energy into it and only after hours and hours and hours of their own time was put into it they realized, “Oh, I’m going to be bleeding $2,200 a month if I buy this property.”

Rob:
Yeah. I mean, this is really… Honestly, I agree. If I saw something like this, I’d get excited because right now Austin is the hottest market in the country, right? In theory, almost anything out there should pencil out just because of the demand. But just running the numbers here, the actual mortgage payment on this property is $2,600 a month.
And so, if the median rent here is $1,700, then just right there alone, we’re negative 500 bucks in cash flow and that’s not including vacancy, CapEx, anything like that. So, right off the bat, how long did this take us? Five minutes? Five minutes just saved us 15% more on our car insurance and from a really, really bad deal.
Here’s the cool part about this calculator. Even if you’re not a pro member on the BiggerPockets website, you actually get to use this calculator five times. Five times for free. Now, if you’re a BP pro member, you get unlimited uses of this. If you’re actually very serious about analyzing deals, in my mind you should be hitting deals five times a day, personally. I think if you’re serious about it, you want to get started committing, learning and planning, analyzing a deal is perhaps the most important skill that you’re ever going to have in your whole entire real estate career because it’s what’s going to save you money and it’s also, what’s going to make you money.
So, you get five for free whether or not you’re a member but, yeah, the unlimited use for me has really come in the clutch because we’re doing this so many times every single week at this point.

David:
Yeah, and it has a psychological effect as well where real estate now doesn’t feel as intimidating. You’re not afraid, like, “Oh, my God, what if I get the wrong deal?” There’s this, I don’t know what to expect, so what if is constantly running through your mind.
When you’ve got a tool like this, it answers the majority of those questions for you very quickly, easily, without a ton of energy. Psychologically, it becomes much more easier to feel confident in what you’re doing.

Rob:
So, if you want a negative 20% cash on cash return, this is the deal for you. We’ve analyzed it. All right, maybe it doesn’t pencil out right now, but now I want to get into actually funding the deal and maybe talk about a few creative solutions. Is there anything here that we can do to make this deal make sense?

David:
Well, the first thing that you got to look at in a situation like this is can I add additional revenue? There’s got to be a way that you can bump up the money that’s coming in if you wanted to pencil out so you could reanalyze it. Instead of saying, “Hey, what can I rent the entire house out for,” you could say, “What can I rent a room out for?” You may get more per room if you multiply what you get per room time every room versus what the house is going to rent for.
You may look into doing a conversion. Can I turn the garage into a separate unit? And then the last thing would be, can I build an ADU? Can I put a tiny house in the backyard? Is the lot big enough? What options do I have from there?

Rob:
I will say, I remember there was a BiggerPocket episode, singular pocket, BiggerPockets. There was a BiggerPockets episode that I listened to a couple years ago. It was a gentleman that you had on from Seattle and he was really big on student housing and he had a house-

David:
Todd, I believe.

Rob:
Okay, Todd. He had a house where, it was basically, he was looking for four or five bedrooms and he was tossing like people in every single room and he was making crazy return. I love that strategy. For something like this, maybe this house is only going to bring in $1,700 a month. It doesn’t really work, but I know that it’s close to one of the colleges out in Austin. So, what if you chopped it up a little bit and you rented each room, now you’re looking if you could charge 800, 900 bucks a room, maybe even $1,000 a room depending on the amenities that you’re offering, now this deal starts to work a little bit more. Obviously, I’m going to be partial to the ADU because I built a tiny house in LA. That to me was something that really made that deal pencil up for me and that tiny house now is bringing anywhere from 2,500 to $3,000 a month. The mortgage on my LA property is $4,400 a month. So, it just chops a significant amount of my mortgage just by adding an ADU.
So, there’s a couple creative solutions there. We don’t have to get into the nitty gritty, but I think any of those three can work. This could even work as a house hack too, if you want to live in the main bedroom and then rent out the other two rooms. I mean, that would be great. If you want to do the STR house hack where you rent out each room on Airbnb and charge $50 a night, that could work too. So many solutions here that could make this deal work.
Lastly, now that we’ve figured out funding it and making it work and making it pencil out, if we’re able to do that with this property, the final step here is honestly kind of… It’s a few, but they all go hand in hand together and that’s going to be buy it, right? Close on it and then manage it. Whether you’re self-managing it or you’re hiring a property management company to do it, that is eventually just going to lead to building the wealth of your personal portfolio because if you self-manage it, you’re going to save money. That’s money that you’re going to be able to save and reinvest a lot more. If you decide to give it out to a property management company, well now it’s a completely passive investment. If it’s a completely passive investment, that also puts you a little bit closer to that path towards financial freedom because you’re now making passive income versus active income.

