Month: December 2022

Dave:
Hey, what’s going on everyone? Welcome to On the Market. I’m your host, Dave Meyer, joined by Jamil Damji today. I was going to ask how you’re doing, but now I know you’re dancing, you’re singing already.

Jamil:
I’m super good. Yeah, this is fun.

Dave:
Last time I saw you, we had a team call on Monday, you were going to Disney World. How was it?

Jamil:
It was incredible. I went to Disneyland with six 16 year olds and I survived. Actually, I have a beautiful family and I got a great kid, and well, we had a lot of fun. I got to ride some rise. I ate Turkey leg, had some Dole Whip, what could be better in life.

Dave:
Yeah, that sounds lovely and I’m glad you had a good time. Well, today we have an episode that we’ve been talking about and wanting to do for a long time, and that’s talking about iBuyers and we have one of the foremost experts I think in the world talking about real estate technology in general. Mike DelPrete, he’s not an investor, but he’s a professor of real estate technology. He knows everything about this, and we had a great conversation, but the conversation, we obviously already filmed it. We sort of go right into it. So before we go into the interview, I’d love to just quickly explain what iBuying is. You’re pretty familiar with the topic, right?

Jamil:
Sure. So what I have seen iBuying as, how it works is, it’s essentially a convenience purchase. So a company will come in and give a homeowner a convenience offer, typically a cash offer, and they’ll provide all of the ease and flexibility that that offer should provide. So cash, quick closing or flexible closing, flexible terms, lease backs, post-possessions, all of the ways that a homeowner can get maximum flexibility, and in return for that convenience, they trade value, they trade some equity.

Dave:
Yeah. And so basically as a seller, you could go on Zillow, sort of the famous one, but there are several Offerpad and Opendoor publicly traded companies. Redfin was doing this for a while. You can go on these websites and it’s like if you’ve ever seen that instant offer kind of thing, like Jamil was saying, they’re just making this convenient for you. And it’s been this sort of hot topic, especially I think in the real estate investing community over the last couple of years because in some ways, and I think people can argue this and we’ll talk about this, it does threaten or you could make an argument that it threatens real estate investors because they’re going after some of the, let’s call, the motivated sellers that real estate investors typically target.
And I’m not going to spoil it, but that’s sort the framework of why we wanted to have the conversation here with Mike and talk about iBuyers because it is a really important trend impacting the world of real estate investing. And I think he sheds a lot of light on how as an investor you should be thinking about this industry. Is there anything else you think our listeners should know before we jump into the interview?

Jamil:
I think, just take notes, because this is an incredibly intelligent conversation about where real estate has been, where it’s currently at, and where it could possibly be going. If you are the kind of person right now that’s trying to determine where should I be, how can I be more forward thinking, how can I be the next innovator? You might find the idea on this episode.

Dave:
Awesome. Well, that’s a great setup. We’re going to get into our interview with Mike DelPrete, but first we’re going to take a quick break. Mike DelPrete, welcome to On the Market. Thank you so much for joining us.

Mike:
My pleasure. Thanks for having me.

Dave:
So can you tell our audience just a little bit about the work you do related to the real estate industry?

Mike:
Yeah, sure. So if we go back in time a little bit, I worked at an internet business that owned a real estate portal, kind of like the Zillow, but it was in New Zealand, so it was the Zillow of New Zealand. And since I left there and returned back to the states, I’ve been studying, well, there’s this question in my mind, which is what are some new ways, new business models that might change how people buy and sell homes? I assume you and a lot of your listeners, people buy and sell homes, it feels antiquated. You’re like, why does it work like this? How come it doesn’t do that? Concurrently, billions of dollars have poured into the space over the past couple years, and there’s a lot of investors and companies and entrepreneurs trying to change that.
So that’s what I’ve been interested in, and all of my work stems from that. So I’m looking for businesses, business models, companies, entrepreneurs that are trying to change how people buy and sell homes. And a lot of that work just comes out as research, reports. I’m a data guy, so I try to find evidence, it’s who’s raised money or issued a press release, but what’s actually working? And then trying to connect the dots between those different data points to enlighten what the trends are, what the insights are, what’s working, what’s not working, and why.

Dave:
Awesome. You’re our kind of guy. That’s going to be a great interview. I’m looking forward to this. But before we jump into some of the recent stuff, I’m just curious, were you in real estate before working in that portal? Were you a tech person or how did this interest pique in you?

Mike:
It’s a good question, and my family asks me that all the time. What are you doing and why? After I went to college, I started a tech business. So I was a tech entrepreneur. I didn’t raise any money, but I built up a company, 40-50 people, and sold it. And that was a good exit and that gave me the freedom to explore my passions a little bit more. And some of that was moving to New Zealand and experiencing a different culture and a work environment. And that’s where I first got interested in real estate or technology in real estate. I’ve always been a tech guy. I haven’t really been into real estate. I’m not that into real estate. I don’t own any rentals. I don’t have a property portfolio. I’m not invested in any real estate stocks, but I think it’s a fantastic area that suits me because it’s huge.
There’s a huge opportunity. There’s a lot of data, just a lot of data all over the place, and it’s hard. The path forward is not clear and it wasn’t clear to me five years ago. I could look at other industries and you can chart out how you think it’ll go. Video on demand or cable television, it’s clear where this is going. But real estate, no idea, all bets are off. And I have a busy brain that doesn’t like to sit around idle and I wanted something, a hard problem to think about. And nothing to me seemed harder at the time than figuring out, okay, what’s going to happen in this space? What are we going to see going forward?

Dave:
All right, great. Well, you seem like just the person for the questions that we have. I actually first stumbled upon your research last year when I’m sure it was a very busy time for you with Zillow’s iBuyer program, famously, infamously, whatever, shut down. So we’re curious just to learn a little bit more about the state of iBuyers right now, because as real estate investors, there’s been, I don’t know, Jamil, what do we call it? Paranoia, fear, something.

Jamil:
I call it paranoia. I would call it fear. I think there’s a lot of misunderstanding about the space and I’ve looked in and dove into a little bit of Michael’s research. And again, just understanding how little of the market right now, it’s actually affecting. It’s such a overestimated fear. The real estate professionals in general don’t understand how to utilize this resource that’s available there. And so I think it’s all of it. I think it’s misunderstanding. I think it’s fear. And I also believe that if we had a better understanding of what their model was and what they were actually trying to accomplish, then we could have a better narrative about it. Because real estate agents think that they’re there to take away their jobs. It’s not the case.

Mike:
Yes and no.

Jamil:
Okay, well, let’s hear it.

Mike:
Yeah, I mean, think, so, if we go back to my question, what are some new models that may change how people buy and sell homes? iBuying is one of many. So we can talk all about iBuyers, we can talk about other stuff. But iBuyers are a clear answer to that question. They’re probably the largest, the most well-funded. And fundamentally, they represent this really radical change to the status quo. At the time when Opendoor, the biggest iBuyer first came to the scene and raised some money, there were other companies, but they were all taking the existing real estate process and just digitizing parts of it. If we can bring this online or automate that, that’s disruption, that’s real estate tech. Opendoor came to the party and they cleared the table and said, nope, there’s a totally different way from A to B.
Instead of listing your home the traditional way, we’ll go in, we’ll buy it from you almost site unseen. You could get a check in the mail by the end of the week and then we’re going to fix it up and sell it off when we’re done. That was a radical proposition at the time. So iBuyers are part of real estate tech disruption, but real estate tech disruption is not just iBuyers, there’s plenty of other companies out there. But to answer your question, I mean, there’s so much to unpack there, but just to pick one topic of what you asked and happy to talk about the business model, but I think if we talk about agents, Opendoor is the largest iBuyer, and they came out of the gate with a bit of an anti-agent message. I mean, the marketing is really clear.
It’s like the traditional process is broken, we’re going to fix it. If you’re an agent, you are the traditional process. Opendoor spends, I mean, even up until earlier this year, they spend tens of millions of dollars on TV advertising campaigns. And the messaging there is sell your home the new fashioned way. So if you follow that train of thought, the old-fashioned way is the traditional way, and that’s agents. So every real estate agent is old fashioned. So there is a bit, to be fair, there has been a bit of antagonism between iBuyers and real estate agents from the get go and continuing to today.

Dave:
So how does that work with a company like Zillow or Redfin, that those are two, I guess, previous iBuyers now that both of them have thrown in the towel. But how was that working and is that part of the problem is that they sort of had this iBuyer business that is potentially antagonistic or adversarial towards agents? At the same time I know Zillow, the vast majority of the revenue comes from agents. I don’t know exactly how Redfin’s revenue comes in, but.

Jamil:
Well, they’re a brokerage as well. And so Redfin is representing buyers hand over fist.

Mike:
Well, let’s get the easy one out of the way first, Redfin. Redfin was technically an iBuyer but just exponentially smaller than anyone else. They’re also their own brokerage. Redfin employs their own real estate agents. So Redfin can go out there, do whatever they want and say, this is what we’re doing, like it or leave it. They can just force their organization to accept this. So it wasn’t a big deal for them. So we’ll put that to the side. But Zillow, yeah. I mean, I think Zillow’s entry into iBuying and their messaging and how they pitched that to agents, it’s a master stroke in good communication. There was such little backlash from that that often gets forgotten. Because so much has happened since then, but it was really well done. And the way that Zillow got around it was they said, yeah, there’s another iBuyer out there, Opendoor, and they don’t want to use agents, but we do.
So we’re Zillow, we want to come in, we want to offer iBuying because we think that’s a pretty valuable solution for today’s homeowners. But we also, we want to work with the industry, we want to work with you, our valued partners, our valued agents, and the way we’re going to do that is we’re actually, we’re going to continue to use an agent on every single one of our transactions and we’re going to pay you a commission on it. Whereas, with Opendoor, consumers would go to Opendoor directly, they wouldn’t use an agent. It was a zero-sum game. The agents lose because Opendoor wins. Zillow was saying, Hey, we’re going to still use agents, we’ll still pay a commission.
And the way that financially transpired was almost this tax that Zillow had to pay agents for every transaction. I forget it, that it was like one and a half percent just to pay those agent commissions. So if you look at the unit economics, Zillow’s were always worse than Opendoor because Zillow continued to pay that agent tax to use agents in order to not upset their existing client base. Zillow generates a billion dollars a year in revenue from agents, they can’t afford to go out there and upset them.

Jamil:
I think in addition to that, though, there’s an important piece to the equation that having a homeowner have an advocate in the conversation. When you look at the way that, I mean, I’ve transacted with Opendoor before and it’s interesting, though, just the way the contracts read. You’ve got your first line item, which is your purchase price or their purchase price, and then all of their credits come out on the last page of the document where you’ve got their technology fee, you’ve got their market risk fee, you’ve got all the different ways that they’re going to change the settlement statement when the deal actually closes. The property then records at a much higher price than what they actually pay for the property. And it’s confusing. It’s confusing to people when they’re looking at the settlement statement.
They say, wait, hold on, you said you were going to pay me 225,000. I’m looking at my settlement statement now, it says 165. So inserting an advocate into that conversation so that the technology can be explained so that the contracts can be explained so that how everybody’s being monetized is explained and people can make an informed decision. I don’t think that’s a terrible thing to have.

Mike:
No, and I think that’s symptomatic of the psychology of this whole space. We’re talking about real estate, somebody’s single largest transaction they will likely undertake in their lifetime. And I mean, I’ve talked about this, right? This idea of loss aversion and whatnot, but fundamentally, the larger a transaction, the more conservative human beings are; the less we want to make a mistake. If I want to try a new coffee shop that opened up down the street, I’ll try it out one day, I spend $5, and if I don’t like it, what did I lose? I lost five bucks. I’ll just go to my normal place tomorrow. I want to try video streaming service. I sign up for Disney plus the first month is either free or 10 bucks. What do I get if I don’t like it? I just lost 10 bucks. Not a big deal. But with real estate, what’s the potential downside if you make a mistake? It’s huge.
Your example, it could be tens of thousands of dollars. We’re talking about video streaming services and coffee are not on Maslow’s Hierarchy of needs shelter is. So, I mean, coffee is on my hierarchy of needs, but real estate, shelter is right. We’re talking about being in the right school district at the right time. We’re talking about safety, we’re talking about being near my parents or something. It’s all wrapped up into that. And that’s why on these high value transactions, people are much more conservative and they have a specialist help them. That’s why we have financial advisors to help with financial planning and wealth management. That’s why there’s divorce lawyers. That’s why there’s M&A attorneys and investment bankers to help out with these high transaction, low frequency transactions where they can be the specialist and provide that expertise. And in real estate, that’s the real estate agent. So bring it all back. That’s why we still have agents, that’s why agents are not going away anytime soon. And that’s why it feels funny to outsource that advocacy to the for profit company you are working with.

Dave:
Yeah, it seems a little bit like a conflict of interest, I guess, when it’s all sort of vertically integrated and they don’t have that much objectivity. I would like to jump back, I guess, a foundational question here, particularly for real estate investors. Because as a group, I guess, I’ll speak for everyone and say felt like iBuyers are competition, too. They were coming in making offers on a lot of the types of distressed properties or value add opportunities that traditionally smaller investors really liked. And that sort has been a threat. But one thing I’ve always just been curious about, and Jamil hinted at this, is what is the volume even? Are they even making a dent in the national scheme of housing transactions or is this sort of overblown and they’re really just of this niche thing?

Mike:
It all comes down to perspective and the tyranny of percentages. So if we start way at the top, I think Opendoor, it’s either Opendoor or all iBuyers, but Opendoor’s market share last year was something like 1.3%. So out of all the homes that were purchased, Opendoor purchased maybe 1.3, it actually sounds too high. I think that was all iBuyers. So anyway, you’re talking like a percent, right? So you can look at that and you can say, oh a percent, that’s a rounding error. It’s totally niche, not a big deal. But then if you translate that percent into an actual number of transactions, you’re talking about 40, 50, 60, 70,000 houses. That’s 40, 50, 60, 70,000 houses. That’s 40, 50, 60, 70,000 families that are looking to move. So there’s a big deal there. And then if we go a little bit further, because that’s national. The iBuyers are not, they’re not really national.
I mean, they kind of are but they’re not, right? So they’ve issued press releases and launched in 50 markets around the country. So there is a growing national presence, but not all markets are created equal. There’s a very high concentration in these top four-ish markets. Phoenix, Atlanta, Texas, and kind of the Carolinas. So Phoenix is ground zero for iBuyers and Atlanta is very close number, well, they go back and forth. So if you look at one of those, Phoenix or Atlanta at times market share, the iBuyer market share maybe five, six, 7%, but it’s peaked above 10

Jamil:
10, yeah.

Mike:
So there’s times when those markets where they have 10% share the markets, one out of every 10 homes is going on Opendoor’s, books. So that’s a big deal. And then you can even get narrower and you can say, okay, there’s a neighborhood in Atlanta and you know what? In there that market share number is closer to 20, 30, it could be even 40%, right? The denominator’s getting pretty small at that point. And Bloomberg has done some research on that in the past. So it really all depends. If you’re a property investor in Minneapolis or Indianapolis, this is not a big deal. They’re not doing anything right. But if you’re a property investor in Phoenix or Atlanta, this is absolutely a big deal.

Jamil:
And I’ll speak to that real, real quickly because I’m in Phoenix, Arizona, and I felt Opendoor coming into the market. I’m a investor. I buy and sell houses. I wholesale traditionally. And when Opendoor came into the space, they were the Silicon Valley wholesaler. They were the wholesaler in a suit and that was what everybody got fearful of. Because they thought, wow, these guys are, they’re sophisticated, they got billions of dollars, they’re going to come in and they’re going to completely disrupt what our business model is. And was there a dent, and did it affect us in the early parts? It did, absolutely. Everybody’s volumes adjusted and we had to get more engineered with our marketing. We had to get more boots on the ground. Everybody had to pivot. If you were going to survive when you had an 800 pound gorilla in your backyard, you were going to have to do better.
You’re going to have to offer more solutions. You were going to have to offer more service, you were going to have to offer more transparency. There was going to need to be a shift in the market. And I think that what Opendoor effectively did for us in Phoenix is it made everybody better. We all had to work harder and do better in order to compete with Opendoor. I’m also going to say this, there are parts about it that I don’t think got better.
For instance, when you look at some of the product, and I’m not knocking Opendoor, I think they’re a wonderful company and I like the people involved in it, and God bless them. But when you look at the product and you see what has come down from flipping houses from the sky, I did a whole YouTube exposé on it and I looked at what does it look like when a mom and pop rehabber whose heart and soul goes into a project when they care about where are we going to put the placement of this shelf because we’re thinking about the family that’s going to live here and where they’re going to put their things and how people are actually going to live in this home.
And when you changed it from the perspective of somebody coming in and their livelihood being the business versus an algorithm deciding that they were going to buy this house and that they were allowed to spend 1% of purchase price in order to renovate it, which is the typical amount of money that they want to spend in a property, what did that project look like when it came back onto the open market? And when you look at how that affects neighborhoods that they’re investing in, I think that the ultimate result wasn’t super positive. And to me, I think that’s a piece that we all need to understand and look at is that when somebody has the choice of selling their home, you might get X dollars from Opendoor and you might get X dollars from this wholesaler or this rehabber, but what is that impact on the community when it’s done?

Mike:
It’s a really good point. It reminds me of a chat I had the other day with an agent friend of mine who was showing their buyer a bunch of homes. Some of those homes were Opendoor homes. And the feedback, again, this is one data point, but it reinforces that. The feedback from the buyer after touring that Opendoor home was, “It doesn’t have any soul.”

Jamil:
Exactly.

Mike:
Right. They don’t-

Jamil:
It’s missing the soul. Michael, you hit it.

Mike:
Yeah, they don’t stage the houses, which is fine. This is what happens when you have, like you said, an algorithm running the business. It’s very data driven and when that occurs, you don’t stage the home. All the paint colors are the same, all the rugs and carpets are the same. Everything’s the same. But that the buyer was looking, they want to live there. I want some character. I want to know what is in the soul of this home and do we connect or not? Yeah, I think that’s a tough proposition.

Dave:
Interesting. Yeah, I mean, I think that’s really helpful context too, to understand the localized concentration here. Obviously, 10% is a lot, especially if you live in those communities, you feel that, and it feels, I’m sure, pretty weird as both an investor and just a home buyer. So that’s helpful in helping everyone understand that if you’re a real estate investor, unless you’re in one of these major markets, you’re probably not competing that directly against some of these iBuyers. Which sort of brings me to my next question is are there going to be any iBuyers in the near future? Because now we’ve seen Zillow drop out, we’ve seen Redfin, which you just explained is not a huge player anyway, but one of the bigger names, at least in the industry. So I guess, Opendoor, Offerpad is still around, are those the two big ones? Because from what I read, they’re not doing great either.

Mike:
Those are the two pure play iBuyers left Opendoor and Offerpad. And Opendoor is about four times as big as Offerpad and by volume. And Offerpads always played by the beat of their own drum. I’ve done some research on this, it’s all online and free. So if you want, you can look at it. But Opendoor is founded by a bunch of Silicon Valley Tech folks. Offerpad was founded by a bunch of real estate folks. And Offerpad has had a different philosophy. It’s not pedal to the metal, let’s get as big as we can, as fast as we can. It’s a little bit more moderate and they’re willing to put more time and money into the rehab of the houses. They’re real estate people. So they get that a bit more and they have a different model. And the result of that is, I think, Offerpad, at least, is just, let’s call it, more moderate. When the market’s swinging wildly up and down, Offerpad’s not going to go up as far and it’s not going to go down as far.
So in the last quarter, Opendoor, lost a lot of money, Offerpad, lost a little bit of money. Yeah. Anyway, I don’t know what the next, I mean, the next 12 to 18 months is a free-for-all. I’m not sure what’s going to happen. Surviving it is simply a matter of how much money do you have in the bank and how much are you spending every month and do you have enough to weather this financial and real estate market storm. I think Opendoor is in the process of pivoting or evolving their model a bit. They’ve launched more asset-like products. So they’re basically Opendoor’s trying to be an iBuyer without actually buying the home. They have this exclusive marketplace and they’re going to sellers and saying, if you want to sell your home, come to us. We’ll charge you a fee, 5% fee.
And right now we’ll rebate 2% of that back to you, but we’ll charge you a fee, we’ll give you a cash offer. And remember, Opendoor only buys a percent of the homes. They don’t have to, nobody’s holding a gun to their head and forcing them to buy every home. But we’ll give you a cash offer and then we’ll advertise your home in our exclusive non-MLS marketplace. And if you’re a property investor, this is where you should start paying attention and we’re going to try to find you buyers. And that could be individuals or that can be institutional investors. And I made this point a couple days ago on a webinar, what I’ve just described sounds a lot like a real estate agent.

Jamil:
Or a wholesaler.

Dave:
Horse to mil, yeah, try to turn you into a robot.

Jamil:
Let’s be real. This is what we do is we sell equitable interest in the house, and that’s exactly what Opendoor is proposing. And rather than coming and the whole thing, oh, we actually have the money to back up what we’re going to do, we’re actually going to close. All these promises go out the window. Now all of a sudden they realize that, hold on a second, we can’t take everything down. Maybe it’s time that we just start selling equitable interest. I mean, that’s what happened, right? It was always the better model anyways, right? Because I’ll tell you what? I didn’t lose money any quarter.

Mike:
Yeah. So they’re pivoting around. I mean, will we have iBuyers in a year, two years, five years? I don’t know. I sure hope so, because if we don’t, that means a tidal wave has swept over this industry and washed away everything new. And we’re back with the 1990s again. And it feels like that shouldn’t be the case. Traditional iBuying is a great proposition for a certain segment of players. I’d like to see more options for consumers, more options for people to buy and sell homes. But it’s definitely, I’d say this, it’s funny in real estate, I think the phrase existential threat gets overused. But this is the existential threat. This is the crisis moment.

Jamil:
It’s not a nuclear disaster guys, we’re talking about houses, right?

Mike:
Well, for these companies it is, it is life or death. And that’s where we’re at now. Opendoor got punched in the face really bad in Q3. They guided to an even worse Q4 and Q1. I mean, the next six months are just going to be pretty brutal. So we have to wait and see.

Jamil:
Well, I’ve got a piece to add to that, because looking at some of the numbers that shook out. Because I was looking at your research, Michael, and again, it’s phenomenal research for anybody that hasn’t dove into what Mike DelPrete is actually doing out there, read it. Read what he’s talking about. Because when you look at the business model in itself, they haven’t accounted for operations. There’s no money to operate. They can’t pay anybody if they’re just looking at the margins that we’re looking at here, it makes no sense. So then I started to think about, well, let’s look at some of the transactions that I’ve in fact been involved in where Opendoor was either a buyer or a seller. And it was interesting because when the market was doing what it was doing, when things were getting a little heated here in Phoenix, Arizona, I’m buying and selling houses.
I’m fixing and flipping houses, I’m wholesaling houses, I’m active. I’m in a deal. And I put this nice remodel, we did a good job on the remodel. I think we over improve for the neighborhood, we put it on the market and of course, market was hot and we started getting multiple offers, but they were reasonable multiple offers, just super reasonable $5,000, $7,000 above list. It made some sense for the market and the heat. Then all of a sudden we get this one offer and it was $75,000 above list. And I thought, who the heck would do that and why? I just needed to know why. So we look and it’s Opendoor buying our fully remodeled house. And I said, if these guys want to buy this house at $75,000 above list, sell it to them. But I need to know why. And so I started looking at who owned the houses in the neighborhood, and a lot of them were Opendoor.
And so it made sense to me that would Opendoor not want to buy this house at $75,000 above list price and set a new comp so that they could add money or equity to all of the other holdings that they had there. And then is that not part of the bigger problem that we’re talking about affordability here in the United States. When you look at the practices and how these things are shaking out, when they don’t make sense, understand why? And that’s the reason I had to look at that whole offer and that whole situation, because it made no sense to me. And the only reason you would want to overpay once is if it was going to make you money 30 times behind it. So how do we make sense of that, and how does the public digest that?

Mike:
We can’t make sense of it. We don’t. I think it’s the question, what’s really interesting here, it’s not so much the question of is Opendoor doing that on purpose or not? Because I think there was some Zillow conspiracy theory about Zillow doing the same thing. It’s the fact that we have to ask ourselves the question. Are they? That’s new. We’ve never been in this position before. We’ve never had a for-profit Wall Street-backed company with billions of dollars and tens of thousands of houses operating like this in the housing market. Effectively like short sellers, because I think institutional investors are long, long term investors.
You buy some AT&T or GE stock, you hold it for 10 years, 20 years, 30 years, that’s it. But now we’ve got day traders, and you see what happens with day traders, with Game Stop and Bed Bath and Beyond and all this craziness, that didn’t exist before. That wasn’t a possibility. But now it is. So the same thing is true in real estate. Now that we have Opendoor operating effectively as a real estate day trader, what are the unintended consequences now? What are the questions we have to ask ourselves now that we didn’t have to five years ago or 10 years ago? And this is exactly one of them.

Dave:
So I’m very curious because during the run-up in prices, the recent rapid appreciation, some of them, Zillow being the notable one, but even Opendoor, they weren’t doing that well in a market that just seemed perfect for them. Absolutely perfect. You could buy something, do literally nothing, and then sell it six months later and make a killing. And they were somehow losing money off this. And to me, it seems like what is the problem? Because is it operational? Because that seems like one problem. The other one that me, Mike, just so you know, I have some training in data science and machine learning. The other part of me is how in hell can they not predict the prices of these houses a little bit better? Because, like you said at the top of the show, there’s just so much data with which you can build AVMs, an automatic valuation model. It just seems like they should be better at this. So do you have any idea why they’re struggling so much?