David:
There you go. That’s it. We did it.

Rob:
We did. We analyzed a deal here in, I don’t know, 40, 50 minutes. The actual analysis of the deal took us five minutes. It helps to run this exercise over and over and over again, which is why that calculator has been so clutch for us whenever we’re actually looking for our deals too.
So I don’t know where everyone’s at today in their investment journey. I mean, we have a really big audience and everyone’s just in their own step, in their own journey. But I do know that there’s one thing that’s true for all newbies, for all the green investors, all the rookies out there that are looking to get started today, the one truth is that it’s scary. It’s scary. It’s a scary thing to get into your first deal. It gets less scary as you go, but you should use that fear to drive you a little bit. Turn your fear into curiosity. That’s how I always approach all of my deals.
This is what it looks like to jump into real estate. The exercise that David and I just ran, we literally just analyzed a property and we took action. This is what it can look like for you too, but you can only ever get started in real estate if you take action.

David:
Yeah. This brings us back to when we said the first step is you have to commit. The first step to action is not getting out of doing something, the first step in action is committing to the process of doing something because there’s always going to be something that makes you want to quit.
I like to look at using tools like this as a sign that I am committed to something. If I started a construction business and I was a contractor and I was going to go out and I was going to build a deck in someone’s backyard, and that was my business, I was going to build decks or build fences, do some kind of woodworking, if I was not committed to that, I would buy the cheapest thing I could or borrow a hammer, get a bunch of nails and I would put them in one by one. I would manually put in every nail because it’s the cheapest way. Therefore, in my head, it’s the last risky.
The problem is it would be so slow going, that as new opportunities came and I could build a new deck, I wouldn’t be able to go do it because I’m still working on the one that I’m trying to put together.
Furthermore, I’m going to hit my finger more times using a hammer. I’m going to bend more nails. It’s going to be overall much more hard on my body and I’m going to get tired faster and need to take more breaks. I’m going to make mistakes, I’m going to do it the wrong way, and I’m going to hurt myself.
It’s the same thing with real estate investing. If you’re trying to do all of this by hand, you’re going to end up losing money and making mistakes that you wouldn’t make if you had a tool.
Now, compare this to someone and buys a nail gun. They load it up with the nails, they go right down, they’re all put in there. They did not make mistakes. They did not get hurt by hitting their thumb with the hammer. They didn’t bend nails. That’s a person who’s committed to working that business, and this is the way that I tend to look at tools. If I’m committed to doing something well, I’m going to invest a little bit of money and time and effort into buying tools to help me do it.
A good example of this, to go back to our gym analogy, is some weight gloves. If you try to go work out and you don’t have gloves, you’re going to get callouses on your hands, you’re going to cut your skin and you’re going to have to take time off from the gym to let yourself heal. If you buy a pair of $25 weight gloves, it is spending a little bit of money, but it’s overall going to make sure you stay in the gym more often and it reduces some injuries.
So, people that are willing to buy… I’m not saying buy a $50,000 truck for your construction business before you have business. That doesn’t make sense. But something as small as a nail gun does.

Rob:
100%. I also want to say, we’re talking about taking action, but if you really want to hit your goals, it’s really more about taking consistent action, right? You don’t just go and bench press one time and then that’s it. You can bench press 300 pounds. Now, you have to do it routine. It’s got to be your regimen. You got to be doing it weekly, right? You got to build those skills.
So, if you’re committed to doing them, you’re committed to taking action and becoming a better real estate investor, then let’s talk about really quickly here how BiggerPockets Pro can help you get into more deals faster with less risk.
BiggerPockets Pro also helps you become a better investor with curated articles and video content. You get webinar replays and exclusive articles covering everything you need to know to make smart investments and avoid bad markets. If I’m not mistaken, David, I think you actually have a little workshop in there that people can go and watch.

David:
Yeah. Brandon and I made a series on buying with no and low money down, that was fantastic. It’s probably, I think, the best work that he and I ever did together. When we were making it, we just knew, like, God, this is so good.
You can access that video and then there’s a lot of other ones. Every webinar that BiggerPockets has ever done, you get access to those. You get access to videos that Brandon did where he interviewed experts on things like driving for dollars, door knocking, using relationships to get deals where he interviewed experts in those fields. The information’s out there for everybody to watch, as well as things like world renowned economists, different, BiggerPockets personalities like Anson Young talking about finding and funding great deals. There’s stuff in there for specific to investing in Canada or SEO-related information. Basically, specific niches within real estate investings where we at BiggerPockets have interviewed experts in there and have made that content available only to pro members.

Rob:
Yeah. It is a wealth of knowledge in that vault, so I definitely recommend diving into that the moment you become a prom. Also, once you become a pro, you get the bragging rights. You get a little pro badge there that shows next to your name that shows people that you’re serious. You get that badge of honor that shows up next to your name that everyone can see on the forum. If you’re vain like me, that’s always very important.
Aside from that too, you can save time and money and, honestly this one comes into clutch often, minimize all of your risk with lawyer-approved lease documents for all 50 states. If you’re in the long-term game and you’re using lease a lot, boom. We supply you with a whole library of documents that you can use, and they’ve already been vetted by the BiggerPockets legal team.

David:
Yeah, that’s big because some people like to manage their own properties. If that’s you and you don’t want to have to try to figure out, like, hey, is this lease good or where do I get a lease, you could download it right off of BiggerPockets. They’ve already had lawyers look over it and give it the good old you’re good to go here.
I feel like just that alone, someone can spend an entire day on Google looking for different lease documents and comparing one to the next. That’ll save a ton of time

Rob:
And I have. And you also save thousands of dollars on loans and other tools that you’ll use in your overall real estate business with BiggerPockets perks, plus you’ll get access to discounted educational boot camps. I know Tony Robinson just did one on short term rentals. Very good feedback from everybody. Everybody loved it. All these boot camps all focus on very specific niches from some of the best pros in the industry.
Another thing, when you got a glimpse into this earlier, you can also accurately estimate rental rates based on local property comp. You can put in your address and the BiggerPockets Rent Estimator tool will help you understand what the possible projections are for that specific property.

David:
Yeah, and that is also huge. What we’re basically looking to do is take away all the points where an investor starts down the journey or starts up the journey, I should say, because this is typically an uphill battle, you’re going to get some exercise but you only get the best view at the very top and you get stuck. It’s like you’re walking, there’s a dead end, I don’t know what to do. That’s when people quit or they turn around and they go back downhill. So, the lease documents is one that people get stuck on.
Not knowing what income to expect, right? The calculator will help you figure out all your expenses, but you need income to put into it to know what to get. Well, the rent estimator tool is very accurate. I rely on it all the time, and it does the work for you. You type in the address of the property you want and it goes, boom. Here’s what you can expect to get for rents and then here are all the comparables that we’re pulling this from. And, oh yeah, click on that comparable and look to see and verify that it does look like your property. It makes it incredibly easy.