Mike:
Yeah, the short answer, and I don’t mean to be curt and we can expand, is just their expense base is too high. I mean, at the high points of 2022, home price appreciation is crazy. You look at the numbers of Opendoor and I mean, don’t mean to keep picking on Opendoor but any iBuyer, but the problem is Zillow was out of the game. But you look at what they bought a home for and what they sold it for, and I published this research, it was record high. The difference between what they bought it for and sold it for was like 20%.

Jamil:
And Michael, that didn’t even take into consideration the way that they manipulate those contracts, right? Because it’s not, the recorded buy price is not actually the purchase price. So it was even higher than what you were thinking.

Mike:
If there’s other costs in there or other takeouts then yeah, absolutely. And I mean, they still charge a 5% service fee, but 20%. And you’d look at that and you’d say, wow, you bought something for 300, and then I mean, literally the amount of time between when they take possession of something and then re-list it as about 10 days. So it’s unfair to say the price appreciates 20% and 10 days because there’s a closing period. There’s a lot of time in here. But even if you say two months, three months, that’s crazy home price appreciation. Now the reason that doesn’t fall to the bottom line is because it doesn’t include all of the expenses. So any expense these companies have, all their hundreds of millions of dollars, employees, technology, office rent, salary, all that stuff. It adds up. And I think that’s the fundamental challenge for profitability of these businesses.
It’s also, it’s symptomatic of the fact that it’s real estate and you need boots on the ground. I mean, you guys get this. You just can’t manage this business from your basement. You need hundreds, thousands of people in the field. They’re buying, I forget what it was, 150 houses a day at their peak. There’s so many people in trucks with ladders driving around Phoenix that you can get to fix things up. I mean, you really hit these real world situations. But just to wind it back, I mean, they’re making money. Homes are appreciating, but it’s pretty simple math, it doesn’t flow to the bottom line because there’s just a huge pot of expenses here.

Dave:
That’s crazy. Because that makes me feel like they’re not going to succeed ever. Because if they couldn’t make it work during a time when they were getting all of these market tailwinds, how are they going to make it work in the future when hopefully we get back to a housing market in the next year or two that just grows around the pace of inflation?

Mike:
Well, here’s the thing, and we might not have even talked about this today in this chat unless I brought it up, which is, again, showing the problem. But the thing is, everybody is so focused on the short-term crisis of the iBuyers that we’re all forgetting to take a step back and look at the long term view. We’re like, oh, my God, are they going to survive? Is there enough cash? They’re making so much money on home brace appreciation now everything’s tanking. Are they going to weather the next six months? But we have to remember, if we go back to pre-pandemic times before the market got crazy, the biggest question for iBuyers, and this is something I harped on time and time again, is there wasn’t a credible path to profitability. These businesses were still, they were losing money. It’s like, okay, that’s fine, but what is the path to profitability?
How will you become profitable one day? And that had not been proven yet. There were arguments to say once we get to scale, we’ll be profitable. We can grow our revenues and the expenses grow slower and ta-da, we’re another Amazon. Or we can make money by selling adjacent services, primarily mortgage, title, and escrow. So we get a bigger slice of the pie for each transaction. That was it, right? And we’re going to automate stuff and use technology to bring our expenses down. So you look at all those and I love looking at those, and the evidence wasn’t there. It was like, yeah, I see maybe a little bit on the scale thing, but it’s still too early to tell. And the other ones, I’m just, it’s not flowing through on the data yet. So if we put aside the short term, are they going to survive? I’m thinking we still have that same problem that is still the same problem. We saw what happened when they get to scale and the market goes bananas, that you lose a billion dollars. So there’s a big problem.

Jamil:
The only way they survive, Dave, is through the marketplace.

Dave:
What do you mean? Coming after you, basically.

Jamil:
100%. The only way they survive is buying my company. No, no. Really, the only way they survive is the marketplace. Because, look, if you can change the model where you don’t have to be so cash-intensive, you don’t have to take title down, you don’t have to take title to all these properties. You’re not paying commissions multiple times because, Michael just said, it’s a 10 day turn. They are doing nothing to these houses. You accomplish the exact same. In fact, the house might look better the day before they close and the day they list. Okay, so with that said, the marketplace makes sense. It makes sense, right? It’s like if you look at the car industry, how many of us have traded in a car? All three of us, I bet. We’ve all traded in a car. We all know that we were leaving money on the table.
Every one of us understood that there was a convenience situation here that we were taking advantage of. So what if that becomes the proposition, the value proposition of the consumer? Listen guys, we are becoming your marketplace, you know that we’re just going to take your car and put it on the dealer auction. That’s exactly what’s going to happen with the house, you know that we’re just going to take your house, we’re going to put it in the marketplace auction, you’re going to get what you’re going to get. We’re going to take our fee, bada-bing, bada-boom. We didn’t have to come up with any extra money, we didn’t have to raise funds, there was no cost in capital, operations completely come down. And this starts to make sense.

Mike:
I think there’s a different factor in there. You asked how many of us traded our car in, I traded my car in. I went to a dealer and I traded it in and I was done. That’s different than me going to a dealer, giving them my car. What is that called?

Jamil:
Consignment.

Mike:
Yeah, consignment. Giving them my car on consignment and then seeing what happens with it.

Jamil:
True.

Mike:
So iBuying is the first. They buy your home, done. What you’re talking about now, this marketplace, that’s consignment, and it may be great, but it’s less speedy, it’s less certain, and it’s less simple than the iBuyer proposition. So I don’t know how that’s going to pan out, but we can’t kid ourselves. It is different. It is a different proposition. And sorry, just one more thing. When I trade in my car and I give it to the dealership on consignment, the dealer’s saying, oh, actually, we’re going to sell this to our exclusive network. We’re not going to expose this to everybody. We actually have a set number of buyers.

Jamil:
I think that changes, too. I think eventually what ends up happening is it’s the network and the MLS. I think essentially what’s going to end up happening is they’re just going to become the full scale wholesale operation.

Dave:
Interesting.

Jamil:
And they’re going to change their name to Keyglee, that’s what’s up.

Dave:
Well, it’s funny, Mike, when you were describing these paths to profitability or proposals. It sounds like these companies and it makes sense, given their backing, are following almost more of a venture capital model where it’s like just go rapidly after market share, worry about profitability later. You hear about companies like Uber that was doing this, they were taking a loss. They were subsidizing rides for people just to capture market share. But Uber didn’t own the cars, they didn’t have assets, they weren’t stock holding anything in case things went wrong. And this, it doesn’t seem like, there’s so much risk just going after that market share approach before you have profitability when you’re buying literally billions or tens of billions of dollars worth of assets often leveraged. That just seems crazy. And so what you’re saying, Jamil, is more of the Silicon Valley approach to this, right? They would not touch owning the asset. They would set up a marketplace, like Uber did between drivers and rider. And they’re basically going to take the same approach to real estate.

Jamil:
Imagine if Uber had to own every car.

Dave:
They wouldn’t do it.

Jamil:
I mean, the model wouldn’t make any sense, right?

Dave:
Yeah.

Jamil:
So it’s got to evolve. It’s got to evolve. And listen, I congratulate them for the amount of bravery it took to do what they’ve accomplished. It’s incredible. It’s a great disruption to the business. I think that evolution is necessary in everything. We want to see things change; we want to see things get more efficient, we want to see things become more fluid. I can see that looking at the way that this is panned out right now, that there’s not enough money in the pie to operate. So what’s next? And you hit the nail on the head in the biggest appreciation we’ve seen in the history of housing, it couldn’t survive. So what’s next?

Dave:
Well, Mike, I’m curious. Yeah, we’ve asked you a lot about iBuyers, but is there something else coming down? Is it sounds like iBuyers are trying to evolve or is there something else you see coming down the pipe in terms of real estate tech that might be impacting the industry?

Mike:
Yeah, before we get to that, I want to come back to the marketplace thing as well. The challenge that Opendoor and any other company faces in trying to create a marketplace in real estate is that one already exists, right? It’s the MLS systems everywhere. There is a marketplace, it functions, it’s efficient. Could it be more efficient? Yes, but it does work. There is one place you can go to find all the houses for sale. There’s not one place I can go to find all apartments for rent. There’s not one place I can go to find all cars, there isn’t. And that’s why there’s not one place I can go to find all taxis available in my area. Those things don’t exist. But the challenge is in real estate that does exist, it’s the MLS system. And I get it, you bump into 10 people and you’re going to get 10 different opinions about why the MLS system is broken.
It sucks, it doesn’t work. But at the end of the day, it is a marketplace. It could be more efficient, it’s operating. But I don’t know about you guys, but I’ve bought homes, I’ve sold homes, it works. The MLS system, it does work. I can go to Zillow and have a high degree of confidence. I’m looking at all the properties for sale. So anyway, that’s the marketplace. What’s next? Well, listen, I think the crisis of the moment is home affordability. And I think that will be a new category in prop tech, real estate tech that we’re going to see created over the next six to 18 months. There’s a variety of different ways to address that from rent to own to shared equity-

Dave:
Fractional ownership.

Mike:
Fractional ownership. And I hate fractional ownership if we’re thinking about blockchain and owning like $100,000 worth of a house. But if you can can’t afford 100% of the home, maybe you can afford 70% of it. And some investors come along for the other 30% and they’re in it for the long term ride. There’s a number of different ways companies are starting to do this and I’m excited and hopeful about what the future is there because home affordability is a problem and it’d be great to get some Wall Street money funding companies to solve the problem created by Wall Street money in the real estate market. But that’s kind of where we are. So I think that’s next and I’m interested in that and I’m starting to advise some companies in that area and dig a little bit deeper because I want to be smarter in that and do what I can.
But for all the other, there’s iBuyers, there’s a classic company called Power Buyers that do cash offer and buy before you sell. There’s W2 brokerages, real estate brokers that employ their agents like Redfin, instead of the contractor model. There’s a lot of new models out there and I think there is absolutely value in that model for consumers. The idea of buying before you’re selling that sounds really cool. Why isn’t that the status quo? But the challenges in the current financial markets and real estate markets, those companies are all bleeding. They’ve yet to reach escape velocity. They’re not profitable and it’s going to be really tight. So my hope is that that category survives, and I think it will, but depends how bleak the next year is. I hope it survives. I hope the iBuyers survive and I hope we have some new models that once things start picking up again, they can keep going and keep offering new ideas into the space.

Jamil:
And I wanted to add one little defining piece to the marketplace conversation because I’m stuck there.

Mike:
We can’t get away.

Jamil:
No, but I don’t think it’s just the overall marketplace. I think it’s the cash buyer marketplace. I think the piece of the pie or the piece of the puzzle here, that Opendoor, when they say the word exclusive, what they’re trying to say is this is not going to be subject to a retail mortgage. This is not going to take the time that a regular sale would take. This is going to be a speed and convenience situation. That’s why you’re coming to the cash buyer marketplace. And this is going to be different from your multiple listing system, where you’re going to be subject to all of the nuance that regular retail sale would have.

Mike:
I meanm I can’t help it, but my mind goes to, well, okay, so-

Jamil:
Let’s start it.

Mike:
Opendoor’s going to… No, no, just who has the cash? Opendoor has the cash. So you’re going to be using their cash. So it’s not going to be on Opendoor’s balance sheet, but you’re still using their cash. There’s other companies that are doing that and they’ve announced they have to stop, their lending facilities are drying up or interest rates are becoming too high. There’s too much risk. Like, okay, Dave, I’ll give you my cash, buy your home. But my God, what happens if you work for Meta or Amazon and you just got laid off and you lose your job? It’s too risky right now. So there’s still this huge, I believe, I mean, there’s still a really huge financial risk for that company providing that at the moment.

Dave:
Yeah, it’s going to be really interesting to see what shakes out over the next couple of years. Because you look at publicly traded real estate companies and the best ones are down 30 to 40% like REITs often. Redfin is down 90%. And so these are big well-funded companies. You think, I’m sure, Mike, some of the companies you like or research startups, pre-revenue companies, it’s going to be pretty tough for them to survive. I totally agree with you. I hope they do because I do think there is need for some innovation in real estate and I think there’s so many interesting ideas out there, but none of them have been able to really make a dent yet. And so I’m with you. I hope they survive and I hope that we start to see some interesting new trends emerge as we hopefully in the next 12 to 18 months come out of this correction and into a new era for the housing market.

Jamil:
I think the next thing that we’re going to watch is the feast. There was another brilliant article that Michael wrote where he talks about predators and prey. And I think the next show is going to be a National Geographic basic show where we’re going to watch a whole bunch of companies get devoured by the companies with the money, and that’s the next six to 18 months. We’re going to watch the feast, who’s going to survive and who’s going to get eaten?

Dave:
Basically all the big companies with cash are going to roll up these smaller companies.

Mike:
Yeah. And the asterisk is, but these smaller companies are all losing money, and some of them are encumbered with debt. So it’s like, right now, I’d hate to be in Zillow’s boardroom saying, yeah, I think we should drop 500 million and acquire this business that’s losing money. Really? Can you justify that? And there’s also this question of what are you buying?
Even Opendoor, if we were to buy Opendoor, what they own, I mean, geez, they ended Q3, they own 16,000 homes. That’s pretty good. And they have technology, but these transactional things, it’s not a subscription as a service that it’s not a SaaS model. You don’t have recurring revenue. What kind of do you have there? You’ve got a brand and technology. So I think you’re right. I mean, yes, you’re right and referencing me, yes, there is going to be a feast. I do agree with that, but I’m worried about companies just zapping out of existence or fire sales rather than a smart amalgamation of existing players into something new here. Because there’s questions. Where’s the value? What am I actually buying? What can I value?

Dave:
All right, well, with that grim ending to this episode, I think we have to get out of here. Well, I guess real estate investors will probably be happy to hear that they are not facing tremendous competition from iBuyers, but it remains to be seen what sort of real estate tech we might be hearing about next. But Mike, this was tremendously helpful. You’re a wealth of knowledge. We really appreciate you being here. For anyone who wants to find out more about you or connect with you, where should they do that?

Mike:
Just go to mikedp.com. Look me up on Google, got a website, all my material is there. You can have a lot of fun reading things; mikedp.com.

Dave:
All right, great. Well, thank you, Mike. We appreciate it and hopefully we’ll have you back sometime soon when there’s some new exciting trends to talk about.

Mike:
Sounds good. Thanks for having me. A pleasure everyone. And yeah, have a good one.

Dave:
All right, that was fun. I’ve wanted Mike to come on the show forever and he did not disappoint.

Jamil:
He is a really intelligent person. I loved his perspectives and it gave me a lot of insight and obviously, he’s researched what he’s talking about. He knows intrinsically what’s going on in this business model. And when you see somebody that is so well versed in the data and the model itself, it’s really valuable to listen to them.

Dave:
Totally. I like it because he’s also not an investor, he’s not an agent, he doesn’t work for any of these companies. He approaches it from a much more academic standpoint. And I know he does consulting and private practice stuff, but he is also a professor at CU Boulder, so yeah. Yeah, it’s really cool to just hear this research-based analysis of it and it took a turn. I was not expecting. I did not. I was excited to have you on the show. I was like always am because of the Phoenix iBuyer connection. But I didn’t realize that there is a sort of idea that they’re going to go into and try and automate the wholesaling industry.

Jamil:
It’s exactly what’s happening. It’s exactly what’s happening. And I’ve been, it’s funny, I’ve been calling it for a while. I figured that this evolution was going to take place. I couldn’t see how taking properties down, doing minimal repairs to them, and then trying to get retail value for it was going to pencil out. I didn’t see this playing out well. I’ve gotten a lot of flack. I’ve been making videos about this conversation for a few years and I’ve had multiple people reach out to me and say, “Why are you taking shots?” And I’m not taking shots. I’m just literally expressing what’s obviously happening in the market and we’ve got to look at it, we’ve got to call it what it is. And we’ve got to then assume that a pivot is in place. They are going to have to evolve. What they’re doing right now isn’t going to work. And I think what Michael talks about in this episode was really important.

Dave:
My big prediction now is that the CEO of Opendoor in 2024 is going to be Jamil Damji. You are going to be tapped for that job because it seems like-

Jamil:
I would do a fantastic job of it, to be honest. I think they need to learn from the scrappiness of wholesale. They’ve got to understand this instrument that we’ve made millions of dollars on. And listen, look, I’ve been profitable through the down, and even as the market’s doing what it’s doing right now, we’re still crushing it, right? So iBuyers take notes. Equitable interest is an incredible tool. And figuring out how to monetize that is probably your parachute out of this.

Dave:
Totally. Well, first of all, you should just get a consultant gig and make a lot of money from them, but you don’t seem nervous about it. Why is that?

Jamil:
I don’t seem nervous about it because I have no reason to be. I’m looking at our balance sheets, I’m looking at what we’re accomplishing right now, and while everybody is bleeding because we don’t hold property, because we are truly just delivering the information that exists. Look, your house can trade at this price right now. It is what it is. And buyer, this is how low you can pay right now. Are you interested in purchasing? Yes. Let’s connect the dots. Let’s do the deal. And because of that, we’re still transacting. People still need shelter. He talked about Maslow’s Hierarchy of Needs. Shelter is still there and it doesn’t matter what if we’re in a recession, if we’re in a boom economy, that hierarchy of needs will always be the same. Housing is inevitable because we need somewhere to live.

Dave:
Totally. First of all, never thought Maslow’s Hierarchy of Needs would be referenced on this show, but here we are. And then, secondly, but are you nervous that they might eat into your business? They’re active in Phoenix. If they start trying to mimic wholesalers, Phoenix might be their first choice.

Jamil:
I think there’s a conversation that we have. I truly do. I think there’s going to be a point in time in the future where Opendoor and Keyglee sit down, and I think it’s going to be a good conversation because I think that they could gain so much from what we do. They really could. And if we melded the business model of what we do and the business model of what they do, and we brought those things together, I think you actually have the perfect iBuyer. So I’m not nervous about it. I’m excited for the conversation.

Dave:
Nice. All right. Well, thanks a lot for coming, man. This was a lot of fun. I really enjoyed this episode a lot.

Jamil:
Likewise.

Dave:
All right. Well, Jamil, where should people connect with you if they want to be a part of the Opendoor Keyglee mashup?

Jamil:
You guys can find me on my YouTube channel. There’s a great video that you should check out from back in the day. I posted it with Max Maxwell and I on my YouTube channel. It’s just Jamil Damji or youtube.com/jamildamji. And also follow me an IG. I make funny videos there.

Dave:
You definitely do. You can also follow me on Instagram where I’m @thedatadeli. Thank you all so much for watching. We’ll see you for next episode of On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pusher Janedoll, and a big thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

David:
This is the BiggerPockets podcast show 696. That’s not talked about often, but it’s important to note picking your goals is sometimes even harder than hitting them. I remember the first time that I… when I was new in Go Button, the first time I heard someone say, “Well, what do you want your life to look like?”
It’s like, well, better than it is now. What does that look like to you? And it was hard. I don’t know. I don’t know what I want my life to look like. I just know I don’t want to work 20-hour shift as a cop, and I’m always tired and cranky and miserable.
I don’t want to have to do that. I was very good at saying what I didn’t want. It’s more important to come up with what you do want. What’s going on everyone? This is David Green, your host of the BiggerPockets for real estate podcast. Here today with my co-host, Rob Abasolo with a special episode for you.
Today, Rob and I pull back the curtain and show you how the sausage is made. In today’s show, we are going to get into our goals. Rob and I review both our 2022 goals as well as our 2023 goals. We share how we did in 2022 and what our goals are for 2023. But more importantly, we show you how you can prepare your own goals. Now, setting goals sounds simple, and it probably is simple but it’s not easy.
If you’ve ever tried to do this, it’s much more difficult than you might think. And we do our best to give you some very practical advice based on our own experience for how we fight through the fog of not being sure what goals we want, as well as some tactical advice for how you can follow the steps that we take to set your own goals. Rob, first off, welcome. And second, hello. What do you think about today’s show?

Rob:
It’s good. It’s a really good deep dive just on how different we are, but in a really cool way. I think you’re a very astute businessman and I am a creative that doesn’t know what I’m doing and I’m figuring it out along the way. But we both have fun crushing it, and it’s really cool to see, honestly, just hearing you talk about your goals.
I’m like, man, that’s very inspirational. A, that you’re that organized, but B, that you did it all. I’m like, good. I need to do that. I’m in. So, I would definitely recommend for everyone watching at home, listen all the way through, definitely get to David’s part. At the very least, fast forward to David’s part because it’s really cool to see David in his element.

David:
I don’t think you’re giving yourself enough credit. Basically, if we were musicians, I would sit down with a pen and paper and write out my entire verse, and you would be like, “I’m freestyle and just give me a beat.” And you would just spit something incredibly amazing that’s bigger and better than anybody thought.
So, I guess the point here is it doesn’t matter how you think, it just matters that you set goals down and different people are going to do it differently. If we want to help you guys make sure that 2023 is the best year you can possibly have. On that note is today’s quick tip.
My advice here is to make goals, but give grace for yourself. It’s okay if your goal is pivot. It’s okay if your goals pivot. It’s okay if they change. It’s okay if you start on one path and then you switch a little bit and you make a different direction. Also, not every goal has to be the same.
Rob brings up some fantastic insight where he shares he has small, medium, and large goals. We have big vision type goals that are large. We have medium size goals, and then you have small goals, like what’s your most important next step? What can you do right now to start building momentum in the direction that you want your life to go?
There is a systematic approach to this that does make sense and will help improve your life if you use it. We’re happy to bring that with you today. Rob, before we get started, anything you’d like to leave our audience with?

Rob:
Nope. No, I don’t know. You always do this to me. I was like, “Well, maybe I’ll riff for a second.” But no, I’m excited for them to hear the chaotic organized mess that is you and I.

David:
The freestyle rapper didn’t want to riff. Okay, fine. Let’s get into the show. Welcome everybody to our goal setting episode. If you’ve been following this podcast on episode 552, we sat down and we talked about the goals that we wanted for 2022.
Well, in today’s episode, we are going to cover how well we did with hitting those goals, what challenges we faced, how we pivoted, and then what our goals are going to be for 2023. Now, the goal of this episode, you see what I did there, Rob?

Rob:
I did see that. I’m picking up what you’re putting down, David.

David:
You’re getting better and better with these quips, the quippy quaff.

Rob:
Hey, I’m smelling what you’re stepping in.

David:
There you go. The goal of today’s episode is to help you prepare 420-23, because you don’t want to wait until January 1st when you’re drunk at a New Year’s Eve party trying to figure out, oh, shoot, what is my New Year’s resolution going to be?
I suppose this is happening on December 31st for all of those detail-oriented people, the detailed Debbie’s, but you know what I mean? You want to get ahead of this now and start preparing for 2023 so you could set yourself up to achieve those goals, because success does not just happen.
It doesn’t happen by chance. It happens by choice. You got to make a choice to change some things in order to hit the goals that you want. So, for those of you that talk about it, well, don’t worry about this episode. But for those of you that want to be about it, you definitely want to follow along with what we’re talking about. Rob, overall, how did your 2022, how’s it been going?

Rob:
Honestly, it has been a scramble in the best way possible.

David:
So, this is an omelet that came out wonderful? Like a great scramble?

Rob:
Yeah. It’s like, oh, my gosh. The vegetables that I chose, I didn’t know if it was going to work. I didn’t know that the carrots were going to be a good addition to the omelet. This is true. I actually do carrots in my omelet, fun fact. I didn’t know.
And then, at the end of it, I took a bite of said omelet. I dipped it into some ketchup. No, I’m just kidding. That’s a bad call, don’t do that. But I ate omelet, I was like, this worked out. This worked out. That’s an interesting analogy right there.

David:
So, why don’t we start with you. I will ask you about what goals you set. You can let me know what they were and then we’ll dive into how they worked out. Sound good?

Rob:
Sure. Let’s do it.

David:
So, give me a list of what your goals were for 2022.

Rob:
So, I wanted to double my portfolio and I wanted to exponentially increase the amount of subscribers I got on YouTube. I think it was more so just my platform in general. And then, I wanted to start a couple of companies, and then I wanted to double my income.

David:
Okay, good. So, let’s start with your first goal. Did you double your portfolio?

Rob:
I more than doubled it. I went from the 15 Airbnbs and we bought a motel and then a few other Airbnbs as well. And then, you and I bought the luxury property in Scottsdale. So, I mean, all in all, I’d say I probably walked away from 2022 with, I want to say 25 new properties, 25 new doors, I suppose.

David:
Now, I forgot to ask you this before we got into hitting your goals. How did you come up with what these goals were going to be? How did you plan this?

Rob:
This is more complicated than… I wish I could just be like, “Oh, I’d sat down and I wrote it on a piece of paper.” And for me, my whole life, my goals have been set around monetization of myself, like how much money I was making, and I crushed that in 202 and then in 2022 as well.
And that started to understand that monetization and money coming in is obviously a great thing and I hit the goal, but it was very unfulfilling. But what’s more fulfilling for me is, I don’t know, coming up with big goals that I can hit, I suppose.
And I don’t know, challenging myself and getting to be more creative and out of the box. And so, I think moving forward now, even as I start to format what I want for 2023, all of my goals aren’t really monetary goals at all, they’re all just like, all right, what’s cool crazy stuff I can do that’s going to make me happy?