Rob:
Right. Ultimately, it just saves you money in the investments that you’re making, which kind of bring me, today, we actually have an offer out. If you decide to become a BP Pro today, you’ll actually save 20% on your annual pro membership. In order to do so, whenever you go and you sign up, just make sure to use promo code REPOD22 that’s R-E-P-O-D 22.
Just for clarity, I know a lot of you are probably wondering how much is BiggerPockets Pro. Annually, BiggerPockets Pro is typically $390. But, again, if you sign up today, after that 20% discount, it is $312. It’s pretty significant, 78 bucks that you just saved today. Most of you were probably already going to sign up for BiggerPockets Pro. If you’ve been thinking about doing it, I would hop on this because the 20% isn’t really around all the time.
So, if you’re looking to take action and get started today, all you have to do is go to biggerpockets.com/proupgrade. Again, the promo code for that is going to be REPOD22, and that’s going to save you 20%. That’s R-E-P-O-D 22, and you’ll get 20% off of your pro membership when you do that.
There’s a ton of other perks that are associated with this, by the way, that we didn’t even get into because we’re running short on time, but just know that there are so much more than we just discussed.
So, truly, you have nothing to lose here. I mean, it’s a 30-day money back guarantee. I think this is about as safe of an investment as you can make because there’s no refunds in real estate, usually.
With all that, I mean, you just took this journey with me and Dave just on this deal, but also, if you’ve been following along in the podcast, you know that we’re taking a journey that we’re letting everyone follow along with. We just bought a $3.25 million house in Scottsdale, Arizona. We’re excited to share that with you because we really do believe in transparency, sharing with the audience, bringing people in with us, and sharing the insight so that you can learn as well.

David:
Yeah, that’s exactly right. I got to say, that property felt like getting to the top of a hike and having the amazing view. I mean, it has amazing views that might be [inaudible 00:56:18] like that.

Rob:
It has an amazing view, yeah. Yeah, yeah for sure.

David:
But it wasn’t just… Other decisions I made were a good business decision, and so it was kind of like, hey, I hiked to the top and now I get to rest. I feel good about myself. This was amazing. It felt so good. It was one of those things where you’re like, this is why I’ve been working so hard and delaying gratification so much. Let’s get access to properties like this that are just fun.
I mean, we’re going to make good money with this deal, but we’re also going to make good memories there. We’re going to be able to have masterminds and groups together where we go out and we teach people about real estate investing and we’re going to get to share this with other people, open their eyes, change their lives. But you never would get this amazing view that we got from that property if we were not steady staying on our hike, if we weren’t surrounded by other people that are doing the same things as us, learning from them, helping them and creating community.
In fact, it’s the community itself that’s going to make this property so fun because they’re the ones that are going to be joining with us at the deal. This is why you want to get involved, get a gym membership and get involved in the community, right? Or find a group that hikes with you and go hiking together, whatever analogy you want to use. You want to get deeper into the real estate investing community.
BiggerPockets Pro is probably the biggest and best community of investors in the world. I mean, there are more people. There’s over 2 million members at bigger pockets and many of them are pro members. This is where you get access to the best stuff. The best podcast, the best webinars, the best videos, the best blog articles, the best books. BiggerPockets were dominating pretty much everything in the investing and educational space.
So, this commitment you’re making to get into pro is less than the cost of a home inspection on a condo, okay? Rob, what did we pay for our home inspection on the Scottsdale house?

Rob:
Oh man, 1200 bucks.

David:
Okay. I bet it could have been worse, right?

Rob:
Oh, yeah.

David:
So, this is like four of those basically that you’re going to pay to sign up here that’s going to get you in the door and get you connected. If part of your goal for 2022 was to get into the real estate investing game, this is a great way to do it.

Rob:
Yeah, I wouldn’t downplay the networking here. The forums are popping off all the time. There are icons even within the forums too. We just had Jonathan Greene on not too long ago. He is very iconic in the forums because he’s just helping people. The community helps each other, they answer each other’s questions, they help build each other up. We’re all here to help each other get into our first, second, third, fourth, 10th deal.