David:
Yeah, that’s not talked about often, but it’s important to note picking your goals is sometimes even harder than hitting them. I remember the first time that I… when I was new in GoBundance, the first time I heard someone say, “Well, what do you want your life to look like?”
It’s like, well, better than it is now. What does that look like to you? And it was hard. I don’t know. I don’t know what I want my life to look like. I just know I don’t want to work 20-hour shifts as a cop, and I’m always tired and cranky and miserable.
I don’t want to have to do that. And I was very good at saying what I didn’t want. It’s more important to come up with what you do want. And this shows up in many aspects of my life. I see it in business where I’ll say to somebody, “Hey, I want us to be able to do this business for the one brokerage.”
And they’ll come back and say, “Here’s all the reasons it won’t work. Here’s all the reasons we can’t.” I’m like, okay, what would have to change so that it would? And then, you see them hit that wall, like I don’t know, I don’t think what would have to change so that could, I just know that it can’t.
And you’ve really… it’s a skill of training your brain to see the way to achieve something as opposed to what is easy to achieve. And coming up with my goals was very difficult. Was it a similar experience for you?

Rob:
Oh, my God, it’s so hard. It’s very difficult for me. David, if I’m being very honest with you, I don’t… it’s really hard for me to set goals because I’ve hit them all. I say this as humbly as possible. But all of the things that I’ve set out to do, I’ve done.
And so, it’s very perplexing to do that when you’re so focused on the one thing and then you do it. And then, if you’re focused on several things and you actually are able to accomplish your dreams one at a time, then I’ve been like this whole year for me, it’s like now what? I don’t know. I don’t know, like I’ve done it.
So, that’s why I’ve really been challenging myself to put into play some medium goals and then some very lofty goals. Because now, I need something really big to work toward, and so we’ll get into that here in a second.
But I think it’s like you really have to categorize the small, medium big goals and really think of your small goals as things as you can hit maybe every week or every month. Your medium goals are something that you can hit every year. And then, your big goals are your five-year plan. Does that make sense?

David:
Oh, totally. You remind me of that meme where the guy goes to talk to the girl and he asks her out and she says yes. And she says, “What do you want to do?” And he says, “I don’t know. I didn’t think I’d get this far.”

Rob:
Yeah, that’s me.

David:
Sometimes, you’re just in that position in life. I think we all are where we know what we don’t want, but we’re not exactly sure what we do. And it actually takes some effort and some discipline and some trial and error if we’re being honest about, figure out what do you want your life to look like? It’s very easy.
In fact, most of the time if I ask that question, if someone else just like it was asked of me, they don’t tell me what they want. I get a list of what I don’t want, but that doesn’t always help you. You got to figure out what you’re trying to get to, which is the short-term goals are typically escape my pain.
How do I get out of this situation? That will typically, for me, be I need to hire a person to do this part of the job because I don’t want to do that. But what do I want the company to look like? What do I want my schedule every day to look like?
There’s certain entrepreneurs that have hit this level where they’re very, very detailed about exactly how they want their life to look and you only get there through setting goals.

Rob:
That’s funny that you say that. For you, one of your small goals is how do I get out of this now and who can I hire? Because for me, my big goals are who can I hire? Because it’s so hard for me to relinquish control creatively, especially to other people. And so, it’s a big thing to work up towards, even though the way you frame it is, it’s actually something that should be a small goal that gets me out of this.
So, I’m actually starting to flip flop now. To be that way, I’m making a couple of hires now. And that to me, every time I make a hire, the stress of the financial aspect of it goes away the moment I hire them. Because I’m like, “Oh, I don’t want to spend the money.” And then, I hire them and I’m like, “Oh, my goodness, what have I been doing?”

David:
And hopefully, your revelation in that area is the same thing that our listeners get. That’s why we’re making this episode. Because you don’t realize how bad things are until you actually slow down and listen. One of the pieces of advice I’d give is people are trying to figure out their goals and they have a hard time, is start with what’s causing you pain, that is your don’t want.
I don’t want to work 20 hours a day. Why are you working 20 hours a day? Because I’m doing A, B, C, D, E, and F. I want to keep A, B, C, and F. I’m okay to let go of D and E, but I need to hire someone to do it. Now, we’ve got to want. My want is to hire someone and we can work backwards from there with actually coming out with a strategy and actions you can take to hire somebody. Would you agree that’s a pretty good overall approach to get started?

Rob:
Oh, yeah, definitely.

David:
So, this is where we’re going to start where what’s causing you pain? And instead of just being a baby that cries and says, “It hurts. I don’t like it. I don’t want this.” Turn your don’t want into a want. And then, you have a plan that you can take which will have individual steps that will start.
And then, it’s okay if your goals pivot, they do all the time. I’ll set out with my goals for 2023. And then, by June, May, July, I’m like, “Ah, I don’t really care about that anymore.” I have this opportunity. It’s okay to take something out and add something else in. Did that happen to you in 2022?

Rob:
Yeah. So, I am not the most detailed oriented and organized person. And so, I’m a very free flowing, I don’t know, visionary, creative guy. And so, I think my biggest problem that I’ve been overcoming as of recently is actually just writing down things. I have all these thoughts floating in the ether, and so I didn’t really know what I was working towards.
I have all these things like, “Oh, I’ll get to that. Oh, I’ll get to this. Oh, I’ll get to that.” And yesterday, I just told myself, I was like, “You know what? I’m going to go get sushi. I’m going to go to sushi bar, I’m going to take my remarkable tablet right here and I’m just going to write down everything that I have on the back burner and actually write, I don’t know, a tangible action step for each one.
And as I started to do that, a lot of the things that I wrote down seemed silly when comparing them to some of the bigger visions that I have. So, there was definitely a lot of reorganizing and restructuring of what I really want. And going back to the hiring thing, I’ve realized that they all require me. And because I’m so bad at hiring people until I get over that thing, I can’t really move forward with any of these goals.

David:
This is why I say all the time that the enemy of business success is typically personal growth. The I’m bad at hiring. I don’t know anyone that isn’t bad at hiring to be fair. And the only way we get out of this pain is we have to prove as a person, which is why personal growth always pops up in podcasts like this and we often call it mindset but it’s the same issue.
So, that’s amazing advice. The therapeutic energy of taking what’s in your head, trying to convert at a motion of feeling, a frustration, a hope into a word, putting it on a document and then letting it grow in detail from there. Is that typically how it works out for you?

Rob:
For sure. And then, honestly, just writing it down that, some of these things I was like, oh, my God, this is so easy. All I have to do is this one thing and then the project moves forward. For example, it’s a long story, but I was building that tiny house village in Tennessee.
A lot of other projects took priority over that one. We’re permitting a 60-unit glamping resort in Arizona right now, and so we took our focus off of it. But there was just one snag with the septic tank issue permit, the environmental permit in our Tennessee property.
All I had to do was make a phone call. And so, literally, I made a phone call today to the contractor that it might be running that build. I think he’s going to… and he is like, “Oh, I’ll just go down to the city today and I’ll talk to him about it.” And guess what, he did it.
And then, we got off the phone with him today and my business partner Clint was like, “Bro, is this happening? Was it really that easy?” And I was like, “Yes.” We hit pause on this project for almost a year because of a septic tank permit that could have been solved with a visit to the office.

David:
My soul is screaming inside because you’re so right. I don’t know how important it is for people to understand this. We have a short-term rental that we’ve been waiting four months, four months of me making payments and getting nowhere. As someone on my team was like, we have to go through this process.
We have to hire an architect. They have to draw this out. We have to submit the plan of the city. We have to wait for the city to get back to us. It took forever to get the architect to draw it up that I had to pay an architect to do this. And I’m just going by with the team member telling you needs to happen.
All right. Long story short, I have one phone call with the contractor. They go, “Oh no, you don’t actually have to do that.” We could just start the thing. I don’t even think we need permits for some of this stuff. And if we do, they’ll just come and tell us we need permits. And I was like, “You’re kidding me.”
You’re telling me that four months have gone by and they didn’t need to. And he says, “Yeah, I thought that’s what you wanted. Why’d you think that?” Well, your team member asked me “What should we do?” And I said, “Hey, we should do this.” And no one asked the question of do we need to.
So, many of your struggles are not as big as you think. It’s a phone call, it’s a person. It’s a tiny little thing that if you put in place and writing down what your struggles are, brings clarity to what could be done. So, remember Rob, to ask me when it comes to writing a book, with that process is like for me because it’s very similar to what you just described for your goals.

Rob:
Dude, genuinely, there is a project right now that I’m trying to get off the ground, like a development project. There’s actually two things in Joshua Tree. One of them, I just have to fill out a spreadsheet, but I have not done that because it would take about an hour to tabulate and I’m just freak out about giving out that hour.
And then, the other thing is we have one small permitting thing, I just have to call the city of San Bernardino and tell them, and then I have to wait on the phone for 30 minutes and then talk to them for 30 and I don’t want to do it. And if I just did it, then this project would be built a month faster.
Same thing with all of our Scottsdale expenses. By the way, I am making progress on that but that’s a long-

David:
Don’t worry about that.

Rob:
Yeah, that is a long spreadsheet that I’m just like, “Oh, gives me anxiety just thinking about adding everything up.” I know that there are calculators and everything. So, when you write it down though, it really is like, okay, tally up Scottsdale expenses. What’s the to-do here? Add up expenses.And then, when I look at that, I’m like, “I’m so dumb. I could really just figure this out in an hour.”

David:
Or, if you had a team member that was capable that you could say, “Hey, do this for me, it would get done.” But then, it comes back down to finding the right people. Finding somebody you have confidence in.

Rob:
Yeah. So, that feeds into one of the other… I guess, one of the goals that I didn’t mention, David, was to actually hire people, so I did make progress on this front. One of the big things for me is I just wanted to make my life easier and something felt wrong. I was just like, “Why am I so spread thin? Why is everything very difficult for me?”
And actually, I went to get coffee at six in the morning, which I’ve literally never done before, but it was the only time my schedule would sync with Brian Dovala. We had him on the show a couple months ago and he was just like, “You need to hire a CO.
He’s like, “I think this is time for you.” And then, I was like, “Yeah. I was like, it’s expensive.” He’s like, “Yeah.” But if you look at the monetary aspect of it today, you’re missing the monetization of it one year from now basically. And so, we got up from coffee and he is like, “I think this was a seven-figure conversation. Let me know in a year.”
And then, I was like, “Okay.” And so, I set out and I hired a COO. And I mean, again, it was expensive. But as soon as I did it, there was that relief of like, “Oh, I don’t have to worry about logistics anymore. And you know what?

David:
So, you’re happy with the hire then?

Rob:
Oh my god, so happy. It’s great.

David:
That’s a big piece of it, is being good, happy with the person that you hired. So, that’s a major milestone that you hit was-

Rob:
Big one. Big, big, big

David:
… hire a COO. You also bought… perhaps the biggest, What you also bought way more property than you were planning on. How did that work come out to be?

Rob:
It turned out to be good. And this is a bittersweet. I’m always grateful for the expansion of my portfolio. Good and bad. Good in that I did it, bad in that. I was just like, okay, I could have done more, I think, now in retrospect. And so, it really gives way for what 2023 is going to be. I doubled the portfolio this year. I would like to probably, if I can, triple it, maybe quadruple it in the next… in 2023.

David:
Is that going to be one of your goals?

Rob:
Yes. So, I will say it basically showed me that I was capable of a lot more than I thought I underestimated myself. And then, when I did it, I was like, “Oh, okay, actually, that wasn’t that bad.” And now, I’m here and I’m like, “Oh, I wish I would’ve done more.”

David:
It comes down to that saying that Brandon used to quote that it’s attributed to Abraham Lincoln that if I have six hours to cut down a tree, I’d spend the first five sharpening my X. Your goal seems incredibly difficult to accomplish until you put them on paper and then say, “Okay, if I want to do X, I need to take these steps to get to X.”
And then, you get four steps of Y and then you’re like, “Oh, that’s actually an hour for each step or a day for each step and I could be at X.” which would be huge and it would allow me to double whatever I’m doing. That’s why we’re having this episode. It’s often much loftier in your mind than what it would be if you got down to doing it.

Rob:
And I guess to wrap up that analogy, I think my axe was a lot sharper than I thought. And we spend too much time sharpening, and that analysis paralysis where I was there consistently everyday sharpening that axe. And then, came game time, I was like, and I was like, “Oh, dang it.”

David:
That tree came down way faster than you thought. You’re like, “Oh, I could have chopped down a bigger tree.

Rob:
And now, I was out of time to go and do it again. I mean, we’re still closing a couple of deals by the end of the year. But at the end of the day, I was just like, “Dang it.” Like, oh, I could swung faster, I guess.

David:
And I’m confident this applies to more. I don’t hear this and think, well, of course David and Rob have a sharp axe but I don’t know how to invest in real estate. Yeah, you do. You can go house hack if you want. You can go buy a primary residence with 3.5% down and just spend your time working with an agent to find one that has two ADUs or a duplex that has an ADU in the backyard.
Or you could even go look to buy an RV and put it in the backyard and rent that out to somebody else out. There’s a lot of small steps that could be taken on this journey. And you take them and you get there quicker than you think. And you’re three months into the year, you’re like, “Okay, I already bought the house, now what do I do?”
You got nine months left to figure out how to expand. When it’s written down, it’s much more simple than when it’s all in your head and it feels intimidating and confusing.

Rob:
Yes, 100%.

David:
So, part of your challenge was like, how do I come up with my goals? You wrestled with that. Part of your challenge was finding a COO, and that sounds like that relieved a lot. What other challenges did you encounter in your 2022 goals?

Rob:
So, this one is the current challenge right now. And I have figured out that I want to triple, maybe even quadruple my portfolio in 2023, after writing it out, thinking this through, ruminating on it for the last couple months. Now, I know that that is my goal.
And so, instead of slowly pacing myself towards it now and sprinting. So, actually, I said I wanted to start a couple of companies. One of those companies is going to be raw built capital, which is going to be my fundraising arm. Remember when I said I wanted to put a really lofty goal out there?
My lofty goal is I want to raise a hundred million bucks in the next five years, that’s my target. 20 million a year seems really achievable. I think it gets… every year will probably be more and more and more. But for now, that’s what I tell myself every day, a hundred million in the next five years.
And I want to continue scaling up my property or my property portfolio. So, what I’ve of encountered was my big hurdle was I had a guy that he’s really great, quoted me on how to structure the fund and how to do everything that came out to $20,000 or something.
Honestly, nominal for the work that he’s going to do. But it just held me up for too long because it’s not that I didn’t have it, but I was just like, “Oh, I don’t have the mental capacity to spend $20,000 on men, $20,000 on lawyers and I don’t want to think about it right now. But after writing it out and thinking that, I’m like, “Okay, that’s what I decided.”
Literally, after I went to sushi, I emailed them, I’m like, “I’m ready to go. Let’s build this fund out.” And so, we are going to be meeting here in the next week or two and putting together all the architecture to officially launch in 2023, which will also come with staffing up and building that team as well. But I’ve already got a lot of those people in place.

David:
Very lofty. What makes a goal that size feel achievable to you?

Rob:
No, that’s not… see, that’s the thing is I’m actually trying to create goals that feel impossible because, which I don’t know. It’s like I want it to feel like I can’t ever get there so that I have something to work towards. Because all these other goals that I set felt impossible and then I hit them all and I was like, “Well, shoot, I don’t think I was thinking impossible enough.”
So, I’m really trying to put a crazy number out there, a scary number so that it gives me, David, at least a year or two to get to a runway to, hopefully, I don’t hit it faster than I think. But I genuinely, I’m like, okay, that’s scary enough to where I think it buys me time to figure out other goals that I might want.

David:
So, one of the ways that we approach making progress on a goal is acronym that Brandy came up with called MINS, which stands for most important next step. So, when it comes to, I’ll let you pick a goal, tell me what is your most important next step for whichever goal you want to use as an example.

Rob:
I want to get 50 units in the next three months.

David:
So, what would be your most important next step towards that goal?

Rob:
Honestly, ask my audience to send me deals.

David:
And it can be that simple. That’s exactly right. And then, do you have a person on your team that sort analyzes those deals and brings the best juiciest ones to you?

Rob:
Yeah, I do. So, typically, and this happens on a smaller scale, I just haven’t asked for it on this larger scale. But they’ll send me a deal usually on Instagram or via email or via BiggerPockets. And then, I send that over to my COO, Clint, and then he’ll go and run the numbers and then he’ll go and talk with the investors and talk through all the financials.

David:
And if you didn’t have a Clint, your most important next step would be find a Clint?

Rob:
Find a Clint. Yeah, that’s right.

David:
There you go.

Rob:
And you know what, even Clint’s starting to get pretty spread thin because the operation is booming right now. So, it’s like now we’re working for towards not just a COO, but an analysis under that to help us underwrite these a lot faster.

David:
To take that off at Clint’s plate, right?

Rob:
Exactly.

David:
There we go. Anything else you’d like to share about your goals for 2023?

Rob:
Let’s see, I have put into place two hires that I needed. This was actually going to be 2023, but after writing it out, I was just like, “Nope, it’s time.” So, I interviewed someone and I hired someone last week to be my content writer. And basically, we’re going to copyright together a lot of the material on my different platforms and everything.
And then, I haven’t announced it yet, but I’m hiring a social media manager too to help me manage, spoiler alert, my social media. And by doing those two things, I will now get infinitely more time towards which will go into next year’s goal of 2023 of doubling my platform.

David:
Wow, man, that is pretty impressive. This is my first-time hearing about this, Rob. I got to say, you seem unstoppable right now.

Rob:
Oh, don’t fall for the calm, Rob. You see here, he’s getting crushed inside. No, I’m just kidding. No, it feels good. It feels good to have been in this situation for the last year in a good way where I’m like, okay, I’m figuring things out. What do I need? What do I want?
And then, now that I’ve figured it out, I’m like, “Oh, man, this feels good.” The outlook is so cool now. Because now I’m like, I can stop worrying about the day-to-day frustrations and start focusing on the tomorrow, not just the day to day. But hey, these people can help run my companies. And then, now I can start leading from a much larger standpoint. So, I don’t mean to get too lofty here, but I’m just like, I feel good.

David:
You should. You deserve to, man. That’s awesome. And I like that you’re just highlighting that the majority of the work is figuring out the vision. Where do I want to go? What do I want this to look like? When you have that, the rest of it falls into place if you take the action.
But if you don’t have a vision, you’re just going to feel like you’re always in a foggy headed state where you’re not sure what you should be doing. And often that’s associated with negative emotions like guilt, shame. You want to hide. You don’t want to talk about stuff because you’re not sure what direction you want your life to look like. But once you’ve got it, man, it becomes very simple.

Rob:
I think I figured it out too, by the way, or partially figured it out. Side note here, which is I said, look, money, it’s something that I chased. I’ve made more than I thought I would make and that box is checked. Cool, great. And then, I was like, “Well, shoot, now, I thought that was going to be the end all be all and it wasn’t.”
And so, my big thing for 2022 was like, well, what is it? What is that thing that’s… I’m a relatively happy person. So, I always like to caveat that, don’t listen to this and be like, “Whoa, he’s not happy.” No, no, I am. But I’m like, “Oh, it didn’t come from that, it came from this other stuff.”
And so, I think one of the things I realized is I was chasing doors a lot and obviously that’s a part of building the portfolio, but what really makes me happy, I was trying to trace back my happiest time in the past couple years and it’s when I launched my YouTube channel, I was building tiny homes a lot more.
I was doing more glamping. I was doing a lot more creative stays and I moved away from that because of just the way things went. And so, I just realized, I’m like, well, shoot, if that was what was making me happier, I think I just need to lean into that.
And so, when I’m launching ROBUILT Capital, my goal for that fund is not to be your typical apartments syndication per se. It’s actually meant to be more of a unique stay fund where I’m going to be investing in RV parks and turning them into upscale glamping resorts or taking campgrounds.
And instead of renting out a space for $20 a night, I want to put a really premium $200 tent on there and create a super unique stay, and so that gets me. So, I’m like, oh, I have not been this excited in a long time. So, I’m now going to be just really putting a lot of time and effort into things like treehouses and domes and really cool structures like that for 2023. And now, that I figured it out, I’m like, ugh, it really is a weight lifted off my shoulders.

David:
Awesome man. Well, make sure you lifted off very slowly because we don’t want you hurting your back again.

Rob:
Oh, well, hey, I worked out for the first time on Monday since I threw out my back and it felt good. And then I went back today and I’m like, man, I’m so glad I’m back in the groove. So, honestly, a big tip for a lot of people’s workout, you never really realize the clarity that you’re going to get from working out. Because honestly, at the end of it I was like, oh, feels good.

David:
All right. So, last question here. What about personal goals as opposed to business goals for 2023?

Rob:
Yes, this is a big one. This is a big talking point between my wife and I. I think she’s slowly coming. She’s getting on board with it, but I want to travel more. I want to travel internationally more specifically. And it’s just really tough with kids.
We got a one-and-a-half-year-old and a two-and-a-half-year-old, not good ages for kids on a plane. Every time we go, it’s absolute craziness. And so, pitching her on a 10-hour flight to Copenhagen hasn’t been going over super, super well. But for 2022, I just want to travel. That’s like my big one. I don’t care. It doesn’t have to be across, it can be in Mexico, it can be in Canada.

David:
You and I might be traveling to Mexico in a couple weeks here. I’m trying to put that together now.

Rob:
Yeah, we need a chat about that today. Hey, not on the pod, David. Don’t tell everybody our secrets.

David:
You don’t want them to travel there to find us? You don’t want to get kidnapped in Mexico?

Rob:
Now, I’m excited. That should be cool. But yeah, traveling more is a big one for me. Before my wife and I had kids, we told ourself we were starting to think about it, I was like, “You know what, I’ve never traveled and I think we should go to 10 countries before we have kids.”
And she was like, “Let’s do it.” And so, we did. We traveled to Japan, to Denmark, to Sweden, to the UK. We went to a lot of places in a year’s time and it was really great. And those were some of the happiest times of my life. So, I just want to go back around the world.

David:
All right. That sounds amazing. Thanks for sharing that.

Rob:
For sure. So, let’s turn it around on you here for a second. You just heard my ramblings. Hopefully, some of it made sense. But what were some of your goals for 2022?

David:
Mine are actually much more systemized. So, the way that I typically work out my goals is I take more or less each of the business endeavors I have going on, combine that with my investing, I make a headline for it on a Google document and then I write down these are the goals that I want for each company.
And then, I save that as a tab open on my browser. And a couple times a week, I just check it and see how are we doing as far as marching towards that. And I often will see, oh, I fell behind there. That becomes an email, a text, a conversation with a leader to say, “Hey, we wanted to hire five more agents. What are we doing?”
Oh, I wasn’t thinking about that. I was thinking about this, okay, let’s put this back on the radar. You’re constantly moving to all these spinning plates and trying to spin them and like you said, my biggest struggle is always hiring. There’s so many people in the world that want to be a part of your company or your enterprise because how they see it would benefit them.
There’s not a lot of people that say, I really want to come and contribute to what you’re trying to do. And if I contribute well, I know that I will be financially compensated as well. So, I think this is every business owner’s struggle. I think this is every person’s struggle and it’s not unique to business.
If you’re in the dating world, it’s not hard to find a person who says, “Well, what does this person have to offer me?” There’s not a lot of people that are going around saying, “I want to find a person that I can really serve.”
But that’s what you need. If you need two people that are serving in business and relationships and whatever, if you want to be successful. So, if you’d like, I can just start with each category and go through and read off what the goals are.

Rob:
Wow, we should have started with you first so that people could stay hooked, because everyone’s gone at this point.

David:
No, I don’t have want to make you feel bad by having this very systemized process. And you’re like, “Well, you know what, I’d get a napkin at a restaurant and I wake up at 6:00 AM one time in the year.

Rob:
It’s a remarkable tablet by the way. It’s not a napkin. It feels like a napkin when you write on it, but it’s a pad. It’s a-

David:
I’ve heard of these remarkable. I’m actually thinking about getting that as a gift for a couple people for Christmas this year.

Rob:
It’s a good gift.

David:
So, my first one has to do with vision. This is the stuff that’s very big picture that I know in general I want to move in a direction. And my vision has been the same the last three years. I don’t always have clarity with how I’m going to achieve it, but I know what I want.
The vision I have is to create an ecosystem that everybody who wants to invest in real estate can come to one place that gets everything they need. They need an agent, they need a loan officer, they need insurance, they need a contractor, they need an appraisal, they need education, they need knowledge, whatever. They can come to one of my companies and be connected to all of it.
Now, that sounds very simple. Actually executing, that’s very difficult. So, the first thing I have on my vision now, this is, I guess, these would be 2022 goals that we’re going over. This is what I had for last year. Was I wanted to buy a commercial building that would be a one stop shop model.
So, literally a physical location where my real estate team would have offices, my loan company would have offices, my insurance company would have office, everyone could be there together. And then, I could get everyone together in one auditorium type of a setting where I could teach everybody at one time and then have a marketing system that would work for everyone.
So, maybe some form of salesforce that we could get connecting everyone together, one hiring division that would be filling it up. That’s still what I’m building towards. I did not buy that building.
And part of that is because I’m not sure if I wanted in a physical location because we’re now operating in so many different states and areas, it’s very difficult to get everybody in one place. So, I think I’ll probably have one physical location for leadership. I don’t know if it’s going to be for every employee.

Rob:
Obviously, you started taking steps towards that. Was there a moment where you’re… that where you made that decision where you’re like, “Eh, I’m good. I want to keep it remote.”

David:
It was everything that I looked at. I could see this isn’t going to work. I wanted to buy a church building but they were too expensive in the Bay Area. Then I was looking in Los Angeles and it was the same problem. Then I was like, “Okay, well, we’re going to… let’s move to the south and let’s put a building there.” And then, a lot of the people were, “Ah, I don’t want to move. I like where I am.”
So, there was every single opportunity that came my way, I could see there was something that would stop it from working. So, we’ve just stuck with the remote thing for now. Another vision I have is to have at least two companies that makes six figures a month in profit.
So, right now that’s the one brokerage and the David Greene team. So, working to maintain that, the profit that comes out of those companies is in the six-figure range. Another is to stay in Gary Keller’s top 100, meaning that I’m one of the top 100 agents or teams in Keller Williams.
And then, my last one from Vision is to maintain BiggerPockets as a world’s best real estate podcast. So, as the face of BiggerPockets, it’s very important that nobody catches us, passes us up. Side note, this is why we love a review from you on wherever it is that you listen to your podcast. Because if you stop leaving those and other people are leaving for the podcast, they like, we will get passed up.

Rob:
But let me just click in on that real fast. I will say if you seeing us on the charts, we’re always number three or number four some, I’m sure we’ve been number one several times, that is very dependent on your five-star reviews and it genuinely means a lot to us.
We read those things and we take them to heart. If you have feedback, send us a message on Instagram or on BiggerPockets, we’ll read it. But we would really appreciate the five-star reviews. It genuinely helps us with the podcast algorithms out there getting served up to new audiences.

David:
Thank you for that, Rob. Very important. All right. I will go through each company here and then I’ll pause and let you see what questions you have. So, the first is the David Greene team. Four goals for that. The first is to hit 250 million in gross sales volume, so, the accumulated total of every house we sell needs to be at 250 billion or more.
I would like to maintain four strong, oh, sorry, we’re at 2023 now, four strong sales leaders. So, those are agents on the team that over that get leads handed to them as opposed to just generating their own and they oversee showing assistance to help them with their job.
I would like to add five new agents to the Northern California location. There’s going to be a few more because I switched to 2023 off of 2022. I would like to add two expansion teams, so this would be agents in different markets that we can refer buyers to.
Typically, there’s a margin where I’m buying a lot of houses, so I’m looking to add an agent in the Smokey Mountains as well as one in either Bluebridge, Georgia or South Florida or Scottsdale. Those are all areas that I believe in I’m buying property there, so I’d like to have a David Green team agent that I can refer people to.
I would like to launch the DGT program that’s actually called Launch. So, when we have new agents come join our team, we now have a video library of trainings that helps new agents get started and acclimated to our system.
And then, release the David Greene Team University DGTU coaching program that will help real estate agents to sell more houses. And that will be tied in with the series of books that I wrote for BiggerPockets to help agents with selling homes.

Rob:
So, my first question is, you said that you wanted to reach 250 million in close sales. Why that number? Is that an achievable number? Is that something that’s like are you guys on the cusp of that? Tell me why you chose that number.

David:
It’s the number that with the group we have, if everyone gets maybe 80% of their potential, that’s about where we land.

Rob:
And then, you said that you wanted to… man, so, what I’ve realized that I’ve already learned so much from you, David. Your goals have goals, that’s what it sounds like. You keep clicking in and it’s like, I want to [inaudible 00:39:09] this and I want four sales managers and then I want these markets.
And then, I want these agents in market. So, I guess, with your four sales managers or your four team leaders, are those all going to be in one office or do you want those spread across the country?

David:
So, this is a great question here. And it is true what you just said about my goals. My brain tends to work that way. I see the big picture and then I click in and those enhance the footage. It just keeps zooming in on the individual details and that’s how I come up with these.
I would like those sales leaders to be a strong core in California. And because the idea is once I have a strong core, when I add expansion agents, they have a mentor they can learn from. It’s like you’re trying to build a culture which is very difficult because that depends on people and you got to get people that are bought in.
I can’t accomplish the goal of adding expansion agents if I don’t have a core of agents that are already established in this system that can teach the new people, like you can’t draft rookies if you don’t have veterans for them to learn from.

Rob:
And so far, are you tracking with… have you been hitting a lot of those goals for 2022? Or, because I know those were a blend. But where did you net out for 2022?

David:
2022, I landed right around where my goals were. So, the goals for 2022 with that company was 250 million in gross sales. I wanted four strong buyers, agents which I have. I wanted to hire a COO, which I did. Kyle was promoted to COO and he’s been doing well.
And I wanted to end with a team leader for the Brentwood location, which is our hub. And Kyle has taken that over and he’s about to promote our first agent to be that. So, all the DGT goals for 2022 were hit.

Rob:
Amazing. Congratulations. That’s awesome dude.

David:
Thank you. And I should also highlight that’s not massive growth mode. I’m more wanting to maintain what I’m doing and have a healthy growth as opposed to blow it up, because you can’t blow everything up at the same time.
You’ve got to let something go if you want to focus on other stuff. So, my method tends to be put all my energy into this thing, get it really big, hire someone to maintain it, move on to the next thing in life that I want to grow.

Rob:
I could take a page out of your book. There’s that phrase that I hear very often, which is you overestimate what you can do in a day, but underestimate what you can do in a year. And that sounds like what you’re talking about, which is you just want steady growth over the year.
You recognize that you can get a lot done, but don’t go too crazy with it. I’m like, oh, yeah, okay, I need to… this is what I’m saying, the small, medium, big goals, which is what your goals of your goals of your goals, that’s what I need to be better at.
So, it’s nice to actually hear your systems because I’m like, all right, if I just write these out even more then jotting them on this remarkable, use my affiliate link by the way. No, I’m just kidding. But yeah, writing them out seems to be your system here works.
So, moving into the real estate side of things, I know we talked about your commercial building, but you also… I have to imagine you had some real estate goals too because you closed on what most people will close on a lifetime you did in a year. So, can you talk about your real estate goals?

David:
Yeah. So, I can skip down to real estate here. So, the totals were the one brokerage marketing goals, book goals, insurance company goals, investment properties, taxes and personal goals. That’s basically what my list is made up of. For real estate itself, 2023 goals are to continue to raise money for multifamily, single family and commercial properties.
Find operators to partner with and buy a minimum of four new properties to add to my portfolio. Now, I will most likely blow that goal out of the water, but that’s a minimum. I’ve got to buy at least four properties.

Rob:
Just for the year of 2023?

David:
For 2023. Now in 2022, my goals for investment properties were to… it was actually very similar. Find operators to partner with, which I’ve been doing with Andrew Kushman. We bought an apartment together in Fort Walton Beach. We’re going to be doing more of that.
People can go to invest with davidgreene.com and they can let me borrow money that I will then pay them a return on as I go invest so I’ll continue to do it. But I wanted to buy a minimum four properties in 2022 and I probably bought more like 16, maybe a little bit more than that.
I bought a whole bunch of them here at the end. So, my numbers aren’t… I have to look at my spreadsheet that tracks those to see where we are. But like you, I blew that one out of the water.

Rob:
So, why don’t we…. I’m just going to redo your goal here because I think if you hit the goal, your next goal has to be bigger. So, I’m going to make you at least, least double your goal for 2023. But if you bought 16 this year, then I think you should set a goal for se 16 and a half, 17 properties for 2023.

David:
Here’s the problem with messing with buying how many properties I want to buy. It’s like Dave Meyer setting a goal for how many sandwiches he wants to eat. That is a tempting thing for me to do anyway. I don’t have to put focus on that goal to hit it. Dave loves sandwiches. He’s going to eat as many as he can. I love buying real estate. It’s really freaking fun.

Rob:
Wait, hold on. Sorry, Dave Meyer, the data deli, Dave Meyer?

David:
Yes, that’s it. That’s where the data deli comes from. Like deli is, he loves sandwiches.

Rob:
Oh, really? Oh, I thought he was just… I thought it came from… he’s like, if you went to a deli, that was all computers and data.

David:
He’s playing on that.

Rob:
Nice. Okay.

David:
[inaudible 00:44:20].

Rob:
Okay, good.

David:
So, that isn’t difficult goal for me to achieve. What I find is I go by 16 properties at one time, and now I have this log jam of trying to do rehabs, talk to contractors, order furniture, find people that can manage them, and then I get screwed up.
So, by focusing on how many properties I buy, I could buy a hundred of them, but everything else would fall apart. I have to intentionally put my focus on business goals because it’s not as fun. But business is what helps me build the reserve so I can go buy 20 properties at one time.
And as I’m waiting for these things to get up and running. I can handle the cost, like I said, of all these properties that are four or five months in and I still am not generating any revenue yet.

Rob:
That makes sense. All right. Okay, cool.

David:
I’ll give you a shortcut. When it comes to investing, here’s the best way to go about it. I talked to my CPA. I say, “It looks like going to make X amount of money this year.” They run some numbers and they say, “You’re going to need to buy X amount of real estate for the depreciation to cover what you bought.” And that’s how I determine my investing goal. Now, that could be four properties, that could be 20.

Rob:
I see. I’m in that same boat. And when I say I want to double or triple my portfolio, this is actually something that you got to me on, which is like, I’m not looking to double or triple it with single family acquisitions anymore. I am looking to just double it with number of doors, but creative doors, like I said, the glamping or RV parks or anything like that, just from a scalability standpoint.
And that is actually a big thing that will be pivotal for me. I just realized when you hammered that in my brain, I was like, okay, the way to scaling is I can’t focus on single family acquisitions anymore. I have to buy them in bulk, if you will. And that has actually informed a big part of my 2023 strategy. So, kudos to you.

David:
That’s why you got to be careful with how you set your goal. Because if you say I want to add a hundred doors, you’ll go buy a hundred bad properties to hit the goal. It’s like I don’t like… with fitness, I don’t believe in setting a goal for how many steps you’re going to take in a day. Because steps is not a great form of exercise. It allows you to check a box and say, “I hit my goal.”
But those people are not going to lose weight because they’re taking steps as opposed to, I’m going to go to the gym and work out really hard for at least 15 minutes, you’ll probably burn way more calories and it will help you. So, sometimes we unintentionally set goals that are not going to help us achieve the life that we want, just to get the feeling of I made progress.

Rob:
So, that’s a good way to put it. So, if I say, let’s say I want to triple, so I’m at 35 doors right now. Tripling would roughly be a hundred or so. I’m not looking to buy a hundred properties. I’m actually looking to buy two or three properties that get me a hundred extra doors.

David:
Or maybe say the total volume of the real estate I own is 15 million, I want to triple that to 45 million. Now, what’s the most efficient, productive, effective real estate I could buy to get to 45 million instead of focusing on the doors, which is a very easy metric to hit.

Rob:
Sure. So more-

David:
So, what you described is exactly right. I’m going to buy three properties, but they need to get me to 45 million

Rob:
Exactly. So, I guess that term would more be like AUM, assets under management.

David:
Something along those lines. Or I want to build X amount of equity, or I want to add this much cash flow to my portfolio, which now forces you to look at the quality of the product, not just the quantity.

Rob:
That’s good. That’s all about framing. So, right now, so, then I guess I want to quintuple my assets under management. Thanks for putting it that way.

David:
Now, here’s what’s cool, because if one of your goals is to pay no taxes and this goal over here, the quintuples it helps you to pay no taxes. Now, you’ve hit two goals with the same action and you’re synergistically increasing your wealth building.

Rob:
Yeah, the goals start compounding. And by the way, if you want to learn more about taxes, we actually did an episode with Matt Bontrager. He is a true book CPA. He’s my CPA. He’s saved me six figures in taxes. That episode is 689. Go check that out. It was, I think, your mind is going to be melted after you listen to it.

David:
Wonderful. The next category I have here is the one brokerage. The goals were to close 600 loans, hire 25 loan officers, hit 250 million in gross volume, hire 10 new processors and get to nationwide service. We achieved all of those except for nationwide service.
We’re about halfway there. And in 2023, we should be licensed in all 50 states. My goals for 2023 with that company are to move our model to a processor pool as opposed to a processor working under an individual loan officer, hit 350 million in gross volume, develop 10 solid realtor referral partners that will send us business and hire 25 more loan officers.
So, if someone’s out there listening and they’re a loan officer and they’re looking for a new broker to hang their license with, I got to hire a minimum of 25 people for that company. And if I hit that goal, all the rest of them will probably be hit as a consequence of that one goal.

Rob:
Very cool. All of that is crazy. You close 600 loans and you hire 25 loan officers. Is that what you said?

David:
No, last year, I already had about 10. I hired 10 more in 2022 and we closed a little bit over 600 or we’re on pace to close a little bit over that.

Rob:
Good for you, man. That’s top tier, man. It sounds like you questioned on all your goals, on all your highly organized, highly systemized goals that now I’m like, oh, shoot.

David:
So, one of the things I’ve learned about when you’re… it’d be easy to say close 2 billion, set a big goal. But here’s what I don’t like about that. I would then go hire a hundred bad loan officers to hit that goal. The customer experience would be terrible.
I wouldn’t be able to manage the hundred people. The company might hit its goal, but the profit would be very low and the reputation would be bad. I look at it like I want to hire five new agents for the David Greene team, why not 50? Because frankly, I don’t think my new COO can handle hiring 50 agents when he is only done the job for six months.
Now, let’s say he does it for two years, two and a half years, he’s probably at a skill level that can handle hiring 50. And that’s when I would make that goal really, really big. And so, it’s not linear growth. You have to time, what are the resources I have and how much time do I need to give this quarterback to develop before I throw them in the game and have really high expectations on them.
So, I don’t want to make it sound like I’m saying set small goals. It’s set goals that you can hit that would cause you to stretch. But those numbers, if we’re still here in three or four or five years, you should be seeing me say, “I want to hire 10 expansion agents. I want to hire 20 expansion.” Each of these companies should get progressively larger goals as we go.

Rob:
I always tell people to scale accordingly. When you’re getting to short-term rentals, for example, don’t go out and buy 15 short term rentals. Well, don’t worry, David, I’m not dogging you. Give me a second. Unless you can handle that, unless you’ve worked your way, unless you’ve earned your rite of passage of real estate.
And like you, you went out and you bought 15 short-term rentals this year because you have a storied pass of being a successful real estate investor, you’ve scaled accordingly. You were able to do that in a way that 99% of people could not do.

David:
And even then, I didn’t do… it hasn’t worked out as well as I’d hoped. So, I had a person in place that was going to help me get these short-term rentals going. They had another job, they were going to quit that job and come work for me. They changed their mind. They didn’t want to.
Now, I’m stuck. I’ve got all these rentals and it’s moving so slow moving them along because I lost the employee that was going to be helping getting them ready. So, if we’re just being transparent, in general, I’m losing about $80,000 a month over real estate that I am waiting to get set up and cash flowing.
If you can afford to lose $80,000 a month, it’s not a terrible idea to buy 15 homes. But it’s definitely not ideal. If I could have, I would’ve gone in there and I would’ve bought two at a time instead of 15 or 16 at a time.

Rob:
But I mean, think about, this works on so many levels though, because if it happened to anyone else, they would’ve thrown in the towel so long, and their mind would be melted. You’re the best in the business. So, at least you can sit down and say, “All right, here’s the fire. I see a fire extinguisher over there. It’s up a mountain.”
“I got to figure out how to get up that mountain.” Or, “I got to hire someone to help me get up that mountain and get that fire extinguisher.” Sorry, my David Greene analogies aren’t quite as good as the David Greene. But all to say, you have also have systems in place.
You have reserves in place. You know how to handle taking an $80,000 loss until they’re all running. And then, all of a sudden, great, guess what? In 10 years, you’re going to look like a genius because you got all these short-term rentals.

David:
And so, you mentioned a couple good points there. Taking the big picture approach when you’re setting your goals is huge. It looks like a loss. It feels like a loss. It’s terrible right now. In 10 years, I won’t even remember this. I’ll be like, “Oh, yeah, I remember back when I did that.” If I listen to this podcast, I won’t know.
Second, by focusing on these other goals I have, the business goals, there’s enough money coming in from other businesses that can float that loss that I’m describing. Then I also have reserves. There’s layers of protection here. And I call this concept portfolio architecture.
It’s easy to look at every individual house as it’s like it’s own thing, but it actually fits within a larger organism. Your portfolio itself is the organism, not the house. So, I try to set things up to where, okay, these are my cash flowing assets that don’t really grow in value very much.
These are my assets that grow in equity very quickly that are supported by cash flowing assets. These are assets that kick off a lot of cash flow that can afford to float at me for the six months while I do this really big rehab and I lose money. But then after the rehab, when I burn, I get all my capital back out.
I didn’t lose anything. And boom, there’s a flesh of capital to go add new assets and new ways. And so, as you stick with real estate and you continue to buy homes, you start to get flexibility. It’s like a football team where our tight end just went out.
Well, we’ll just run a different offense. Our running back is in good shape. Our quarterback’s fine. We can utilize this wide receiver. You’re not like your whole enterprise falls apart because you had one injury to your team. That’s the goal of what we’re trying to get you there.
And house hacking is the best way for people to get started. But it’s not to just look at one individual home, that’s where all your anxiety comes from. Because if you have a bad month, you’re like, “Ah, I’m a bad investor, I should just quit.”

Rob:
Yup, 100%. You got to look at the bird’s eye view level, if you will.

David:
So, thanks for pointing that out. Marketing goals. I’m getting a new website made. So, I have davidgreene24.com, which is better than the old one, but we’re redesigning that again. I would like to develop more engagement through a website we use called Circle that my mastermind members have access to.
So, I want to be engaging with them more through that. I would like my YouTube channel that just hit 10,000 subscribers. So, in this room, I’m the little baby in the room and Rob is the big babysitter that’s crushing me there. So, I just finally hit 10,000.

Rob:
Just let me have one.

David:
You’re definitely got zilla in that realm. And I am the Geico insurance lizard.

Rob:
Wait, you hit 10,000?

David:
I just hit 10,000 like yesterday or something. So, the goal-

Rob:
Congratulations.

David:
Thank you. The goal for ’23 is to get to 25,000. So, I’m definitely, that’s a goal you could help me with or other people by subscribing or just giving me advice about what works for my personality on YouTube. And then, what has been working and I’ll continue to do is weekly YouTube lives.
So, pretty much every Friday night I’m on there for about two hours sharing information about the economy, sharing what I’m investing and answering people’s questions.

Rob:
Well, every person listening to this goes and subscribes to David Greene Real Estate on YouTube, we will quintuple, we will… you will be a much larger star than I. So, everybody, go subscribe to David right now.

David:
So, then if you do that, then you get to come onto the YouTube and ask me whatever questions you want and I’ll help you with your goals and we’ll create this wonderful symbiotic relationship. My goals for 2023 regarding books is just to write one book, which is, I’ve already started it so that should be accomplished in 2023.
And then, to write an eBook. So, that would be a book that I’m thinking about something along the lines of building a financial fortress. Because as we see when the economy changes, which it has very suddenly, the way that you have built your wealth is very important.
When everything’s going great, I built wealth through crypto, I built wealth through NFTs. I built wealth through whatever new cool hack everybody’s talking about, infinite banking or whatever, looks great. The minute that you see things shift, man, how many people lost all of their money because they built a treehouse, they didn’t build a fortress.
So, I’m thinking about writing an eBook that focuses on ways of building wealth that will stand the test of time that maybe take longer to build. But you’ve got Helms deep, the fortress in Lord of the Rings that’s been there for hundreds and hundreds of years and won’t be taken down.

Rob:
Very cool. I need to prick your brain about that because I too am writing, I’m possibly writing a book. I can’t speak too much about it. I can’t speak too much about it, but I need to understand how you do it because-

David:
I can help you with that, writing a book. So, it’s like we’re talking about goal setting books are even easier. So, happy to help you there. The next company is an insurance company that I wanted to start in 2022. We just got licensed two days ago, so we’re probably going to have that thing up and running by 2023.
So, I want to hire a couple insurance agents. I want to buy a couple books of business to get the business started. And I want to incorporate a marketing plan that will include the insurance company with the other businesses I have, that’s my goals for that company.

Rob:
Cool. And so, you’ve laid out the goals. Have you taken… you said it might be launching in 2023, so does that mean that you have actually started taking small goals to get there?

David:
Yeah, so those small goals look like get licensed in the states, we have to be find the… and I don’t know what you call them, maybe just your partner that’s going to get you connected with all the carriers for different insurance. It’s highly regulated, it’s very, it’s like trying to run in sand, trying to get this thing.
Anyone whose insurance understands what I’m talking about. We’re working on branding and names. So, it takes forever just to get the uppity up regulators to say, yes, you could use this name for your insurance company. Once we have the name picked out, we can work on the branding.
Once we have the branding, we can work on the service. When you have the service, you can work on the marketing, you have the marketing, you can work on actually tracking the revenue.
So, that, it’s just a slow process. And that’s why I’m saying once it’s up and running, I’m probably just going to invest some money into buying a book of business so that I can get existing revenue going. I can use that revenue to then hire the new insurance agents I need to help sell. And then, you’ve got a legit company that can actually make progress earning income.

Rob:
Nice, nice. Okay, cool. So, you have that… we have wire framed out an insurance company. We are way more in the beginning stages than that. So, that’s tough, man. That’s cool. I have a lot of respect for you that you’re able to really… you’re so good at business development and that’s such a good skill to have. And that means when you have an idea for a company, you basically know how to attack, launch-

David:
So, actually, a program I’m thinking about putting together in 2023 would be something that would teach people how to start a business. It doesn’t have to be a huge freaking like Fortune 500 company. But you want to start a construction company or a pool cleaning company or a landscaping company or an insurance or a loan, whatever it is.
How you take a skill of doing a thing and convert that into a business that would you hire a couple people, those components. Because I’ve done it enough times now that I’ve started to recognize the patterns and how it works. Very similar to buying real estate long distance, you start to recognize patterns in the pieces that you need, which became that book.

Rob:
And you’re good at it. So, that makes sense. Sign me up.

David:
Thank you for your compliments because I don’t ever feel good. I feel like I suck every single day and it’s very frustrating. So, this is a bit therapeutic for me, Robbie.

Rob:
No, to everyone listening at home, you’re like you’re everyone’s hero and you’re my hero. David.

David:
Thank you for that. I should probably make growing a quaff be one of my goals. It’d be funny if we did that together. Who is it… somebody sent you a picture of us. They molded our basically faces into one, which was awesome. Do you remember who that was? Could we give them a shout out?

Rob:
Yeah, I looked it up. His name is Edward Morden and I’ll try to time it to where when this podcast goes live, I’ll post it on my Instagram and you can repost it. It’s really good.

David:
Good looking out, Edward. That was a very funny picture. All right. My last set of goals are personal goals and those are, I’d like to do quarterly paid speaking engagement. So, I need somebody who has experience booking speakers to speak at different events.
I want to be doing like I’d love it if ideally, I went and spoke somewhere every month, but I don’t have the infrastructure in place to get a person that would book me at those events. I would like to hire an employee for property management, that’s a huge one.
Looking for a full-time person that their job is to work for me and manage my short-term rentals in different states, but having a very hard time. I appreciate, Rob, you sent us over a couple people, just everybody is like, well, I thought we were going to start a business together or I don’t want a full-time job.
I do it on my own. Finding that person who says, “Oh, no, I know how short-term rentals work and I want to make a $100,000 a year. Managing these for somebody else has just been tricky. But I know once I have that person, I can really scale how many short-term rentals I buy.

Rob:
Oh, that’s right man. Host campers. They provide my friend. Well, we’ll get you set up.

David:
If you’re a host camper, let us know if you’re looking for a full-time job. Other personal goals are to work out three times a week to do BJJ, Brazilian Jujitsu twice a week minimum. And to build at least one additional recording studio like this one.
Because what I’d love is to have another place I can stay at during the winter months when California’s cold and not that much fun, that I can travel to somewhere warm without having to record for my laptop. Because like I said, my vision goal is to make continue BiggerPockets being the best real estate podcast in the world. So, you can’t be having subpar performances every time you travel.

Rob:
Well, hey, on that note, BiggerPockets just had… this in October, we had the most downloads ever as a podcast. So, I think we are the best real estate podcast.

David:
But we got to work to maintain that. Once you get a six pack, it doesn’t stay there. You got to keep working. So, if I want to be able to travel and I want the show to be good, I got to invest money in finding a property and building a studio in one of the rooms of that property. So, that’s another one of my personal goals.

Rob:
Sure.

David:
And that’s it.

Rob:
That’s it. We did it. Man, I’m going to pitch to us, hey, can we redo my part? I’m going to go right down everything like David did. But this is, honestly, it’s good because it’s like, I think it shows two different mindsets, or not two different mindsets but two different minds, like we’re very different people but we’re all we’re both going towards the same thing. So, it’s why I always like-

David:
No, I see a world where our paths probably intersect years into the future where your skills and my skills come together and many of our goals will probably align because we have two different approaches, but they’re very complimentary.
You’ve got this big vision that you want to see that isn’t necessarily within the ecosystem of helping clients, but putting conferences together, the programs that you’re running, continuing to grow your followers, you’re much better at that.
I barely hit 10,000 on my YouTube channel. That’s not something I’m good at. I’m definitely, definitely probably is a dumb thing to say, I don’t know why I just did that but I think you know what I mean. When it comes to the details of how you take what the goal is and you break it into manageable actual steps that you can take.
So, I think you and I, I like that… this is one of the reasons I like working with you, Rob, is we have different approaches but the same value system and a complimentary synergy between the two of us. So, that’s another reason why you want to share your goals with other people because you come across other human beings that can help you with them, that you can also help.