David:
Amen to that. One of the things I like to say is if you do nothing right now, 10 years down the road, 10 years has passed. Whether you take action today, whether you don’t take action today, 10 years is going to go by and you’re going to look back and you’re going to have had that time pass regardless of what you did.
So, the 10-year from now version of yourself can either say, “Thank you, 2022, David, for making the decisions that you made that made me more physically fit, more financially fit, better relationships, happier person, better life, better family”; or you can look back and say, “Man, I wish I would’ve done something before.”
This is the same thing. If you start right now and you look back at 2012 version of you. Are you really glad with the decisions you made, what you committed to, what you invested in or are you kicking yourself saying I should have bought more real estate, I should have started investing, I should have got more serious, I should have dove in deeper. If you make a decision right now and you stick with it, is impossible to not be better off five years down the road, 10 years down the road. But if you don’t make a different decision right now, you can guarantee, you’re going to be thinking the same thoughts, doing the same stuff that you are right now, you’re just going to be 10 years older.

Rob:
Yeah, 100%. Look, it might be a little scary, guys, but I personally think that growth comes from fear. I guess I’ll leave it there, man. That was a very impactful word you said there, my friend. Anything that you want to leave the audience with before we go? How about this? Because usually we ask people where, where can people find out more about you, Dave, if t they want to get your awesome knowledge bombs on the interwebs?

David:
You can follow me @davidgreene24. Instagram’s probably where I am most active. I recently got a social media company making some stuff for me, so it’s finally cleaned up and looking like a professional Instagram should. Let me know what you guys think. On TikTok, I’m official David Greene and then on YouTube, I’m David Greene Real Estate. Recently, I just got on CNN and did an interview there about interest rates, what we can expect in the market, house hacking-

Rob:
Yeah, that’s cool.

David:
BiggerPockets, I saw, posted that today. If you guys want to see it, it was like a five-minute section on Mother’s Day, go to my Instagram. You can check that out.

Rob:
Awesome, man. Yeah, I saw that, dude. That’s very cool of you. I don’t know how I can one up that. You’ve done it. You’re a news anchor now.

David:
Yeah, I’m anchorman, but you’ve got that cough. I don’t think you ever have to worry about one upping me as long as you’re rocking that cough.

Rob:
Yeah, I guess that’s true.

David:
And Rob, if people would like to hear more about your stunning success in the tiny home and short-term rental space, where can they learn more?

Rob:
Oh, just the typical channels. You can find me on YouTube at Robuilt, R-O-B-U-I-L-T. You can also find me on Instagram at Robuilt and then on TikTok at Robuilto. Reach out, say what’s up, leave a comment, leave a like.
Yeah, that’s it, man. That’s the show. We did it. We showed people how to get started. If you get started today from this episode, do me a favor, leave us a comment in the YouTube and this video and let us know because we always like to see who out there is taking action.

David:
And if you are on the fence, I highly encourage you, go to biggerpockets.com/proupgrade, sign up for pro. You get a money-back guarantee if for some reason you don’t like it, but it will change the way that you have a relationship with real estate. Your identity will slowly shift into someone who has committed to it, not just someone who’s at the outside of the gym looking at the windows of the people working out wishing you could be in there with them.

Rob:
Yeah. Don’t forget to use promo code REPOD22 for 20% off. With that, David, you want to sign us off here?

David:
This is David Greene for Rob the Improv Abasolo signing off.

 

This is by no means the worst economy we’ve ever seen. But with the exception of the first few months after the beginning of COVID-19, it is almost certainly the strangest and most volatile. 

Inflation is the highest it’s been since the early 1980s and will likely remain for the foreseeable future. Real estate prices have increased at a rate that exceeds the pre-2008 crash. There’s a massive housing crisis, various supply shortages, rising interest rates, an inverted yield curve, and economic growth during the first quarter of 2022 was negative. 

Indeed, a recession may be upon us. Some think another housing market collapse may be coming soon.

Wherever we’re going, one clear thing is that we are in a very volatile economy where investors should proceed with caution. Nevertheless, they should still proceed. 

I’m not a fan of sitting on the sidelines and “waiting for the market to correct.” I thought the market would correct around 2018. I was wrong. Had I stopped buying, I would be regretful about it. Had I sold our portfolio, I would be even more regretful.  