Rob:
That’s genuinely… that’s probably going to be a… I wish we had more time to talk about it, but that’s so important, dude. A year ago, I went and spoke at Codie Sanchez’s conference, it was called Uncon and I have probably said this on the podcast.
I was in the green room with all the speakers and they were all millionaires and billionaires and way more successful and smarter than me. And I was just like, oh, my God. And I felt like I leveled up several times just talking to people. And so, you definitely want to find people who are very different, very contrarian to you that are better, smarter, richer, wealthier.
Because you can learn, you can evolve so many times. I feel like just since you and I have met and become friends, I’ve evolved 10 times this year. I’m a completely different person than I was whenever I met you. And it’s just because I’ve really actively worked to surround myself with people that have really cool, interesting ideas and really cool executions of those ideas.

David:
Well, thank you for that, Rob. I appreciate the support there.

Rob:
Well, if people want to find out more about you and all your cool businesses and your insane business development, where can people learn about you?

David:
Please look me up on social media @davidgreene24. I think TikTok, I’m officialdavidgreene. But everywhere else, I’m davidgreene24. And YouTube just came out with handles and I was able to get the davidgreene24 handle before some jerk got it and tried to sell it to me.
So, I’m very happy. I don’t know exactly how they work. I’ll probably have to have Rob walk me through it because I’m an old man who doesn’t know how technology is. But right now, it’s a youtube.com/davidgreenerealestate. But if you look up the YouTube handle, it’s davidgreene24.

Rob:
Awesome man.

David:
Have you looked into the handle thing yet?

Rob:
Yeah, I locked up, robuilt, thankfully.

David:
At a baby. All right. One win for the people that aren’t out there grabbing other people stuff and trying to sell it to us.

Rob:
I know because someone tried to sell me robuilt.com for $18,000 one time and I was like, “No.” And now, I’m like, “Dang it.”

David:
They’re basically terrorists that are just holding your own stuff hostage.

Rob:
They’re technological extortionist.

David:
They steal the keys to your house. They make you buy it from them to get back in.

Rob:
But hey, here’s the good news. I was able to lock up robuilt on YouTube. So, if you want to find me on YouTube, go to robuilt. If you want to find me on Instagram, robuilt. And then, TikTok, you can find me at robbuilto.

David:
But nowhere else, don’t follow robuilto on Instagram with Robert’s pictures because those are fake.

Rob:
That’s true. Yup, they are.

David:
I heard Elon is trying to switch Twitter so that the blue check mark is something you pay like $8 a month and it’s much easier to get. It would be wonderful if every other social media platform adopted that same method and they verified the majority of people that were on there.
I’d even pay like $10,000. I’d pay a lot of money so that people could know you’re actually talking to David, not some rip off of David. So, really crossing my fingers that model changes.

Rob:
Yeah, same. I was like $8 bucks, it’s almost too easy but I think I’m good with it. I’m happy that it’s obtainable now, so.

David:
Maybe they can make a purple check mark that’s more money if they… people’s ego need to be stroked. But the idea is we just don’t want our followers getting taken advantage of by people pretending to be us. All right. Thank you for that, Rob. I appreciated you sharing your goals.
You’ve absolutely crushed the goals you had in the past, so way to go there and thank you for sharing the struggle with the audience. Any last words before we get you out of here?

Rob:
No. I’m really excited for 2023. And you know what, 2022, I still got two months man. I got a lot of goals on my mind that I’m like, I’m going to do this just because I like a good sprint.

David:
Right on, man. Well, thank you very much. We’ll get you out of here. This is David Greene for Rob leveling up faster than a Pokemon Abasolo, so.

 

Ashley:
This is Real Estate Rookie Episode 240.

Jamil:
Look at the math here. We know that you’ve got to speak to, at minimum, at minimum 200 homeowners before you’ll get a contract. What I see is that if you talk to, say, 50 real estate agents a day, who are each prospecting themselves, imagine if you talk to 50 agents who are each talking to 50 homeowners to try to get listings, how many effective conversations am I having a day if I go that route? If 50 agents are each talking to 50 homeowners, that’s me talking to 2,500 people. So the math doesn’t lie.

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

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. I want to start today’s episode by shouting out with someone from the Rookie audience who goes by the username, Dudette Three, and Dudette Three left us an honest rating review on Apple Podcast, a five-star review that says, “Love Ashley and Tony. I love their podcast so much. They provide valuable insight and good motivational stories. Both seem to have a very positive and upbeat outlook on life. I’ve learned a lot and look forward to what is to come.”
Then Dudette also dropped an Instagram handle. It’s at Mitten Rentals, so M-I-T-T-E-N R-E-N-T-A-L-S. So make sure to give Mitten Rentals a follow as well for giving us some five-star love. So if you haven’t yet and you’re listening to this podcast, please leave us an honest rating and review. The more reviews we get, the more folks we can help. And I kind of got some beef, Ashley, because I’m seeing some of these newer podcasts coming up, and right out the gate, they’ve got double the reviews that we have. So I want to challenge our Rookie audience to help us out here. Don’t leave us high and dry.

Ashley:
Yeah. We would appreciate it, you guys. Tony diligently looks at the reviews constantly. I cannot, in case there’s a bad one. So I rely on Tony to read all of the good ones when we are recording, and I appreciate every single one of them. So thank you guys so much. So Tony, today we have a unique episode again, just like the past several Rookie replies have been, where we were live at BPCON. But while we were at BPCON, the first day we decided to do an Instagram giveaway, where we announced it at BPCON on stage that we were doing this Instagram giveaway and we had to be tagged in their story. The very next day we picked a winner.
We gave, I think, Ethan, what, maybe an hour-and-a-half notice that he was going to be on the podcast and we’re recording live and to come meet us. So we have Ethan Wilson on, who we just met at BPCON. We randomly picked his Instagram account. We messaged him and he was able to come. So we also have another guest on with us too, Jamil Damji. So we literally took everyone that we knew you guys would want to hear, and we dragged them into our podcast studio at BPCON. So we have two guests on for this episode, and they both provide tremendous value. I mean, Ethan, I think we hit the jackpot. We were shocked like, “Wait, this is your story, and we just randomly picked you? This is amazing.”

Tony:
Yeah. It was so funny. I was in the back of one of the rooms, so it was actually the social media presentation of BPCON. Sarah was on stage, and our good friend Rob was moderating and Brit was up there, a few other folks. I was at the very back of the room, and this kid comes up to me and he shows me his phone, and it’s an Instagram message from Ashley. He’s like, “Hey, is this real?” There’s a lot of fake profiles floating around, so I wasn’t sure. I was like, “I don’t know. There’s a lot of fakes out there.” I messaged Ashley and I was like, “Hey, is this real?” She’s like, “Yeah.” So it was funny how all of that came together. But Ethan was a great story. Then Jamil, if you guys don’t know Jamil, Jamil is first just a fantastic human being.
This guy just radiates positivity and warmth. Not only that, but he’s also an amazing real estate investor, and we definitely have to get him back on the podcast to give a masterclass to all the Rookies listeners around his strategy for finding off market deals. But anyway, before we go too far with Ethan and Jamil, we do want to take a question from the Rookie audience. So if you guys want to leave a question, get active in the Real Estate Rookie Facebook group, or you guys can go to the BiggerPockets forums. Today’s question comes from Heidi Cawood. Heidi’s question is, “When buying from a wholesaler, is the asking price pretty much what you have to pay? Or is there room for negotiation?” Luckily for you, Heidi, there is always room for negotiation. Like most transactions, like most buying and selling, you can always negotiate the price.
We’ve purchased a few deals from wholesalers at this point, and pretty much every time we’ve been able to negotiate a little bit off of the purchase price. Wholesalers are just like regular sellers. Sometimes they’re going to price a little high in anticipation of the fact that people will probably negotiate and the price will come down a little bit. I guess I just do want to share a story. The last time that we purchased a property from a wholesaler, there was a significant amount of negotiation on the purchase price. I can’t remember the exact numbers, but this is a property that we had under contract for, I don’t know, $250,000. I had never seen the property in person, and I’d just seen photos and videos. So we get the property under contract, and I’d worked with this wholesaler before, so it wasn’t the first time I worked with them. So I knew them. We already had a relationship.
We get the property under contract. Then Sarah, my wife and our crew, they go and walk the property without me. As soon as they get to the house, Sarah calls me, all upset. She was like, “Babe, what are you doing? We’re not buying this house.” I was like, “What are you talking about?” I was like, “I know it’s a little rough, but it’s not terrible.” She was like, “The whole roof has collapsed inside.” So when you walked into the living room, the ceiling inside of the living room had literally collapsed. I went back and I looked at the photos and I was like, I would remember if the roof had collapsed on the photos. That wasn’t the case. So I called the wholesaler, I let them know what happened, like, “Hey, my wife and my crew are there and the ceiling has collapsed.”
He was like, “Are you sure?” I was like, “Yeah.” I sent him the photos that my wife had sent me and I told him, I was like, “Hey, this is going to be the cost to get this repaired. We need this deducted from the purchase price.” He was like, “Hey, I’m sorry. We sell all of our properties as is.” I think if I was a new investor, I probably would’ve panicked a little bit. But given this wasn’t my first rodeo, I knew what to look for. So I politely pointed out to him that pretty much every purchase and sale agreement, at least a good one has a clause that says the condition of the property cannot materially change from the time that it is placed under contract until you close. I asked a wholesaler, I said, “Do you think that the roof collapsing would be considered a material change?”
I was like, “Look, we have two options here.” I was like, “You guys can give me a discount on the price, or I can take you guys to small claims court. And it’s up to you. But I would think that if I showed a judge, an arbitrator, whoever that this is what it looked like when I placed it under contract, this is what it looked like today, they would probably agree that a big gaping hole on the roof would constitute me being right and you being wrong.” So a little bit of back and forth, and eventually they were able to negotiate the price down, and we all walked away from that transaction pretty happy. So that was my experience from negotiating on a good wholesale deal.

Ashley:
What happened with this house? Did it turn out to be a great rehab?

Tony:
It actually did. Not before it got really, really terrible because immediately after we closed, we went back to start demo and we couldn’t get in. We ended up finding out there was a squatter in the property after we had closed on it. So we had to kick the squatters out. It was definitely a challenging rehab for us. But the property’s actually done now. We should have our permit here for the short-term rental in a couple of weeks, and then we can put all of this behind us.

Ashley:
Good. Well, thanks for sharing that story with us, Tony. I think it gives a little bit of insight that even as an experienced investor that things don’t always go smoothly, and there are a lot of challenges that we all face every single day. I’ve actually never bought a property from a wholesaler, and I think it’s mostly because there’s not a … I’m investing in rural areas, where there’s not a huge supply of wholesalers going in and buying these markets where there’s very few investors investing in.
But in the actual city of Buffalo, I’m on quite a few buyers’ lists for wholesalers, and it’s always interesting to see. I was at this meetup once, where wholesaler came up to me and said, “Someone said I need to talk to you, that you buy in this area.” It was not even half a mile from my childhood home growing up, and I knew exactly where the house was. So I’m looking at the address and I’m like, “I know something about this house. What is it?” And just by googling the address, it comes up meth house, meth bust, people arrested, all this thing. I was like, “Oh yeah, that’s why.” And I just want to say I grew up in a very nice home life. I did not live in a bad area growing up.

Tony:
No breaking bad.

Ashley:
Literally in the middle of nowhere. My bus ride to school was an hour long. So this little house there had been a meth house, and it probably had been, but when this happened, it was probably eight years, 10 years before that. And the house has sat since then. Somebody has owned it. I don’t know if it’s changed hands or what. But with some place being a meth house, you want to have some kind of remediation. So I asked the wholesaler, “Has there been any kind of remediation on the property?” He had no idea that it was a meth house at all.
So he was like, “Do you think you could send me that information you found?” And this was literally just by me googling the address, all this stuff came up and it was just kind of a shock to me, like, “Oh my gosh, wholesalers don’t even google the properties that they’re trying to sell, just to see any kind of information that’s out there that definitely could benefit them before even putting the property under contract.” So I’ve followed the property a little bit, and I’m assuming they canceled the contract because I never saw that it changed hands at all from the current owner.

Tony:
Yeah. I mean, so would you have bought the house at the right price?

Ashley:
Actually, yes, because I looked into the remediation of it, and it was just like mold. People are scared of mold. I used to be scared of mold. But now that I work with this great mold company, I’ve bought a couple of houses now with mold. They come in and do the removal, and it costs money, but I know what to budget for it. So yeah, you just have to budget for it. But what he had it under contract for, he eventually told me what it was, after I said that I wasn’t interested or whatever, and he wasn’t even trying to make that much off the assignment fee. But yeah, he couldn’t move because he didn’t know when he went into it that it needed that remediation.

Tony:
Yeah. That just makes me think if can, when you’re working with a wholesaler, if you can put off submitting your EMD until you have had a chance to walk the property, that’s always ideal. That’s an area that I shared with that wholesaler. They have a non-refundable EMD, and I want to say it wasn’t a small EMD, it was 15 or $20,000 we put up as EMD, and it was non-refundable from the moment that we wired it in. So that’s why I had to threaten them with litigation to either get my EMD back or for them to discount the price. But if you can, when you’re dealing with a wholesaler, if you can walk the property first, get a sense of what might need to be done to it before you submit your EMD, you’ll have a little bit more flexibility there as well.

Ashley:
Yeah. I smirked when you said it was only 15, $20,000. The last property I put an EMD down, it was $2,000.

Tony:
Wait. Okay, let me share one story about, I think, the best return on EMD that I’ve ever gotten. I don’t even know if that’s a phrase, return on EMD, but this is what it was. So everyone knows we have cabins in the Smoky Mountains, and we bought a bunch in 2020 and 2021. We haven’t purchased anything in 2022 yet. But we got a new construction cabin under contract at the end of 2020. It was December of 2020, and it was a $2,500 refundable EMD, fully refundable EMD, $2,500. The cabin, I think we got it under contract at 780 is what we got it under contract for. It was supposed to be done in the spring of 2021, so six months after we put that EMD down. Well, supply chain issues, labor shortage, I don’t know what, but it got pushed from spring of 2021 to fall of 2021, and then from fall of 2021 to winter or to spring of 2022, and from spring of 2022 to fall of 2022.
So we’re actually just now closing on that cabin in about 30 days. But here’s what’s happened over that timeframe. The cabin is in a new development of short-term rentals. So I think altogether there’s 22 cabins that were built in this one development. Well, out of 22, my cabin was number 21. So one through 10, 12, 15, my cabin has already been built, the same exact floor plan, and some of those cabins have already sold. And my cabin under contract at 780, the exact same cabin sold for 1.2. So we built, what is that, almost $400,000 in equity on a $2,500 refundable EMD. So it was crazy. That was the best EMD I’ve ever put down in my life.

Ashley:
I remember we had a guest on who was doing that in Austin, Texas with new builds.

Tony:
I can remember that.

Ashley:
Yeah. As soon as was a new development, he’d put a deposit down. It was like $1,000 to have it built. By the time it was actually built, they put in so much equity, and he was doing this every year and house hacking it for a year, then going on. As soon as he closed on that first one, he’d go put a deposit on for one for the following year. Since these were the first houses in that development, by the time people were coming into phase two to buy them, they were paying more than he had paid for that phase one. Yeah, super interesting. Okay. Well, today let’s get into our actual guests that we have onto the show. So you can meet Jamil, and you probably have heard him On the Market, the podcast. Tony and I like to joke that it’s the second best podcast and we’re number one, but it really is truly an amazing and informative podcast. So if you guys haven’t subscribed yet, you really should.
Then also we have our winner on, Ethan, and I’m not even going to say anything about him as to what he’s been going on, except that he is very young and fresh out of college and is doing amazing things. So make sure you guys check out this episode. Ethan, welcome to the show. So we also have Jamil here with us from the On the Market podcast. So this is a super special episode that we are recording live here at BPCON. So Ethan actually won a giveaway that we did on Instagram. We decided to do this yesterday, and he was our chosen winner, the lucky one, and we are so honored to have him here with us. He just gave us a 30-second little spiel of what he has going on, and we are already amazed and can’t wait to hear more. So Ethan, you can tell us a little bit about yourself and how you got started in real estate, please.

Ethan:
Yeah, well, thanks first and foremost for having me. I’m honored and grateful to be part of it. Yeah, so I’m 23. I started my real estate journey just a year ago, a year and four or five days ago. Closing my first single family house down in Huntsville, Alabama. I was in college at the time. I was a busy guy running around. I was playing soccer, taking graduate classes, coaching and trying to make it through school and everything. The opportunity came up to get the house just in the neighborhood next to the college. So I got it. I rented out to my roommates who were my former teammates, and they paid my mortgage and a little extra. I fell into a good group of people. A big fan of Bigger podcast. I found Cody Davis and Christian always good on BiggerPockets, listened to their podcast, loved their story, loved what they were about. It really spoke to me, resonated. So I joined them, joined their mentorship and, like I said, got around a really good group of people. Learned a ton over the past couple months. On Friday we just closed on our first eight-plex-

Tony:
Congratulations.

Ethan:
… down in Texas. Yeah. So, super excited about that. Three weeks ago I quit my job to do this full time, pursue my passion. Real estate’s just what burns my fire. It just wasn’t in … the jobs are dangerous, as they say. It’s comfortable. It’s easy to get stuck in the nine-to-five and just do real estate on the side as I planned. But I’m young. I took on the risk and took the leap, and I’m loving it, under contract for a six-unit outside of Knoxville, Tennessee and going from there.

Tony:
Dude, first, congratulations, man. At 23, I think I was working at Foot Locker, so you’re doing some amazing things, brother.

Ethan:
I appreciate it.

Tony:
So what’s next? So you quit your job, you’re going full time, you got a few small multis. What is the goal for you?

Ethan:
Yeah. So one of my buddies, Eddie from Nashville, we’ve been best friends. We’ve always been hustlers together. We’d work our internships and then immediately after going, start doing landscaping, hauling, moving, stuff like that and saving up our money. He started a business. I bought my first house. Next, he’s going to leave his job soon. I left my job. We’re going to go together in real estate and take it on together. He’s more of a flipping guy. He flips couches and he wants to flip houses. He’s going to be the capital-

Tony:
Very similar.

Ethan:
Yeah, exactly. What’s the difference between a couch and a house? But he’ll be the capital provider for my long-term opportunities and in the meantime find private investors to come in with us.

Ashley:
So being so fresh and so new at doing these first couple deals, what’s your one piece of advice for a rookie listener right now?

Ethan:
Jump in. Whatever you think that obstacle is, it’s probably not as real as you think it is. My obstacle was just the lack of knowledge and just the fear of not doing it. I think a lot of people struggle with, and this is all over BiggerPockets, I know, but analysis paralysis. I read Rich Dad, Poor Dad years ago and started studying, studying, studying, analyzing deals, looking all this, what am I going to do? I finally pulled the trigger. If I had done it earlier, maybe I’d be somewhere different, but live with no regrets. That’s my advice, just jump in.

Ashley:
Well, super cool. And thanks so much for coming on the show. Ethan is actually going to help us co-host today as we talk to Jamil. So Jamil, welcome to the show.

Jamil:
Thank you. Thank you for having me. Ethan, first, it’s evident why you’re the chosen one, bro. So congratulations again. Just phenomenal work.

Ashley:
And you know what? It was random. We got super lucky. Great guests.

Jamil:
Just super random? Wow. Wow. I mean, I would’ve picked him. Really cool, really cool story.

Ashley:
Yeah. So Jamil, tell us a little bit about yourself for anyone who doesn’t know who you are.

Jamil:
Well, thank you for having me, guys. I’m Jamil Damji, the co-founder of Keyglee, in my opinion the best wholesale operation in the country. We are franchised in 130 markets. I started Keyglee in a coffee shop with my sister and two other business partners, Josiah Grimes and Hunter Runyon. It has been a phenomenal ride. We do on average in our corporate store, anywhere between 60 to 80 transactions a month. Then our franchises do hundreds of deals. Outside of that, I am a dad, a loving husband. I love my wife, she’s the best. Also, I am the star of Triple Digit Flip with my best friend, Pace Morby on A&E. So that’s super fun. On top of that, I am the leader of AstroFlipping which is, again in my opinion, the best wholesale community that exists on this planet.

Tony:
Jamil, so not to make you feel like outshined, but what were you doing at 23 years old?

Jamil:
Man. I was working at Taco Bell. Yeah, I was working at Taco Bell. I still had ambitions to be a doctor, so I was living my parents’ dream at the time. I come from an East Indian background and for us, it’s you either be a doctor or don’t come home, right? That’s our life. So I tried to get into medical school and I failed at that. I actually, I did really well in the medical school entrance exam, had a near 4.0 GPA and I bombed the interview. So when I wasn’t accepted into medical school, it was heartbreaking for me because I literally had done everything right. I was volunteering. I was all of the extracurriculars that you could possibly think of, I was doing.

Tony:
Then why do you think you bombed the interview?

Jamil:
Well, I was young.

Tony:
Was it a subconscious thing where you-

Jamil:
No. I was answering truthfully. And I think what ends up happening in those is people rehearse and they come in with a prepackaged, they tell the interviewer what they want to hear. I was very honest with what my ambitions were. I wanted to be a plastic surgeon because I wanted to make money. So I was honest with the panel. And I was told that I was a little immature and that I should try to reapply again after some time, but that was a great candidate. Now what’s funny is that my cousin, who might be listening to this, sorry I’ve been outing you as of late, but he cheated off me on the medical school entrance exam and he got in.

Tony:
Is he someone’s doctor today?

Jamil:
Yeah, he’s prescribing people stuff. So when I think of that, it’s like outside of the fact that I made the decision consciously to never let somebody be able to decide my destiny, and I think that was the moment because I had worked so hard and somebody else could decide. That’s when I knew I had to be in a field where I was driving the boat, and that’s what happened. I went from there into entrepreneurship. It was a bumpy ride. I got into a business at the time, this is now 2001, 2002, and we had started a media company, where we were convincing businesses that they should stop advertising in the Yellow Pages and move their business online, start advertising with a website.

Tony:
Wild idea at the time.

Jamil:
Wild idea. So my job essentially consisted of cold calling businesses out of the Yellow Pages, and explaining to them how some of their funds that they’ve been spending on advertising here could be used to go online so that people could find them, and that it was this revolutionary way that people were going to start doing business. We did really well. I did really well at my job. I was a phenomenal closer. I was selling these five-page websites for 600 bucks a pop. The problem was, is that my business partners hadn’t really ran our costs right. So every time I sold a website for 600 bucks, we lost $100. So I did so well at my job that I put us out of business.
The beautiful thing though is that I was given proximity to my business partner, who was also in real estate. And him and his father were knocking down these old houses, and this is in Calgary, Alberta, and they would build new duplexes on these old lots, and they were having a problem finding more building lots. So thus my real estate journey begins because I basically interjected myself into a conversation they were having, and I came to find out that if I could just help them find some of these houses, I could make some money. So the next day I was walking my dog, called a For Rent by Owner and the rest is history. My first wholesale deal. I made $47,000 after I paid the lawyer their piece and never looked back.

Tony:
So I want to give you a chance to ask Jamil some questions too because this is a great opportunity for you. But before, so Jamil, our audience are mostly rookies, right? So if I’m a rookie and I’m terrified of talking to strangers in rejection, what are some tips you might have about cold calling and being effective with that?

Jamil:
So here’s the thing, right? They’re strangers. So what’s going to happen? I mean, let’s just think about it. What is the worst that could possibly happen? Somebody is mean to you? I mean, okay, right? It’s a person you don’t even know that’s being mean to you. So I think that just understanding the reality of what the fear is based off of. The fear isn’t that someone is going to cuss you out or be not receptive to your call. I think the fear is really, “What if it works? Now what?” Because you don’t know what to do next, right? So many people get stuck and then they think, “Well, I’m all alone in this.”
That’s why I’m just such a big proponent of being a part of a community. There’s so many communities out there. I mean BiggerPockets, for instance, is a massive community of helpful, wonderful people. You can get into the forums and you can talk to folks who are going through the same thing as you. You can squat up with people and really help spread the burden of that fear out. I think once you start to talk to people who have walked that walk, who have literally done the thing that you’re trying to do and they’re alive, nothing has happened to them. They may be richer for it, right? So once you start doing that, I think that the imaginary fear dissolves and then life opens up.

Ethan:
Yeah, I love that. I want to back up first and say, I love what you said about the entrepreneurial mindset. I don’t want to give my time to anybody else. I’d rather work 80 hours for me a week instead of 40 hours for somebody else. So that was always the mindset getting into something like this. And that’s a great question from you, the cold calling, because that was one of my biggest problems was picking up the phone and just calling somebody. I didn’t know who they were, I didn’t know what they did, I didn’t even know if it’s the right number, and I didn’t know who was going to pick up. So I’d call and be like, “Hey.” At first it comes off super salesy. I don’t even know what to say. But I think you hit it on the head with joining a group. I said this already before, but I was in a great group.
There’s guys younger than me, they’re 19 years old, Caleb and Chucky in the multifamily strategy group, they are just wheeling and dealing. And it’s good to have those people who are ahead of you. Christian and Cody, who have shined the light on where I want to go. They helped me from day one all the way to get to where I am. But it’s also good to have people in the group who are exactly where you are and moving along with you. Those guys are same guys who are making the cold calls. And you meet up every night and you’re like, “Dude, I can’t talk to any of these people.” And they’re getting deals and deals. But then you look in the group, and there’s people who are still with you and to help you move through those challenges. It’s definitely good to have those support groups. It goes a long way. There’s a lot to be said for that.

Jamil:
I agree. May I ask, Ethan, the first deal that you did, how did you get that deal? What was your lead generation strategy?

Ethan:
Well, the first one was just the single family house on market.

Jamil:
On market? Awesome.

Ethan:
I offered the asking price. It was just me and one other bidder. It was right after the peak of COVID, so it had just started going down and I think a lot of people were afraid. So I lucked out. I was willing to take the risk and it paid off for me.

Jamil:
Awesome. I want to clear a bit up about my strategies because it’s always been a little bit different from the common conception of how wholesalers will go out and find deals. For the most part, you see a lot of wholesalers out there pulling lists of distress and skip tracing those lists and then calling homeowners direct. I am too lazy for that. I realized that there was a much smarter approach at doing this. I primarily … And the second piece to that is that you can’t build relationships with those people. It’s how do you scale that? How do you scale a business where I’ve got to spend a dramatic amount of money to get one contract? I think the average cost per contract right now in the US going direct to seller is anywhere between 7 and $14,000. I mean, that’s insane, right? That means you’ve got to make at least 10 to 15K just to break even on time and energy.
So my approach has always been a relationship-based approach, where how can I do a certain amount of work but be able to come back to the well and keep drinking? So the approach that I’ve taken is I work primarily with real estate agents and other wholesalers. Now there’s a complete different cadence, technique, follow-up process that is required to do that. You have to be really good at underwriting, you have to be really good at communicating. You have to really be able to take down the guards of these agents who have come to the conversation. When they hear about wholesale, they’re immediately, it’s like their spine stands up because they’ve heard all these horror stories of working with wholesalers. But the facts are is that we provide a significant value to the business place, especially for these houses that are in such terrible condition that they’re not financeable.
And for oftentimes these retail real estate agents don’t have the wherewithal to even handle a house like that. And typically they’re of such low value that it’s not even compelling for them to want to do the deal. So first and foremost, I think that everybody listening to this right now, if you have any ambitions to do wholesale, bet on yourself doing this for a while, right? Believe that you can create an incredible business from building relationships. I look at my wholesale business as one of the most incredible money-printing machines that you could ever have. We’ll do a million, do a million dollars, a million-and-a-half dollars a month in assignment fees. I mean, how many properties do you have to own to have that, right? So this is the approach. And I think that we have to, as a community, understand that we don’t have to go to sellers.
We don’t have to go and try and get one over on grandma to get a deal. That’s not what this is about. For me, I love working with agents who understand what I’m looking for, who know that when you are buying a house that’s in distress condition, that it has an as is cash value. And that cash value has to be compelling to somebody in order to come and make the investment. So this whole question of getting, taking equity, it doesn’t even exist because this equity doesn’t happen until I force it. I’m forcing appreciation on all of these deals by adding value to the situation. So that’s my approach. I’m not a cold caller. I don’t text people. I’m not going to be the guy who’s coming into your phone right now that says potential spam. That’s not me. Everybody that I’m talking to, the real estate agents and wholesalers, they want to hear from me.
Realtors spend thousands of dollars to just make their phone ring. When I call, I’m an actual cash buyer that has the ability to close. I mean, that’s compelling. That’s something that I think that especially if you are getting started in this business, the fastest way. Last thing I want to say to that. Look at the math here. We know that you’ve got to speak to, at minimum, at minimum 200 homeowners before you’ll get a contract. So what I see is that if you talk to, say, 50 real estate agents a day, who are each prospecting themselves, imagine if you talk to 50 agents who are each talking to 50 homeowners to try to get listings, how many effective conversations am I having a day if I go that route? If 50 agents are each talking to 50 homeowners, that’s me talking to 2,500 people. So the math doesn’t lie.

Ethan:
Real quick point, I just want to reiterate the importance of what you said about the relationships. I mean, it doesn’t matter if you’re in wholesale, flipping or multi-family commercial. The most important investment you can make, in my opinion, is relationships, especially early on. I mean, that’s the biggest thing for me is the people I’ve met, the people who I’m going to meet, who are going to provide me with the opportunities and the knowledge that I need to reach my goals.

Jamil:
23 years old, right? You do this for 20 years, man, you’re going to be, I mean, you will be one of those people that people talk about. You’ll be on stage at BiggerPockets. You’ll be the guy that folks will be learning from, right? It’s just so incredible to see young people coming in and being as willing to care about their futures as their parents want to care about their futures. Like you said, 23 years old, man, I was working at Taco Bell. I wanted to be a rapper. What was wrong with me?

Ethan:
Can you rap?

Ashley:
Can you do a little piece for us?

Jamil:
No, no. [inaudible 00:34:49]. Yeah, yeah, I listened to too much Tupac.

Tony:
So I also wanted to be a rapper.

Jamil:
Did you?

Tony:
Literally I have two mixes out on fooling around here.

Jamil:
Get out of here. I got to find them.

Ethan:
I mean, when you first started, what was your biggest focus? How did you go about cultivating those close relationships?

Jamil:
So simply, I literally called between 30 and 50 real estate agents every single day. That was my goal. I could hit that sometimes in a few hours. Sometimes it would take me all day if I got a Chatty Cathy on the other line. But I would make it 30 to 50 calls every single day. And my business exploded. It exploded. I mean, it’s not even close. If you compare our deal volume, our deal size, our longevity in the business and the fact that we franchise now into 130 markets, no one can touch us when it comes to our process and our capacity to get this business done.
So it was absolutely focused on real estate agents. It was minimum KPI. I would try to have my conversations last two minutes to five minutes at most, and that was just it. I was relentless. I never let a day go by. The only day I took off was Sunday, out of respect for people and their time with their families, and if they were going to worship that day, I didn’t want to be bothering them. But beyond that, I was on it, consistent. I showed up every day, and now look at it.

Ethan:
Yeah. I think that’s super important. I think anybody can watch a YouTube video or have a little conversation and get motivated, but staying consistent, being disciplined and putting in that work to kick off those relationships, making those calls, that’s a whole another story.

Jamil:
Absolutely, brother.

Ashley:
Well, Ethan and Jamil, thank you so much for joining us. I mean, that was really awesome. Yeah, the round of applause you hear in the background.

Ethan:
Perfect timing.

Ashley:
So Ethan, can you tell us where everyone can reach out to you and find out some more information about you?

Ethan:
Yes, I am E 7 Wilson on everything. Instagram, E 7 Wilson, Snapchat, Facebook, Venmo if you want to bless me. But E 7 Wilson, that’s my social media.

Ashley:
And Jamil, what about you?

Jamil:
You can find me on IG at J-D-A-M-J-I. Also on YouTube, it’s just youtube.com/jamildamji. But you can also find me on the … I’ll just because you guys, the second best podcast on BiggerPockets, On the Market, where I have an awesome time with Dave Meyer and the rest of the crew there. It’s just so fun to be a part of the BiggerPockets family.

Ethan:
Love it. One more thing. I think I speak for you guys as well. Please do reach out to me. Reach out to these guys. I mean, everybody who’s here is very willing to have a conversation in the DMs, on a phone call if you can find the phone number. I mean, if you’re ahead, next to us or beneath us, I mean, everybody’s in their own path and wants to help each other. So please do.

Ashley:
Well, thank you guys so much for joining us. We really appreciate it. I’m Ashley at Wealth from Rentals. He’s Tony at Tony J. Robinson. And I will say it, we are the number two podcast compared to On the Market. But you’re still right, the whole BiggerPockets host community really is amazing, and just to be able to be a part of this family is really awesome.

Jamil:
Can I say one last-

Ashley:
Yep.

Jamil:
Hey, if any of you guys can find the mix tape, I will pay you $250. So go out there and find the mix tape and make some money.

Ashley:
How much for a music video? Because I do have the link to that.

Jamil:
Oh. 300.

Ashley:
Deal. Well, I have to go make $300. So thank you guys so much for joining us and we’ll see you next time.

Tony:
Later.

Speaker 5:
(Singing)

Dave:
What’s up everyone? Welcome to On the Market, we are here for a very special show, we’re doing a flipper roundup. If you’ve been listening to a bunch of our shows, we’ve been doing a couple of these panel shows with one or two of the OG regular panel, but bringing in some experts based on the specific strategy that we’re talking about. And we’re going to be doing that for flipping today, which is going to be a really awesome show. We just had a great conversation with Leka and Dominique and of course for our flipping, we had to bring in James. James, what’s going on man?

James:
Oh, just enjoying the sunny weather today. I’m excited, I was just in flipping in Seattle where I was getting rained and just, it was freezing cold, wet and now I’m in sunny California.

Dave:
That sounds lovely, that’s actually what I’m doing, I was in Amsterdam. Amsterdam and Seattle have the same weather, but Jane and I decided to just get out of town and now we’re in Portugal and it’s so sunny and beautiful, it’s lovely.

James:
I’d rather be in Portugal, that sounds amazing.

Dave:
I forgot to ask Kathy, I wanted to figure out what she’s doing there with the Golden Visa thing, but we’re working and so and then just eating a lot, but it’s been great. But before we get into the flipping show, which is awesome, you are friends with Leka, so you know her, but we have Dominique Gunderson who first time I’m meeting her, incredibly talented young flipper, great conversation, but I corralled you into joining us beforehand because we just saw some data drop two hours ago, three hours ago, about October inflation numbers. And I felt like they were pretty encouraging.

James:
That was great, when I woke up this morning and I saw that hit my phone, I was like, “Oh, thank you.” Because it’s not just the data numbers, it was the prediction, finally. They’ve been predicting wrong for six months and they keep over pushing and pushing. It’s the first time I think that what? Inflation came out at what? A 0.4 increase and they were anticipating 0.6, is that correct?

Dave:
Yep. Exactly.

James:
And they were a hundred percent wrong last month, they predicted 0.3 and it came in at 0.6, so it’s a step in the right direction of what’s going on.

Dave:
Totally. Yeah, and last month, so September data that we got in October was a pretty big step back. It felt like, here we go, things were not getting better, but if you look historically, the July numbers were pretty good, the August numbers were pretty good, those September numbers were scary and now we’re back down to pretty good numbers. And so what happened, just to recap for people is inflation last month was at 8.2% year over year, now it’s down to 7.7%, which is the lowest it’s been since January, so that’s really good.
And then the core inflation rate, which is really what the Fed cares about, it strips out energy and food costs because they’re volatile. And that went down from 6.6 to 6.3%, so we’re not out of the woods by any measure, but after last month, having that scary bump up, it’s good to see that overall the trajectory seems to be that inflation is heading down.

James:
Yeah. It definitely makes you feel be… I mean last month I was like, “Man, is this ever going to work?” I’m like, “Are we really stuck with this for 10 years?” And so just watching that trend for this month is great, great news. Definitely made my morning better.

Dave:
Oh totally. Yeah. And just so people know, the way it works, what we’re talking about, 7.7%, 6.6%, that’s a year over year data, so we’re comparing October 2022 to October 2021. And the interesting thing is inflation was bad in 2021, but it really started getting bad around this time last year. And so in all likelihood, even if inflation in an absolute basis keeps going up, the year over year number which is what the Fed cares about, what we should care about, is probably going to keep going down. If you look at it just mathematically, not even policy changes, nothing, just mathematically it is very likely that it’s going to keep going down slowly, but I think this is a sign that we will probably start to see more normal numbers. We’ll probably start to see the Fed instead of raising it to 75, maybe they’ll cut it down to 50 basis points in December. And hopefully this is-

James:
Don’t jinx us.

Dave:
It’s not a victory, but it’s hopefully maybe a turning point in the battle against inflation, still a long way to go, but hopefully this shows that we’re heading in the right direction.

James:
Yeah. And at least you can… we just want to get to stabilized. If it’s high, that’s okay, we want to get things stabilized out and moving in the right direction. This is not an overnight fix, but it’s showing that we’re taking the right steps and that things are getting better.

Dave:
Absolutely. All right well, we’ll you all posted as we hear more, but now we have to wait another month, but I was pretty jazzed about this, I’m such a nerd, but I was very excited about it. All right, well, let’s bring in the rest of our panel for this conversation about flipping in 2023, but first we’re going to take a quick break.
All right, for our flipper roundup, we have a great, mostly new panel with us today. First we have Leka Devatha, how are you Leka? What’s going on?

Leka:
I’m doing great. I just saw inflation numbers come in and I’m a little bit optimistic at the core index numbers going down just a smidget, but there’s so much in the news, it’s some exciting stuff, some not so exciting stuff, so I’m just peachy, thanks for asking.

Dave:
When you talk about inflation, you’re speaking my love language, so I appreciate that, but can you tell us a little bit about your flipping credentials and what your experience with it is?

Leka:
Boy, I started flipping back in 2014, so almost a decade ago, all in the Greater Seattle market. I have mainly done full gut remodels, so everything that is structural engineering, just massive reconstruction of homes. I don’t touch the cosmetic stuff, it’s just not fun for me. And true story is that I’ve bought 90% of my inventory from your other co-host James Dainard.

Dave:
Oh.

Leka:
I absolutely have enjoyed, loved working with him and his team. It’s just been such a great partnership, I’ve learned a lot from them and they’ve just given me this landscape to go do some crazy projects and have always had my back. So having that amazing team by my side and then having an amazing contractor team, I’ve been able to do about 75 massive remodels in this area.

James:
I can vouch for that, she’s done some major… I’ve sold her some total turd boxes and she puts them back together. Oh yeah, I mean there’s definitely been a few [inaudible 00:07:24] in there.

Dave:
I was going to ask what happened in the other 10% of the business? You’re just letting that get away.

Leka:
It was before I knew him.

Dave:
Oh, okay.

James:
Yes, they always say 10% of the deals you buy are bad, well-

Leka:
That’s just a [inaudible 00:07:39]. He’s so right though, he’s so right.

Dave:
Yeah, the list of all your failed flips have come from a different provider.

Leka:
And I’m like, “James, what do I do?” He’s like, “Don’t [inaudible 00:07:53] them anymore.”

Dave:
Nice. Well, we also have Dominique Gunderson joining us. Dominique, can you tell the On The Market listeners a little bit about yourself?

Dominique:
Yeah, absolutely. Thanks so much for having me, super excited to have this conversation that’s super relevant today with flipping and what’s going on with the market in that space. I got my start in real estate right after I graduated high school at 17, that was back in 2015. I worked just kind of doing some real estate agent mentoring type stuff for the first little bit and then I jumped into investing. When I was 19, I started wholesaling in Los Angeles where I grew up. Did that for a little bit, about a year and a half. I wholesaled 40 deals and got super comfortable with the process and how to close escrow and do deals. And so that was when I branched out and started my own company out of state in New Orleans, which is where I flip today, and started that in 2019 and have been flipping there ever since. Just kind of started slowly and learning and then have been just hustling and scaling over the last couple of years. And now I’m doing usually about seven or eight flips at a time.

Dave:
Wow, that’s incredible. Definitely doesn’t sound like you’re scaling slowly, to me that’s very, very impressive. Just out of curiosity, why New Orleans?

Dominique:
New Orleans is where my dad lives, so it was a super accessible out of state market for me. And when I decided to start my own company and go out of state, I was still living in Los Angeles at the time, so I was definitely looking for a more accessible, cheaper, lower barrier to entry type of market. And I think one of the biggest things you can do right when picking an out-of-state market is picking a place where you have someone trusted on the ground that can really, even if they’re not in real estate, just show you the basics of streets, neighborhoods, zip codes, what’s going on, having local connections, stuff like that, so that was my major driver for picking that market.

Dave:
Awesome, that’s great. I love that city, it’s just a very fun, delicious place to go. Well, James, everyone knows you but can you remind everyone listening what your flipping credentials are?

James:
Yeah. We definitely like to flip stuff up the Pacific Northwest, so we’ve been active investors since 2005. Been flipping homes throughout from 2005 all the way up until today. Right now I think with our company, we’ve completed about 3000 flip transactions with our clients and ourselves, and then we personally have… we’re coming up on definitely the thousand mark. I’ve lost count, to be honest, how many houses we’ve tore apart at that point, but we’re active guys in Seattle. I think right now we have about 25 to 30 million in active projects with flips and development going on, all short term investments. So we’re active people, always buying different types of stuff and figuring out how to slap them back together.

Dave:
Well, thank you all for being here, I appreciate this is going to be a lot of fun show. I admitted to you all before we started recording that I’ve never flipped a house so if anyone listening to this is thinking like, “Oh Dave’s doing such a good job pretending and dumbing this down.” It’s no, I’m actually just that dumb about flipping houses, so I’m going to ask a lot of silly questions here for you guys, hopefully, everyone else learns something here. But James, can you just tell us a little bit and start sort of set the scene here for where we are with flipping right now. What are the market conditions that are driving the flipping industry right now? And how do they compare to some of your previous experience in the industry?

James:
Yeah, so right now what we’re seeing is we just came off the biggest bull run in appreciation that we’ve ever seen. The last 24 months have been absolutely absurd with the amount of appreciation, I think we’ve seen what? We’re up 35% from 2019 or 2020 roughly in appreciation, so we’ve seen this rapid increase and what that’s done is because it became so profitable. Flipping has always been a very high risk business, you’re buying something on a short term yield, you’re buying something that also needs a lot of repairs, there’s a lot of unknown factors in it and you’re buying at a discount and you have to put the right plan together. But over the last two years what we’ve seen is this rapid amount of appreciation to where a lot of investors have gotten into the market with flipping because what became very high risk and very hard became somewhat easy over the last 24 months.
And so what we’ve seen is the cost of capital has increased roughly 45 to 50%, and what that’s done is it’s slowing the market down. The fed kept their rate at zero for the last two years and we all got the reward out of it. As cost of money’s cheaper, things go up in value, and so as the cost of money has gone up substantially or the fastest we’ve ever seen over the last 90 days, we’re starting to see things starting to decline back and normalize out with pricing. And so right now what that means is as the Fed increases rates and as the rates increase, it becomes an even riskier playing field to be playing in right now. And in the flipping community, we are seeing people get caught where they were buying a lot of property, they’re rolling their profits in, they’re going into bigger properties and it has now became a lot harder to control.
So why is it harder to control? Inflation is still going up or is still higher, so costs are hard to track right now, so people are typically going over budget. The market is cooling down and there’s a lot of uncertainty in the market which is starting to confuse the consumer buyers and there’s less people looking for deals, which means you’re going to hang onto your flips longer at this point as well. And so what we’re seeing is the market’s starting to come down, things are taking longer to sell and we’re in this correction mode to where we’re trying to get to stabilization, but it does make flipping very risky right now because you have to kind of time and really predict the market well with the forecasting. And so I think you’re seeing a lot of shock in the market because a lot of new flippers have not gone through downturns in the market. And since we’ve been doing this since 2005, we’ve seen ups, downs, we’ve seen crashes, we’ve seen things level out, and it’s all about pivoting and changing up your plan.
But unless you go through those types of cycles, you don’t really know what the next steps are, right? In the last 12 months we’ve done a l… or the last four to five months, we’ve done a lot of pivoting in what we’re doing and how we’re running our construction sites, how we’re evaluating things, we learned that from flipping in 2008, because in 2008 when we went through the same type of market correction and pullback and well, not the same type but we are seeing a drastic pullback, that’s where we had to kind of learn how to evaluate properties, look at things a little bit differently and change up all of our plans. And I don’t think right now what we’re going through is the same as 2008, but the impact in the short term is about the same because we’ve seen about home pricing, at least in our market, come down about 20 to 25% from peak pricing in a very short amount of time which can cause damage, and that’s where all the risk is coming from.

Dave:
Dominique, are you seeing something similar in your market or your margins getting impacted or how has the recent shift in market dynamics impacted your business?

Dominique:
Yeah, it’s super similar to what James was saying specifically with investors and flippers. I am seeing so many properties that I either passed on six months ago because I didn’t think the margins would work if the market shifted and went down or even deals that I bought and just decided to wholesale because I knew I couldn’t make the margins work and other flippers picked those up and I can see where they ran their numbers and how they projected for spending X amount and selling for X amount that it would work, and putting it up for that price and it’s just not working. And there’s long days on market and tons of price reductions, especially in the flipping space. It’s super common right now in the New Orleans market, just people who didn’t expect us to be in the place we are right now, maybe even expected things to continue to go up and were shooting for slightly higher than that past sold comp or equal to that past sold comp.
And I mean the main reason why I would pass on those deals six months ago is because I was expecting to actually shoot for lower than that last sold comp. And that’s kind of how I’m running my numbers even still right now, and I have been for the past six months just kind of anticipating this. But so many people that aren’t in that head space and aren’t doing that yet, they’re definitely paying for it right now. Whether it’s when they actually sell losing money or even just paying holding costs for three extra months because they priced way too high and they’re just sitting on the market.

Dave:
And are you able to preserve your margins then and just because you’re buying the right deals or in these type of times you sort of accept lower margins but keep moving forward because you have to do something?

Dominique:
For me I’ve kept to my margins pretty strong, just passed on a lot more deals, really narrowed in on my buy box and I’m only buying in specific neighborhoods and zip codes that I know that have high demand. On the resale side, I’m only buying in the entry level price point right now. So when my product comes out finished and renovated, I want it to be one of the cheapest, nicely renovated homes on the market. So for me in my market that’s kind of in the 200K and under price point, on the resale. So I’ve really just narrowed down my buy box, specific location, specific price, specific type of asset. And so I’ve just passed on a lot more deals that I didn’t think would work with overinflated projected margins.

Dave:
That makes sense, and sounds like you’re adapting well. I see Leka just getting excited about the idea of $200,000 flips over there.

Leka:
That’s the cost of my rehab.

Dave:
Yeah. What is the price point of your average project Leka?

Leka:
So the acquisition price is between, I want to say 500 to 700K, now it’s 750 maybe sometimes. And then the cost of rehab is between 150 and 225, 250 just depending on how extensive it is, whether it’s full permitted all new everything is more like 200, 250. And then with holding costs and all of your property taxes and buying and selling costs, it’s about a million on an average to do a median price point flip in my market.

Dave:
Wow. And what do you target selling those for?

Leka:
Before we would list it for say 1.1, 1.2 and then get 2, 300K over ask. Obviously, that’s not the goal now, my goal now is to deliver above market qualities for under market pricing.

Dave:
Mm-hmm.

Leka:
So then still charge a premium, but then the minute the buyer walks in, there has to be this wow factor like, “Okay, yes I’m paying 6%, 7% in interest, but this is the house that is worth that.” And so I treat every flip as if it was my own primary residence. I’m still able to keep my costs low because I’ve worked with the same team for five years and then we kind of understand each other. I also bring on my contractors as my bridge financers, so they’re also part of the deal, they get a portion of the profit when we do sell the flip.
And so because of all that I’m able to keep my costs low and still offer all these crazy sizzle features and I design them to the tee so that it doesn’t have to be expensive, but it’s a little accent wall here, a little wallpaper there, some wainscoting, something cool and different like ceiling sconces next to the master bed. These are just cool features that not most flippers do, so when they walk into a project or a house, I want them to feel like, “This is my home, I need this home.”

Dave:
I like that term, sizzle features.

Leka:
Sizzle features.

Dave:
That’s a good term. Is that an industry standard? Or is that just what you-

Leka:
It is. It is. It is a total industry standard, when you flip your first home, Dave.

Dave:
I’m never flipping a home, it’s too much work, I’m too lazy.

Leka:
It is too much work.

James:
And what Leka just talked about is really important right now in the market as you’re flipping, right? The rates are going up, I mean actually what Dom also talked about, there was two major things that they just discussed, which is really important for flippers. A, knowing your buy box right now, and sticking to what you’re good at. When you have rates that are volatile, that means that the market’s volatile, it’s a higher risk. So if you know what you want to buy and you know how to execute that plan, that’s where you can mitigate your risk in the flipping. And then knowing what you are flipping, like what Leka is talking about, where her average price point on her flips right now, or I mean I’m her broker so I kind of know the nu… it’s 1,000,050 to 115.

Leka:
Yeah.

James:
And that is a market that has kind of became expensive with the cost of money, right? It is a lot more to service that debt, so adding in those little extra flavors is how you get those deals clicked out. And just kind of that, the little sizzle features are very, very important right now to get that pri… you got to give people a reason to buy in that price point.

Leka:
Right.

James:
Whereas, Dom is flipping in the lower price points, which is a lower risk because you can stabilize it, you can keep it, you can do… she’s buying what she knows, where she knows and also there’s multiple exit strategies. Whereas, in Leka’s market or our market, there’s not a whole lot of exit strategies, it is your selling that property. [inaudible 00:22:22]. And that is the riskier factor, but there is the huge margins that come with that risk at that point.

Dave:
Leka, you mentioned that you were able to control costs, which seems like a pretty big accomplishment over the last couple of years because material prices for pretty much everything have just skyrocketed. Is that starting to slow down? Are you starting to see better or more, at least more predictable pricing for materials?

Leka:
Yes and no. I’m just ordering cabinets for 15 units right now for a 12 unit apartment building and then two luxury flips and all the cabinets are basically back ordered till mid to late December. So then will I step in and pay a little extra to get them in first week of December? Yes, so there’s that. There’s still kind of a lack of inventory with regards to just basic stuff like garage doors, appliances, so if I have to pay a little extra to get those things then I will pay it just to get my project done and on the market as quickly as possible before the Fed raises interest rates, another 75 [inaudible 00:23:38], so yes and no. Lumber has definitely come down, but then I do flips, I don’t do new construction so we don’t use that much lumber for framing. So it’s kind of a wash for me.

Dave:
Dominique, what about you? I think it seems like the two issues… well, flipping over the last couple of years has had some tailwinds, which is the appreciation, but the two headwinds seemed like both material costs and labor was just super expensive and difficult to come by. Are you still facing some of those challenges? Or what are you seeing?