Indeed, I’ve known people who have been saying that since 2015. Needless to say, they’re still waiting.

20-Mile Marching

Jim Collins is best known for his classic Good to Great, but I believe his book on how to invest in a volatile economy, Great by Choice, is even better. One of Collins’s key points is the importance of a consistent approach through both good and bad times. He refers to this as “20-mile marching,” an analogy to the famed explorer Roald Amundsen. 

In 1911, Amundsen and his team faced off against Robert Falcon Scott in a competition to see who could reach the South Pole first. Scott’s team would go as far as they could on good days and then hunker down on bad days. This seems intuitive, but it didn’t work. Unfortunately, not only did Scott and his team not reach the South Pole, they didn’t make it back alive.

On the other hand, Amundsen had a dogmatic belief in preparation and consistency. As Collins writes in Great by Choice,

“Amundsen adhered to a regime of consistent progress, never going too far in good weather, careful to stay far away from the red line of exhaustion that could leave his team exposed, yet pressing ahead in nasty weather to stay on pace. Amundsen throttled back his well-tuned team to travel between 15 and 20 miles per day…When a member of Amundsen’s team suggested they could go faster, up to 25 miles a day, Amundsen said no.”

The relation to business is simple, “The 20 Mile March creates two types of self-imposed discomfort: (1) the discomfort of unwavering commitment to high performance in difficult conditions, and (2) the discomfort of holding back in good conditions.”

Collins found seven companies that beat the Dow Jones and their industry by at least 10-fold over 15 years during a turbulent environment. All seven, including Southwest Airlines, Microsoft, and Intel, followed the 20-Mile March philosophy. 

Hunkering down destroys momentum and creates apathy and perhaps even paranoia about the future. No excitement comes with sitting around and waiting. If you have a staff, the best employees will probably believe that there won’t be much in the way of growth opportunities and move on.

On the other hand, expanding like crazy can create additional problems, from outgrowing your systems to overleveraging to making careless mistakes as the number of your commitments outpace the time you have to vet them properly. 

Growth should be consistent, in good times and bad. More or less, this is the thought behind dollar cost averaging. Of course, you should not take this as dogma. There are times to stop expanding (for example, if multiple employees quit, or your bank won’t renew a big loan) or expand quickly (a killer deal comes around). Still, the plan should be for consistent and quality growth.

Not the Time to Reach

20-Mile Marching doesn’t specify a particular strategy, though. It doesn’t say you shouldn’t sell a property or two now if your cash is tight or cash flow is low. And it certainly doesn’t say you should reach if you cannot find a deal in a hot market like this. 

Indeed, when the market appears a bit irrational (in this instance, too hot), it’s a good time to sharpen your pencil and only take deals that are certain to make sense. This might reduce the number of properties you are buying. You might not even be able to find one for a while.

But not finding a property is not the same as hunkering down. After all, you’re still looking, and sooner or later, you will find one.

Cash is King

Another key point Collins makes is that companies that held large cash reserves did substantially better than those that did not. This is because those companies have sufficient funds for a rainy day and have enough money to pounce on golden opportunities when they come around. 

I made a similar point when reviewing Nicholas Nassim Taleb’s great book Antifragile in a previous article,

“Taleb believes that trying to predict such rare events is mostly a fool’s errand. Instead, one should try to become ‘antifragile.’ Antifragility doesn’t describe something that can survive disorder or even a downturn. For that, he uses the term ‘robust.’ Instead, antifragility is something that gains from disorder.”

“So whereas most companies struggle in a recession, a company that thrives in a downturn would be antifragile… Those who ‘thrive from disorder’ can often grow exponentially while others are declaring bankruptcy.”

Having money to buy assets when they’re cheap can make a real estate investor antifragile.

Of course, “have money” is not the most helpful advice. It is notoriously difficult to maintain strong cash reserves with real estate in particular. I’ve often joked that you’re not a real estate investor unless you’re cash poor. 