Dominique:
I would say pretty similar to what Leka said, I have also been working with pretty much the same team of contractors since I started and they kind of manage all of my projects. So labor wise it hasn’t changed that much, we have a really good set of both managing level and then subs that I haven’t seen huge differences in their availability or their price points as far as labor goes, but materials I would say a little bit different than what Leka said just because we are in that basic entry level kind of more simple price point as far as the renovations go. So we use a lot of materials from Home Depot and Lowe’s and Floor and Decor and some of those larger box stores, so inventory is typically easier to come by and there hasn’t been crazy amounts of back order.
But at the same time I mean if you look at early 2020 pricing on materials compared to now, it’s still so much higher. I’d say anywhere from 30 to even up to 50% higher on certain objects. Just a toilet, I always used to pay $89 for toilets at Home Depot and now they’re a $119 or bathtubs, same thing, it’s like they were a $120, now they’re $220. So you’re definitely still seeing those higher prices, but again, I mean with inflation that’s gone up over the last couple of years, it’s kind of expected. We haven’t really dropped back down to that 2019, 2020 level yet, so…

Dave:
That’s an interesting point that sort of the lower end finishes are more readily available. You’re using a regular toilet, I’m sure James and Leka use those Japanese toilets that when you walk in they-

Leka:
[inaudible 00:26:06] toilet.

Dave:
Yeah, they say hello to you and they warm up and do all this stuff. Actually a friend of mine released an apartment with one of those recently and his landlord came in and got it from… he retroactively, he was like, “I miss my toilet.” [inaudible 00:26:25] just put in a regular toilet, and he is like, “I can’t use just a regular toilet anymore.”

Leka:
Oh my God. I mean heated seats, come on.

Dave:
It sounds nice, I admit. So I’m curious James, I’m sure you talk to a lot of people who are aspiring flippers. What do you think the market is like or what advice do you give to people who are considering flipping or maybe starting to flip in this type of market? Would you recommend it?

James:
Yeah, I mean I think if you make a decision in any kind of business, if your goal is to grow your capital right now, flipping is actually still a really good business. It’s a very high risk business but I really don’t think it’s much different now than it’s been historically, it’s always been a high risk business. When we’re looking at these flip deals, we’re looking at making 30, 40 and 50% cash on cash returns in a six month basis, right? That is an extremely high return. That comes with an inherent amount of risk though, and if you have to move and you really need to perfect your business to get going. And so if you’re a new investor, you can get into the market, and actually to be honest, there’s a lot better buys right now.
I mean where we learned how to flip homes was in 2008 when the market… we would predict, we would run values on a property and let’s say it was worth 500 grand, by the time we went to sell that we were factoring that we were going to sell that at 430, we were knocking 10 to 20% in a very short amount of time to get the values down. So if you’re a new investor, you can definitely get in the market, there’s actually way better walk-in margins right now that can actually help you. You’re walking into a lot better deal, which is going to kind of mitigate the risk down, but you want to take the right steps like what Dominique’s talking about is buying the right type of deal.
If you want to get into a flip, buy a low risk deal. What is a low risk deal? Well, that is a cheap price point where there’s multiple exit strategies. For some reason if you buy that property, you renovate it and it looks awesome, but the market is not moving right, you can still refinance it, stabilize it, wait for the market to calm down and then sell it later or maybe just keep it as a bur down the road. And that’s the first thing I’d be looking at is lower risk deals which require lower capital.
The second thing is you want to make sure that you understand the construction cost, because what we are in is we are in the inflationary period where costs are still well above where they were two years ago, but they are coming backwards. But you have to kind of know that right now to kind of really watch and see what you can get your pricing down because the public knowledge isn’t that the pricing is coming down, it’s guys and girls that are actively in the market working with people and kind of reading the trends there. I’ve seen at least a 10 to 15% drop in construction pricing in the last 45 days, but we’re also getting that price adjustment off construction because we’re changing our plans up, we’re not just accepting the answer that’s given to us. If I’m getting high flooring costs, we have to floor 5,000 square feet at an apartment building we’re renovating right now.
My people in my office are calling all the different flooring companies to find out what they have on overstock and clearance because they did buy up too much product. And so it’s up to the investor to execute that plan and really create the value. If I go get the quote from my flooring company, it’s still going to be 30% higher than it was two years ago, but now what we’re doing is we’re chasing down the product and we’re going to have to find that good deal, and that’s always how flipping has been. When we were flipping in 2015, it was, how do we get our faucets cheaper? How do we get our handles cheaper? And going and actually finding the solution rather than just getting it. And so if you’re a newer investor, buy the right deals, buy something low risk, low that you can sell it, you can keep it, that will make it to where you’re not going to get clipped.
If you’re buying an expensive property and you go to refinance it and you’re losing a thousand to 2000 a month because the loan balance is too high, that’s a hard property to keep. In addition to the lower price points, you’re less susceptible to big hits, right? If I’m flipping a house that’s a million dollars and the values come down 10%, that’s a hundred thousand dollars I have to deal with inside my [inaudible 00:30:50]. If I’m flipping a house that’s $200,000 and it comes down 10%, that’s 20 grand. I can absorb that, that’s not going to bankrupt me at that point. And so just you can get in the market, you just want to buy the right type of deals. In 2008 there was nobody really buying flips and we were not experienced flippers but we were buying constantly. And so we were brand new people flipping the most amount of houses, but we had to figure it out. We had to have a good lender, good construction team and a very padded up [inaudible 00:31:18] to where we just knew the deal would work every which way.
Every deal has a stress test, you can put the value on it, and then what we’re doing right now in riskier markets is if we see the value is today is a million bucks, we’re going to knock 5% of the value off that. If we think our construction costs are going to be a hundred grand, we’re going to add 10% to that deal. If we think we’re going to keep it for five months, we’re going to put seven months of debt cost on there, and that’s how you stress test your deal. And if you can pad that all the way through and the deal still makes money, then that’s something that I’m going to consider.

Dave:
Yeah, I mean that makes a lot of sense James, and it’s excellent advice. It sounds like you have been a very experienced flipper for many years and it sounds so logical when you say these things, but Leka, I’m curious, do you think these, are they achievable for new investors? It all makes so much sense, but do you think, does it take time to learn the skills that James is talking about?

Leka:
I was doing this analysis just a couple of days ago and what I saw was my hard money costs, so if I were to buy a deal, the same deal that I bought earlier this year, if I were to buy that same deal today, just my hard money costs are 25% more. And with prices for flipped homes coming down with the target, right? The market target that is ever changing and with… yes, there’s a lot more labor now than there was a year ago because there’s a lot fewer people actually flipping and investing in real estate and actually reconstructing. So there’s a lot more general contractors available, there’s a lot more labor, but if you don’t know what you’re doing, it is very stressful, it is very high risk. So yes, you can still flip, you can still buy homes and I’m also seeing homes… before, earlier this year, I would see about four deals come to my inbox every day, most of which I would pass on. Today I’m seeing 15 to 20 deals coming my way.
So now what I’m doing is I’m like, “Okay, this house is just a flip, but this house can be a rooming house or a midterm rental or a short term rental, this house I can add an ADU three years down the line if I wanted to just hold it as a rental property and not fix it up right now, so when the interest rates come down, I’ll fix it up, I’ll subdivide lots, I’ll change zoning variances.” I am looking at it through a different lens, which is very hard for a new investor to do. So what I am encouraging all the newer investors to do is go partner with more experienced flippers. Flippers like James, who has been through many market cycles, right?
I started flipping in 2014 and while I started was pretty slow, but then as I… 2015, 2016, 2017, it was peachy, right? It was amazing. And then 2018 we saw [inaudible 00:34:24], and then 2019, 20, 21, boy, I have made more money than I could have dreamed of, right? And so I have seen that cycle that has set me up really well for right now that even if I have to offload properties at a discount or at a loss, just getting the money that I put into it is enough of a liquidity factor for me to go out and buy some killer deals in 2023.
For a newer investor, if they were to partner with someone like James or myself or Dom and then just shadow us and see, okay, how are we pivoting? How are we being flexible? How are we constructing? How are we designing these projects to sell for a profit, not a loss. I think that is much better use of their time and money than going out and buying their own project and maybe taking a huge loss hit.

Dave:
Yeah, that’s great advice, taking the time to learn right now, especially if you learn in these adverse conditions when market conditions improve, you’re just going to be set up for success for the long term. But something that always struck me about flipping, especially in challenging markets is if you do it enough, the probability is that you’re going to make a lot of money over the long run, right? But on any one deal you could lose money, right? I don’t know if any of you want to share, but you do lose money on some deals, right?

Leka:
Ah, never.

Dave:
[inaudible 00:35:55].

Leka:
If someone that has done as many deals as us says they have never lost money, run in the other direction because that is a lie, that is a [inaudible 00:36:05] lie. Yes, a hundred percent. You do as many deals as you do and for no rhyme or reason you can lose massive amounts of money on a deal. It could just be that you got hit with a crazy inspector in the city that makes you do 37 inspections on your project, basically [inaudible 00:36:24] away all your profit. It could be that Amazon announced a head tax and everyone stopped buying real estate and then you just had to sell your property for a loss in a very hot market in a very hot neighborhood. It could be that you overspent on finishes, it could be that you just bought the wrong house at the wrong time, it could be so many factors. But yes, I have lost, the most money I have lost on a deal is $65,000. My own flip, it was flip number 37, so it’s not like I had just started flipping homes, I had quite a bit of experience, so yeah.

Dave:
Well, thank you for sharing that, but I think that’s what worries me personally about flipping or getting started in adverse conditions is if you’re putting a lot of your own capital into it and it’s all of your money, right? It would be scary, and if that bad luck happened to you on your first deal, if you don’t have the ability to absorb the loss, that’s a little bit scary, I’m just telling you why I don’t flip houses now.

James:
And that’s a bad business plan, you should never put any of your money in any one asset class. You need to break it up, and that’s where people get caught. I mean it is a real thing when things come down quickly, we lost 380 grand on a house.

Dave:
Yeah. Whoa, jeez.

James:
That’s a big number.

Dave:
Yeah. Wow.

James:
And luckily we could pay for it, but because we were rolling all our profits for two years. Like I said, bull run, we were making a lot of money for two years. So good news is we made a lot more than we lost, but it can happen very quick. And in 2008 I got wiped out, I went from… I thought I was rich, I was 23, I had saved up 450, 500 grand wholesaling, saving every penny I could, re-investing. And in six months I had 20 grand left.

Dave:
Ooh.

James:
And it was very, very rapid and it can hurt. High risk, high reward, and so yes, do not put all your money into one thing. Take your time, spread it out, start with one. We all started with one and then we start learning the systems and then go in and if you don’t have all the money to… or if you’re putting every dollar into that project, then look at investing with someone else because then you can give portions, you can spread it out, you can get in different markets.

Dave:
Totally. Yeah, you wouldn’t buy just one stock or if you’re a tech investor, you wouldn’t just put it all in one startup in hope, you would spread that around a little bit.

Leka:
Yeah.

Dave:
Even within real estate. Dominique it sounds like you have sort of gone into a couple of different strategies yourself, you’re wholesaling, you’re flipping, is your plan to continue to be primarily a flipper?

Dominique:
That’s a good question, I would say in the immediate future, because I have good systems in place and we’re buying deals and it’s still working. I want to keep the flipping going at sort of the volume or maybe a little bit more than we’re already doing. But I’m definitely starting to shift a little bit, I flipped for the last couple of years mainly just to kind of get experience, get started, save capital, really learn and kind of master the different neighborhoods in the market that I’m investing in. But now I’m definitely starting to shift and starting to make offers and prospect more into small multi-family deals, apartment buildings, things that I can still renovate and flip but not necessarily have to sell right away, maybe keep it for five to seven years and then sell. Maybe sell right away if that makes sense, but just kind of scaling up doing bigger deals under one roof.
But definitely still kind of what James and Leka were saying, there’s still a way to flip and make money. People are doing it, the people that know what they’re doing are still buying deals, are realizing that this is actually the time better than the last couple of years to buy a lot, there’s way more opportunity right now, there’s way less people buying, prices are coming down. So I’m going to keep it up, I mean I’m going to keep buying flips and flipping houses in my buy box that I know that works. And also just kind of backtracking a little bit, something I wanted to add just for newer investors that are trying to get into flipping and analyzing the risk if they can pull it off in this market, I would say one of the best things to do to start is to become the absolute expert on your market, specifically the zip codes or neighborhoods that you want to buy in.
You should know every house that’s on the market pending, that’s recently sold, how long it took, how far over or under ask price people are getting? That’s easy, you can go on Redfin, Zillow and do that research and figure those numbers out, but I think that’s one of the best things you can do if you’re getting started because that’s where you’re going to get hit, if you don’t know those numbers on the resale. If you’re still in April of this year running your numbers, you’re going to lose money. You have to know, you have to be up to date on what’s going on right now and judging by that what’s going to continue to happen in the next three to six months.

Leka:
I have to piggyback on that, that is such great advice. That’s all I did the first six months I started wanting to invest in real estate, that’s all I did. And that kind of laid this foundation that I still have today. When I buy a house in a market, you can ask me about any other house that’s for sale, that went pending, or that’s sold and I’ll tell you about it. My broker called me yesterday and she’s like, “This house sold for 1,000,060.” And I was like, “I know why.” I walked it, it was a piece of [inaudible 00:42:11] flip, it was bad finishes, it didn’t have a garage, it was a choppy floor plan, I know exactly why that house sold for a certain price and that’s why my house is worth a lot more. And this is something I honestly learned from James when I first started because I would ask him about any house because I would do seven, eight flips and he would do 50 flips.
So I would ask him about any house in any market and he’s like, “Oh yeah, and the house next door, and the house opposite, and the house on this other street.” He just knew what houses, and why they sold. And then what happens is your brokers can’t BS you, your wholesalers can’t BS you, your contractor can’t BS you because all the numbers are right there in front of you. And then the people that you are selling brokers, right? The people that are bringing in buyers, when they bring in a buyer, you always want to… in whatever market, if you are the seller, you want to be selling from a position of strength, not a position of failure or loss because that’s when you make… you just give up all your money, you just give up all your equity and your profits. So I always go in like, “I have my numbers, I know why this house is worth as much as it is.”

Dave:
That’s awesome advice. Yeah, I think just there’s no real shortcut to understanding your market, you have to just spend time in it. I mean when I first got started I would just… you’d just be driving around and see an open house, you’d just pull off the road and just go in it, even if you had absolutely no intention to buy it at all, just to learn about the houses. And I feel like that’s been gone the last few years, there was no open houses, people were just… things were going so quickly. So this is a really good time with things sitting on the market longer for you to go and just see more properties and just get that practice, get more repetition that Leka is talking about, so you can really understand it. And then eventually you can become the Will Hunting of house flipping like James where he is got all of the pictures of houses and the red string that connects them all his office. [inaudible 00:44:15]. Yeah. Yeah, exactly.

James:
I’m the janitor in the back, yeah [inaudible 00:44:23].

Dave:
No, no, you’re the genius who comes in on the chalkboard and solves all the problems at night.

James:
[inaudible 00:44:30].

Dave:
Well, yeah. Well, Leka, I wanted to ask you, what are you sort of looking forward to in the next year? Do you see any market dynamics changing or do you think we’re sort in for more of the same over the next couple of months at least?

Leka:
The truth is that I don’t know. I mean don’t know, what I do is I try to be flexible and versatile with what I buy. I’m also doing multi-family syndications, I am leasing out my office building that I just renovated, so I want to diversify as much as possible. So you know how people say, “If you’re flipping homes, just stick to that.” “If you are buying multifamily, just do syndications.” I think that’s bad advice, I think as long as there’s a common thread, my common thread is that I only play in one market, in the Tri-County Greater Seattle market. And because I do that, it doesn’t matter if I’m buying self storage or apartment building or office building or single family flip or a multi-family [inaudible 00:45:35], I know my market, I have my systems in place, I have my contractors in place, I have property managers, I have mentors, and so I have my network and your network can solve massive problems.
So going into next year, I’m looking at a frat house next to Washington State University where it’s already hitting 1% rule and it’s only rented 50% and they want to sell it at one third of the dollar. So I’m like, “Okay, that’s a really good buy in any market.” So why would I not go research that? Or look at midterm rentals? We have such a shortage and a lack of midterm rentals, we have lots of short term rentals which might convert to midterm, so that could be an inventory problem, but right now there’s such a lack of midterm rental opportunities that I’m like, “Okay, if I’m renovating a 12 unit apartment building, why not put one unit on midterm rentals, see how it goes?” So constantly even just playing with my portfolio that I own now and seeing how I can increase profits on my own portfolio, but also going forward, how can I buy more versatile properties?

Dave:
That’s such good advice, I love that advice because I feel like there’s these people who say, “Only do one thing.” Or “Just specialize.” But what you’re describing is so interesting, you can become an expert either sort of horizontally, you pick a strategy and then you can use that across the country or you just vertically integrate in one market and you’re just like, “I know Seattle so well that any property I can make work because I have the network.” I think that’s very, very good advice and really helpful for people trying to figure out how to scale. There is definitely more than one way to do it.

Leka:
Yeah.

Dave:
What about you, Dominique? Is there anything you’re expecting or you said you’re going to go into some smaller multi-families, but are you seeing anything in the market that you think might impact your strategy or anything that you’re looking forward to, think will be big opportunities in the next year?

Dominique:
I personally still see a lot of opportunity in the single family space, in the kind of outskirt neighborhoods of New Orleans. I’ve always seen opportunity there and I think that I’m continuing to see it. The reason being is just because there’s a lot of people in that market that are renters. And so you have a lot of people that are kind of in that space where they’re trying to transition from rent to own, just getting qualified, first time home buyer maybe using an FHA or VA loan, so what are they likely to buy? And that’s kind of looking at the population of the greater area. What I’ve always tried to focus on is I see that there’s a lot of demand in that lower end, first time home buyer, single family home type of space. I mean most likely these people aren’t going to be buying a duplex or something like that.
They’re looking for that entry level, what is nice? What can I take pride of ownership in? Type of property, and there’s just a lot of inventory in the kind of outskirt neighborhoods of New Orleans. There’s a lot of single family homes, there’s a lot of tract home type streets and stuff, so that’s what I think is still a lot of opportunity in that market. Kind of [inaudible 00:49:04] staying outside of the city, there’s a bit less regulations, stuff like that. That’s where I’m going to probably continue to play, and yeah, like I said, some smaller multi-family stuff as well, but I think I’ll still be heavier on the single family stuff for the next couple of years.

Dave:
Nice. All right, great. What about you, James? Any last piece of advice for people who are interested in flipping heading into next year?

James:
No, I think don’t be afraid of flipping, I mean I know we’re not. I mean the reason being is the margins are still big, the returns are still really high, if you can make 40, 50%, that’s a good thing to be looking at. I mean that’s how we grown our whole portfolio is flipping properties, taking the returns of 40, 50%, stacking them away, buying more, right? So we’re always going to be buying, but right now it is risky, do not buy more than outside your SCIs. Do not put all your money into a deal, keep 50% off to the side to kind of work whatever… if you got to come up with some cash, you want to make sure the cash is there, but buying with multiple exit strategies is key. If you’re looking at a deal, make sure that you know what you can do with that deal. Is there multiple channels? The more channels you have, the less risky that deal is.
And that’s why I definitely don’t agree with people saying, “Just do one thing.” The more things you know how to do, the less risky real estate is, so learn. I mean the fact that Leka or Dominique they’re value add investors, they can take that skillset and go and get into every type of market, but if you’re a new investor, learn the skillset, which is increasing the value on the plan, know how to execute that plan and then start expanding out. Don’t go all in right now, take baby steps, work with other people and just be cautious, but just make sure the deal checks out, make sure that deal stress tests, add in the extra contingencies and then you can get going, but there is really good buys right now. I mean screaming buys and so if you sit too long on the sideline, you’re going to miss these buy opportunities.

Dave:
All right, great. Well, thank you all, we do have to start wrapping up. This is super helpful for complete noobs like me, and hopefully everyone listening got some value out of this. James, if people want to connect with you, where should they do that?

James:
Best way to do that is probably on Instagram @jdainflips or you can go check out jamesdainard.com, we do a lot of value add construction talks, learning about ripping houses apart.

Dave:
Oh yeah. Leka, what about you?

Leka:
I’m on Instagram, Leka_Devatha or on LinkedIn, just Leka Devatha, or you can check out my website, rehabithomes.com, and same, we just have a lot of value add stuff that we do and we’re always talking about it.

Dave:
Great. And Dominique, what about you?

Dominique:
Instagram is great, I’m @dom_flips_nola and yeah, same I’m there for messages, answering questions, putting out content about our flips and stuff, so yeah.

Dave:
All right, great. And I’m Dave Meyer, you can find me on Instagram where I’m @thedatadeli where I talk mostly about sandwiches. Dominique, I meant to say my favorite sandwiches in the whole world is in New Orleans. Have you ever been to Cochon Butcher?

Dominique:
I don’t know if I have, but I’ve definitely heard of it. And I have heard of the amazing sandwiches, a lot of people have told me that, Downtown New Orleans.

Dave:
[inaudible 00:52:22] I’m sending you a gift card to Cochon Butcher, you have to go there, it’s so good. All right. Well, I could talk about that all day, but we do have to go. Thank you all so much for joining us and thank everyone for listening, we hope you enjoyed the show. If you did, share it with a friend and give us a five star review on either Spotify or Apple, and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only, all listeners should independently verify data points, opinions, and investment strategies.

 

 

Mindy:
Welcome to the BiggerPockets Money podcast, Finance Friday edition, where we interview Josh and talk about rehab overruns, borrowing costs, and the grind it out versus sell your property decision.

Josh:
Really in the last year have had to learn a lot about tracking my own expenses and my own cash flows through the construction process. And with that, because I took out a construction HELOC, there was some flexibility even there too. But now that I have really substantial housing expenses in the mortgage and the HELOC, I am projecting, I am foreseeing that it’s, I’m basically breaking even for the most part when it comes to after tax and stuff like that.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my wheezing co-host Scott Trench.

Scott:
Mindy, the show always takes my breath away.

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

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or decide whether to grind it out and pay off a HELOC or sell your property and start over. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, today we’re talking to Josh and I’m really excited to talk to him. He is a younger guy who is on his path to financial independence. He bought a house hack, as we say, you should house hack your way to financial independence, house hack your way to get started investing in real estate, which he did. And he ran into some cost overruns and some time overruns, which happens frequently when you are doing your very first rehab. He has, he’s on the end of that now and now he needs to rent out his property. But he is faced with kind of a big decision. He borrowed a lot of money to rehab the property and now he needs to pay it back. And I think you have some good things for him to look at today, things to consider when he’s running his numbers.
I mean, a lot of our answers lately seem to be now you’re in the grind and we’ve talked to so many people on this show and it seems like 10 years is the sweet spot to go from zero to financially independent, 10 years, 15 years. And I just, I want to make sure that people realize 10 years is kind of a long time. There is a grind aspect to becoming financially independent. We cover it in an hour, but it does take a long time. It is multiple years except for that one guy in California last week who won the $2 billion lottery by himself or herself, I should say him or herself, not to be sexist.

Scott:
Yeah, they’re set for life.

Mindy:
They are set for life.

Scott:
They should write a book.

Mindy:
Their book is much shorter than yours.

Scott:
Yeah. Well, great. Should we bring Josh in?

Mindy:
Yes. Before we do, let’s hear a note from my attorney who says the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I nor BiggerPockets is engaged in the provision of legal, tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate. Today we’re speaking with Josh, a fairly recent college graduate who bought his first house hack 12 months ago and has been renovating it ever since. Renovations went over budget and over time as they tend to do, but he’s just about finished and we’ll start collecting rent in the new year. Josh, welcome to the BiggerPockets Money podcast. I’m super excited to talk to you today.

Josh:
Thank you. Thank you. Yeah, I’m stoked to be with you all. Thank you very much. Let’s get going.

Mindy:
Let’s get going. So we want to give a quick snapshot of your money situation. We have a salary of about $5,800 a month and additional income from hockey and CrossFit coaching of about $20,000 a year. I’m showing monthly expenses around 4,100, so that’s a $1,400 mortgage, a $1,400 HELOC payment, $131 in gas and electric, $35 wash, 29 water, $29 trash. No vehicle payment, good for you. $147 in insurance, $280 in gas, $193 for trips and adventures. A bunch of random, I’m going to call it $250 in random. I don’t see anything weird there. $317 a month for groceries, $214 for restaurants, bars, and coffee for a grand total of $4,100 in your spending. And then you’ve got additional, oh, and let’s move to investments. We have $21,000 in a Roth. Hooray. And $6,000 in a TSP, $3,300 in a 401k, $21,000 in cash in various earmarked buckets. We have a house hack that is in progress. What would you estimate your equity to be in that property?

Josh:
Yeah, good question. I’ve estimated it at 75%, the after rehab value is 490 and my all in debt on the house is now 382, 383 with the mortgage in HELOC. So about 75% is the all in loan to value. So 20 to 25% equity.

Mindy:
We’ve got the outstanding mortgage of $227,000 at 3.375 fixed rate, which is awesome. A HELOC of 135,000, a family loan of 20,000.

Scott:
What’s the interest rate on HELOC?

Josh:
The HELOCs on a three month float. So for the first three months here it’s on seven and a quarter, and then it’ll go up obviously with rates so.

Mindy:
$20,000 for a family loan, 12,500 in student loans, and then 20% interest credit cards, one at Home Depot with $4,500 on it and one at Lowes with $9,800 on it. And I think that you are sitting in a pretty good situation. Let’s look at your money story. Let’s get a quick little overview of how you got to where you are.

Josh:
Yeah, absolutely. And I’m not sure if it came through or not that student loans is down to only about $2,000. I think you might have said 12,000 there, but just about 2000.

Mindy:
2000, that’s even better. Okay.