That being said, in volatile economic conditions, it is not the time to ride the line. If refinancing or selling a property will get you some breathing room that you don’t currently have, it would be something to strongly consider. 

Likewise, if you are considering quitting your job and going into real estate full time, I would make sure you have saved up a substantial rainy-day fund. If not, it may be worth holding off on that decision for the time being. 

Dealing with Inflation

Of course, we are in a high inflation environment, so you don’t want to hold too much cash, or at least, you don’t want to hold too much cash as cash. Now would be a good time to look into investment vehicles that offer at least a small return to help offset inflation. 

Unfortunately, these are hard to come by. A 3-month treasury bond, for example, still only provides a paltry 0.95% return as of this writing.

That being said, the nice part about holding real estate is that inflation erodes debt while assets continue to (usually) increase in value. As long as most of your wealth is in hard assets such as real estate, inflation shouldn’t hurt you too badly.

But inflation does make it more difficult to cash flow. Prices for materials, wages, insurance, and taxes all go up, making it all the more important for landlords to keep up with rent increases (at least until the market cools). 

Indeed, last year, rents went up some 15%.

Yes, these are challenging times. If you can afford to offer your tenants a break, do so. But only if you’re confident you can afford to.

Otherwise, you need to be more aggressive with rent increases. Most leases are renewed annually, and locking in a below-market lease could severely affect your cash flow as prices on everything else continue to increase month over month.

In the same vein, you need to make tenant screening a priority. This should always be the case, but in volatile times, it will be the tenants on the edge who stop paying first if we tumble into a recession. Thus, it’s even more essential now to screen prospects thoroughly.

The Real vs. Nominal Distinction

In a low inflationary environment, you can take returns at face value. 8% interest is 8% interest.

In high inflationary periods, this is not the case. When inflation is high, you need to account for real vs. nominal prices. For example, if your annual return is 8% and inflation is 9%, then you really lost 1% in real terms.

This is one reason I believe it’s unlikely that the real estate market will collapse. I do believe that in real terms, it will likely decline as real estate appreciation will fall behind price inflation. But if you look at what happened the last time there was high inflation and low growth, real estate just about kept pace with inflation:

But while this shows that real estate didn’t collapse during the stagflation of the 1970s and early 1980s, it also shows real estate didn’t do particularly well either. However, if you had looked exclusively at the appreciation rate without considering inflation, it would look like real estate did great.

Thereby it’s essential to start thinking in real terms instead of nominal.

Fixed Interest Rates

Interest rates may feel high now as the 30-year fixed mortgage just crossed 5% after hovering near an absurdly low 3% for all of 2021. 

But just because it feels high doesn’t mean it is. Remember, we need to think in terms of real vs. nominal. Interest rates are still substantially below inflation, which doesn’t make much sense.

Historically speaking, the Fed’s discount rate (what it lends to banks at) is still very low, and even if it gets that rate up to 2.8 % by the end of 2023, as it says it will, it will still be at the lower end of the historical average. The discount rate is nowhere near the rates that Paul Volker brought it up to in order to “break the back of inflation” in the early 1980s. 

In other words, interest rates are still low.

The more certainty you have in a volatile economy, the better. So, the moral of the story is this: No adjustable-rate mortgages right now. Make sure your loans are fixed for at least five years, 10 if possible.

And if you have loans coming up for renewal in the next year or two, I would highly consider refinancing them now (assuming the prepayment penalty is not too high) at these “high-interest rates.” Trust me, unless you have lived through the interest rates of the 1970s, 1980s, and even the 1990s, you have no idea what “high-interest rates” actually are.

Conclusion

Volatile and fragile economies can be scary, but they can also bring opportunities. It’s been extremely difficult to find properties to buy in the last couple of years. When the market starts to cool, that should change. 

Indeed, the best investors often do the best during recessions or volatile economies. They don’t do so, however, by sitting on the sidelines. Instead, they keep their reserves high, adjust to the environment, sharpen their pencils, and continue 20-mile marching.