Josh:
Yep. About 1900 left in student loans. So thankfully got an employment recruitment and retention bonus that went towards that student loan, student loan debt. So I took advantage of that and so that’s been great. But my money story is pretty complex. My parents got divorced between second and fourth grade. There was a lot that was kind of fallen out during that time along with my dad’s construction business that also fell out. And then there was a recession there as well. So the foundation is a reasonable level of insecurity, but my parents did the best job that they could to teach us money lessons along the way, figure out how to adapt and overcome with your situation. We got taught the envelope method. My mom for a while had the need, seed and greed method. So anything that we absolutely needed, four walls, food, shelter, all that kind of stuff would go in one bucket.
The seeds would be investments for the future and we would kind of share those 50/50, but then if there was any soda or candy or anything that we wanted, anything that we just wanted, we didn’t actually need or wasn’t an investment for the future, that would fall in the greed bucket and we would have to come up with our own funds to spend in the greed bucket. And so that was a good framework. And then I didn’t start college right away after high school. I played a couple years of junior hockey. I fell into a business relationship with a mentor who taught me business. He exposed me to real estate. He really was an influential force in growing my money story.
We would have road trips all the time, crisscrossing the country for our hockey business and just listening to TED Talks and BiggerPockets podcasts and just going through and thinking and dreaming about how to build a real estate empire. So really my interest in real estate got started with that. And then I went to college for finance because I figured that it was applicable throughout life, not just for a job. I wanted to learn how to account, how to manage my own money and know more the ins and outs of the financial world. So that brings me to today I’m a financial analyst for work and I got myself into, like you said, a pretty big bird there so that’s my money story.

Scott:
Well walk us through. So you’re, to understand your position, we got $20,000 in cash. We got about $30,000 in investments and then about $510,000 in property. And that’s your position there. And we just levered against the property we have a couple of personal loans here. Walk me through your cash accumulation rate. Do you feel like cash is regularly stockpiling in your life? You gave us the 5,000 a month in income plus a bonus here and there, plus the side businesses. Is cash tending to pile up and you generally have a surplus that you’re looking to deploy or is that not happening for some reason?

Josh:
I ran the numbers to come up with a three month average, and those are the financial budget numbers that I gave to you guys was kind of a three month average. But before that, quite honestly it was just kind of a hey, I’ll look at my credit card statement at the end of each month, and if it was under $800, I knew that it would put more money in my bank account than what I was spending. So it was a little more running gun up until more recently when I’ve really in the last year have had to learn a lot about tracking my own expenses and my own cash flows through the construction process. And with that, because I took out a construction HELOC, there was some flexibility even there too. So up until recently, yes, I would just kind of come into having enough cash to then reinvest or to put into my IRA or to pay down debt.
But now that I have really substantial housing expenses in the mortgage and the HELOC, I am projecting, I am foreseeing that it’s, I’m basically breaking even for the most part when it comes to after tax and stuff like that. So I’ve been running break even through the construction period and I’m looking forward to when, like Mindy said, in January, hopefully here getting some rents in to then be a surplus. But for really the last year I’ve been running about break even. I wouldn’t say that I’m clearing a surplus each month. A lot of the retirement accounts are from deductions, right. So paycheck, W-2 deductions, so that all hits before I even touch that money so.

Scott:
Great. And I assume fundamentally that’s the first thing we want to solve today is get into a positive situation.

Josh:
Yeah, I want to get into a positive situation. There’s also a question about with my HELOC I have a little bit of room, it’s up to 150. I obviously have those couple credit cards still outstanding. So those are on 0% promotional rates for now. One will clear in January where that’ll start occurring interest, the other will take until next July. But a question I had is, should I draw 6,000 from my HELOC to invest my personal IRA at the start of the year and then kind of cash flow it throughout the year, or should I continue to break even? My break even also is essentially including a break even of $500 a month to that IRA so should I just put that lump sum into the IRA to start the year or should I kind of just still dollar cost average it throughout the year.

Scott:
Well, let me ask you this, your mortgage payment, what is your PITI?

Josh:
The principal interest tax and insurance is 1442.

Scott:
1442. Okay. And what do you expect to rent this place out? Walk me through the math of the house hack once you have tenants in place.

Josh:
Yeah, so I converted it from a two bed, one and a half bath to a three bed, three bath and so both of the bedrooms upstairs have their own ensuite bathrooms in them.

Scott:
How long did that take you and how much did you put into it?

Josh:
I’ve put in almost, I mean, it’s essentially 150,000 from all in on debt and it has taken me, I started rehab really intensely in middle of October, 2021. So it’s been 12, 13 months that we’ve been cooking on this thing.

Scott:
This is a big project. I bet you learned a lot.

Josh:
It’s a big project. I didn’t know what I was getting into. I didn’t know what I was getting into to be completely frank, and I know you’ll ask about my money mistake, but that it was a big project. There’s a lot of learning curve that comes with that. There were some losses for sure, just by not knowing what I was getting into. An example where I didn’t do my due diligence on research to figure out what it actually cost to get an interior of a house painted and so I got ripped off. I got charged too much for an inadequate job, but that’s being naive and being new and figuring it out. Hopefully as you learn, those losses get fewer and fewer and less and less. But yeah, it’s been a big, big process. It’s got new electrical, new HVAC, new plumbing. I took down a wall, I put up a wall, I moved a wall to add another bathroom in one of the bedrooms.
And above all that, then there were structural issues. We opened up one of the ceilings to put in new lights and we found that the joist had cracked. And so the joist had split for the upper floor and so we had to reinforce those and there was a turnbuckle running through the middle of the house. We didn’t know where it was coming from or where it was going. So there were a lot of weird things about it. It’s an 1876 house, but on the back end, those two rooms upstairs, those two rooms upstairs, I’m anticipating very conservatively 750 each and that’s super conservative. Upwards of 1200 for one of them and a thousand for the other. The one has a little bit better and bigger of a bathroom. So on the high end, 2200 a month, on the low end, 1500 a month.

Scott:
Okay, awesome. So let’s plug it in the middle and say 18 for our purposes of discussion today. Does that work for you for?

Josh:
Yep, works.

Scott:
Okay. So you’re going to get 18 and your PITI is 1430. Is that what I heard?

Josh:
Yep.

Scott:
So that’s great. That’s going to make a major difference in your cash flow in a month or two. What is left that needs to be done to get this project completed? How much is it going to cost and how long is it going to take? You say January, but can you walk us through that?

Josh:
Yeah, good question. What I have left is trim work and molding and included in that is a little bit of finished carpentry to install four custom doors to close off another room. So all in, I already have the material purchase for that. It’s just someone’s labor for a week for 40 hours and then it’s essentially done. We’re finished.

Scott:
And do you have a plan to contract that labor? Is that all lined up or what’s going on with it?

Josh:
Yep, that’s all lined up. They’re coming here in two and a half weeks.

Scott:
Awesome. Start to put the property up for rent today.

Josh:
Okay.

Scott:
So start marketing it for tenants. Give them, get the move in date with that. If you feel like you’re actually certain that in three and a half weeks this will be done, put the listing up. Worst case, you just list it, you get it in January, but that’s $1,800 that’s going to evaporate every month that you don’t have a tenant in there. So it’s like an expense going out. So that would be my first advice there. What would the property rent for if you moved out?

Josh:
If I moved out, it would be in probably 2,750 to 3000 range. I’m in a small town just outside the Twin Cities with good access to the city’s industrial centers and business centers. But it’s really a destination town within the Twin Cities. So it has really strong supports for home values. A big lesson I learned is that if you’re going to do a [inaudible 00:17:33], make sure that you do it in an area that can support the housing values, if you go on overruns. My original project, I was only hoping to turn a $250,000 house into a 325. That was the original project. But then walls started getting opened up and the vision started to come more through of what the house could be and obviously that totally changed where plumbing needed to go. And we found that they had cut joists in weird spots to add plumbing upstairs.
And so if we were going to have to move plumbing anyway, we might as well make it really functional. And so I didn’t ever end up, I didn’t intend for it to be this big. I only wanted a base hit and to have a modest rental a year ago, but it’s turned into this bigger project. But I definitely hear you on getting rents in as quick as possible. I’ve actually ordered the next medium term rental book. I think I got the notice that it was getting shipped yesterday. So my plan is to put it up on Furnished Finder. There’s a hospital that’s a mile away and so I was, that was the plan for sourcing tenants come January.

Mindy:
Okay, so you said Furnished Finder, you’re going to furnish these units?

Josh:
Yep. Two bedrooms, I already have the furnish for.

Mindy:
Okay.

Josh:
I already have beds and dressers for, and then the rest of the space been living in it, so. Well I actually only moved, funny story, I borrowed my mom’s camper throughout the summer so that I could live in the camper while they were doing all the sheet rock and painting and stuff inside. So I only moved back inside around Labor Day just in time for the cold weather to set in. But that was a fun experience. Anyway, I’m sorry I interrupted you.

Mindy:
That’s okay. I want to say this delicately, if you don’t have design skills it might be a very good use of your money to hire somebody with design skills because people will look at the pictures of your property and say, oh, it’s just an old IKEA bed with some random old comforter on there and there’s no pictures on the wall or it’s painted some random color. I don’t have design skills so I ask people who do have design skills to help me out with my medium term rental. So I’m not accusing you of not having design skills, I’m just saying if you don’t, you could greatly improve the amount of rent you’re getting per month and the amount of people who want to stay at your house at all just by having a super cute instagramy site.

Josh:
Yeah, absolutely. That’s a great tip.

Scott:
Yeah, I think that’s really good. You’re already in this project for 150, what’s another two grand and advice, whatever to actually have a good chance at bumping those rents? And I wouldn’t just do those rooms. I’d do some of the common areas if you’re going to do rent by the room as well.

Mindy:
Okay. I think that we have covered the rental pretty well. Let’s talk about your HELOC strategy.

Josh:
Yeah, yeah, absolutely. So I’m going, I wasn’t sure if it was a common term to be called velocity banking. I know it as velocity banking. That’s something that I came into my real estate agent slash friend, really friend first real estate agent second who represented me on the project, he just rolled his mortgage into a HELOC as well. And his wife are funneling their entire salaries into the HELOC and then only pulling out little bits of their expenses each month. So every month their property debt goes down a large degree and then it only comes back up with their expenses. I’m not doing it with two salaries, I’m only doing it with my one W-2. But the idea is that my entire W-2 will go into the HELOC and then every month when it comes time to pay water and utilities and pay off the credit card that I use for food that then I only pull out the expenses for that and the rest of the W-2 stays in the HELOC.
So that the idea is that the balance goes down consistently and frequently and it’ll be little by little, but once I add the rents to it, then it’s going down by 1500, 1800, $2,000 a month. And so when I did the math, it works out. Really the question was do I get another HELOC? Do I, or excuse me, refinance my construction HELOC or do I refinance the entire thing into a seven and a half percent mortgage? This was a decision that I was trying to make a month ago because I only had my original construction HELOC was for only 100,000, 105,000, but it was $150,000 project so I had to float a lot of the expenses on credit cards. So I was trying to refinance all of that. And so the decision was trying to figure out, refinance the HELOC into another HELOC or just do the whole thing as a cashout ReFi kind of a thing.

Scott:
Did you use the HELOC to finance construction or have you used the HELOC at any point so far to pay down the mortgage early?

Josh:
Haven’t done that. Haven’t done that because I’ve had construction costs to repay.

Scott:
Okay, so you have not used the HELOC to pay down your fixed rate 30 year mortgage of three-

Josh:
No, no, no, no.

Scott:
Okay.

Josh:
The fixed rate 30 would be paying down 3.3% versus the 7% HELOC. I figure every dollar that I put towards the HELOC earns seven and a quarter.

Mindy:
Okay. So if I was in your specific situation I would not cash out ReFi because you have the 3.3 whatever on your 30 year fixed mortgage. I would leave that alone. That’s $227,000 at 3%. You’re not going to get a 3% mortgage again. So don’t touch that. If I were you, I would not touch that. The HELOC is what, seven and a quarter right now that is going to go up and I would make it a point to pay that down as much as possible. I don’t know about putting my W-2 and rental income into the HELOC and then pulling expenses out. That seems like an awful lot of extra work. I would just spend my money, my W-2 and my rental income on my expenses and everything left over the HELOC as fast as possible. I think that it is creating a lot of extra mental head space.
To be fair, I’m not a fan of velocity banking and I’m not sure that you’re using velocity banking in the way that it is taught, in quotes, taught online where it is specifically for taking out a HELOC, throwing giant chunks at your mortgage and then putting your W-2 back into the HELOC and pulling little bits out for spending. So you’re doing part of it, but you’re not using it to pay off your mortgage. And again, I wouldn’t recommend paying off your mortgage right now simply because you have such a low rate that will probably never come around again.

Scott:
Yeah, when I first saw this I thought you were using velocity banking and I thought we were going to have a long discussion on it. You’re not using velocity banking. Velocity banking is when you use your HELOC to prepay your mortgage earlier. And if you time it correctly, you may be able to save a few thousand dollars in mortgage interest over a long period of time because of the timing of the cash flows and the way that you’re using, the way you can strategically use the HELOC. In my opinion, that is also, that is a very unintelligent move because while you can save a few thousand dollars in interest payments using that, you destroy optionality of your great 30 year fixed rate Fannie Mae insured mortgage with that.
You would never use your HELOC at seven and a quarter to pay off your home mortgage. Perfect. You’re not using velocity banking and you’re using the term incorrectly. Go ahead and keep using that if you want to. Then you and I will have slightly differing opinions on that, but that was my big, you got to stop doing that right away if you’re using the HELOC to pay off your mortgage with velocity banking. It may have been a interesting complex kind of bad trick previously. Now it’s a really bad trick because they swap your mortgage rate for a HELOC.

Josh:
Yep, yep, I hear that. I hear that.

Mindy:
Yep. So should you get a cash out ReFi? No. What I would like to address is the Home Depot 0% card that ends in January and the Lowes 0% card that ends in July. I’ve done these promotions, I’m assuming it was the promotional period where you spend X number of dollars and then there’s no interest as long as you’re making your minimum payments for 6, 12, 24 months. And I’ve done those. If you pay off the entire amount before the end of the promotional period, you will pay 0% interest for the whole thing. If you don’t pay off the entire amount before the promotional period ends, you will owe interest on the entire amount from the very first day you made the payment or made the purchase for the entire time that it takes you to pay off all of the amount. So the way that these promotions work best is if you can pay it off in time.
If you can’t pay it off in time, you’re it, there’s no promotion at all. It’s not like you get a discount or you don’t pay interest on the time for six months when you have it. I’m really flubbing over my words here, but what I want to say is make sure you pay off that Home Depot card before the due date in January simply because, and even if you have to take money out of the HELOC, which I don’t love, but that’s at 7% for however long it takes to you to pay off, what was that, $4,500 and then pay that off as fast as possible. But you’ll be paying much more for the last six months or 24 months or whatever for the entire amount if you don’t pay it off in January. And then the same with the Lowe’s card. I would do both of those and I would make that my top priority to pay off because I like paying 0% interest when I can or 7.25 on the two months that you have to pay because you’ve borrowed from your HELOC.

Scott:
In terms of the way you’re managing your overall cash, you got $20,000 in cash in various buckets and you’ve got a bunch of different debt including the HELOC, you’re almost done with the student loans. What were the interest rate on the student loans again?

Josh:
Four and a half or 5%.

Scott:
And why are you paying off those ahead of the HELOC?

Josh:
I’m really not. They’re just in deferral status right now so they’re not accruing any interest.

Scott:
But didn’t you say you just got a bonus and you paid off the student loans with them?

Josh:
Oh yeah, it was an earmarked bonus. Right. So it was for student loans, it was a student loan forgiveness bonus of sorts.

Scott:
Great. So that makes sense then. Okay, so these are all fundamentals that you’re comfortable with and familiar with. So you’re not having an issue with those types of decisions. Your cash flow management strategies confuse me at first, but makes perfect sense. This HELOC is ruling your life. You are using that to fund your personal expenses and every dollar of income is going into the HELOC and you are, and it is bouncing around but hopefully tending to go down or should start tending to go down once the trim and carpentry work is completed at your house. Is that right?

Josh:
Yeah. Yeah.

Scott:
That’s fine. I don’t think you have a better option than that HELOC in the near term and so I wouldn’t necessarily change what you’re doing there. Is there a reason why you have all the cash into all these different buckets versus just saying, I’m going to have a $5,000 balance or a $2,000 balance, put all the rest into the HELOC, save my seven and half percent on annual basis on that and then continue to use that as my revolver?

Josh:
Yeah, you know that’s a really good question. I’ve thought about that as well myself because all of that cash has an implied loss of seven and a quarter by not being used. And so I’ve thought about that a lot. Keeping those accounts as they are, if anything is just psychological to just know that I have those buckets, but I mean it would be really easy to just throw a big chunk at the HELOC as well so that’s a good point.

Mindy:
Rather than throwing it at the HELOC, I would take the, out of the $21,000 in cash, I would take some and throw it at the Home Depot card.

Josh:
Oh yeah, of course.

Mindy:
Before January. So we’ve got another month and then before January pay that one off. And then with the Lowe’s card, again, make the minimum payments until you said July, pay that one off in July. But then yes, any additional cash that you have, I would throw at the HELOC.

Josh:
And I’m essentially trying to use the HELOC as a checking account. It is, funds are kind of flowing in and out of that. At least that’s the concept, it’s a new setup. So I haven’t actually tested it over months and months and months. So check my thinking too if that’s a good setup or if that’s a little bit of a sketchy setup. I’m trying to flow as many dollars to that seven and a quarter percent as possible and so.

Scott:
I don’t think you have another option that’s economical here. So I need to double check on this. Make sure that you do actually have access to that liquidity because it would be a real struggle if you ran out of liquidity. But if you can, if you have kind of pretty high assurance that you’re going to be able to access that HELOC, then consider winding down that cash position to something smaller, putting it all towards the HELOC and then to Mindy’s point, bumping up the HELOC to pay off the credit cards as they start coming, bumping into that higher interest rate range with that. And then once that’s set up, your game becomes extremely simple and a little tough, but nothing you probably can’t handle. You’re going to be grinding out paying this thing, paying this HELOC down for the next two or three years. And I think you knew that coming into the call.
But that’s the reality of your situation. You got to get that place rented, you got to bust it on these side hustles and keep working real hard at your day job. And you have the potential it looks like on paper here to accumulate somewhere in the ballpark of 30, 40, 50 grand a year with that hustle after tax. 10 of that is going to go to interest on your HELOC over the next year. That’s brutal. And then I always think of the HELOC as a short term so five year debt. So if you have $60,000 in a HELOC, 60 months is five years, that’s a thousand dollars a month. So you have $2,000 a month on top of that you want to pay in order to stay on top of that.
That would be the rule of thumb. And I’d be, I’d say I, Josh am going to feel very uncomfortable about my position if I am not paying down that HELOC by $2,000 a month handily each month next year. Something’s got to change and I got to start using my free time to pay that down because your position is not bad. It’s just you’re into a pretty, you’re into like a grind mode for a year or two here with what you’ve done. And it’s not like you made it, the house hack bet sounds like it was a reasonable bet, it just went way over budget resulting in this big HELOC.

Josh:
Absolutely. I totally over leveraged because of the reconstruction on the house hack right, over leveraged relative to my own income. I need rents to really drive down the balance of the HELOC. That’s really what it comes down to. So yeah, I agree.

Scott:
Now on the flip side of this, do you believe me that, that’s realistic? You could pay 30, 40, 50 this a year starting next year?

Josh:
Oh yes. Yeah, absolutely. I did a whole breakdown of what the cost would be to refinance into another traditional 30 year versus doing the HELOC path and yeah, I totally see that.

Scott:
Yeah, I, interesting. I don’t like the refinance option for you. I would’ve liked it-

Josh:
I don’t, I didn’t either.

Scott:
If we’re talking this time last year I would’ve said definitely do that because then you would’ve refinanced the whole loan into that. But now, you’re not going to get that on the second position mortgage, so you’re going to lose your three and a quarter on your first position mortgage. So that leaves you with the grind solution, which is no fun. But I think it’s something you can handle in this situation and you’re going to come out smiling on the other side of this in two years with mostly pay down HELOC, wonderful mortgage rate, not paying very, very low living expenses and likely a big skill set with which to take on a future project from where you don’t move six walls.

Josh:
Yeah, that’s a good point you make. I mean at what point that this is getting into real estate is something that I want to pursue more and pull more rental properties into the portfolio. What would some indicators be that you would recommend I wait for or look for to go after the next property? At what point would it be too aggressive or at what point would it be just right based on my situation now looking forward?

Scott:
Here’s how I think about it. This property needs to be putting in cash in your pocket on a standalone basis as a true rental if you’re not living in there and here’s how you analyze that. You have to analyze it harshly here. Your mortgage is 1400. Your HELOC is producing $10,000, that’s called $800 a month in interest. And if you believe what I said, you got to pay a little over $2,000 a month in principal reduction on the HELOC because it’s short term financing. That’s a subjective call. I believe that’s how you should treat the HELOC. So if you put those numbers together, that’s 1400 plus 800 is 22, plus 2000 is $4,200 a month, that’s before utilities and all the other kind of stuff. So those numbers look dramatically better if you’re getting 3000, $3,500 a month in rents and you’re not living in there and you just have that mortgage, right. Now, you’ve got a great rental property with this.
The issue with this property is the rehab budget and the HELOC expense that came with it, not the fundamental of the investment. And so what you have to do, what I think you do is okay, if you’re sitting in that position now you’ve got $3,000 a month coming in, you’ve got a $1,400 HELOC and you are easily cash flowing, this property is a standalone investment at the end state unless rents collapse in your area, which is probably unlikely. So that’s a strong position from which to attack the next investment. Is that logic make sense to you? Do you agree with that?

Josh:
Yep, I hear that. And because I’m ambitious and I like to look at the market and I like to think about the next steps, the next plays, the only way I could start this deal was with leverage and to get myself in with leverage. And the only way to do the next deal I see is by doing seller financing and just trying to get someone to, I would need to do a bigger deal than just a single family, but to get additional cash flow to then throw at the HELOC. But even then I would be taking on additional landlord and other responsibilities and so I hear you, I hear you that the plan is aggressive pay down, finding cash as much as possible to drive that HELOC down and then it’s a strong rental after that.

Scott:
And I think if you’re going to take risks, take them on the income side in the next couple, you’ve got the side hustle that sounds pretty strong here. You’ve got job opportunities you can pursue, you’ve got those types of things. Get your agent license, think about things like that, that you can churn and burn hours for income on in the next two years at a higher and higher rate because in my opinion, buying another rental property in this situation, it can work if things go up, but it can also begin compounding against you and your position is not, your position is not one where, oh the next property either accelerates my position or it really will put you in a tough spot if the next property does not go well right now. Versus if you didn’t have a HELOC then I’d be telling you buy another property right now because you’ve lived in the property for a year, it’s time to go to the next house hack, go do the deal.

Josh:
Yeah. But the rehab took a year and now because of the leverage on that, it’s going to take 2, 3, 4 to get out of the debt of it. I hear you.

Mindy:
I agree with most of what you’re saying. I was looking at his situation and wondering what sort of side hustle additional money you could generate. How much does your current side hustle take to generate that $20,000 a year with the hockey and the CrossFit coaching?

Josh:
Yeah, good question. The CrossFit coaching is nice because I go anyway to work out myself, so what’s another hour of being there to coach when I was going to be there anyway. And then hockey coaching is mornings once or twice a week and weekends every, weekends every week I go through their video and I give them practice plans and I talk with them on FaceTime. They’re not in the city. The other team that I coach is in South Dakota, so I coach them remotely and I travel out there once every month or six weeks or so. So it’s pretty easy to scale because I can, as far as private lessons go and coaching goes on the hockey side I can kind of scale that up during the season if I need to and do more lessons in the morning and stuff like that. So that’s relatively easy to scale during the year.

Mindy:
I would say look into that and scale that if it’s relatively easy. I mean if you’re remotely coaching a team in South Dakota, remotely coach a team in North Dakota, remotely coach, there’s 48 other states you can remotely, 49 other states you could remotely coach a team in and I mean that might start to take up too much time, but if you could generate income while watching videos of hockey stuff, clearly I’m not a hockey coach remote, but there’s easy ways to generate more income and there’s really difficult ways to generate more income and I don’t think that signing up to be a Lyft driver is going to be the best use of your time.
But we talked, I can’t remember who we talked to, he was a remote, I want to say remote tennis coach making quite a bit of money just watching people’s or maybe swimming. I don’t remember what he was doing, but he was watching people’s technique and coaching them on that completely remotely. And you can do that as well. Clearly you already are. So add another team or two or three or add another couple of CrossFit days or you’re doing it in the morning, do it after work too or teach a CrossFit class. Is that what you’re doing or are you doing individual coaching?

Josh:
Yeah, it’s with the group sessions. I don’t do any individual coaching for CrossFit, just for hockey.

Mindy:
Ooh, maybe you could. Start your own CrossFit videos where you’ve got a YouTube channel and you’re teaching CrossFit videos and then you are growing that. Do one for, January’s coming up and that is a huge New Year’s resolution is to get in shape. So you start your video business now, you start pumping out videos. Are there workout videos for people who are just starting to get off the couch? I mean focus on people like that. Everybody’s heard about CrossFit, here’s how you do it from a beginner standpoint. I don’t know, I’m not a CrossFitter clearly.

Scott:
I think that all this is correct that now, this is all true. The answer here is earn more income, keep the expenses low, get the rooms filled and grind this debt down over the next two years. Give yourself a two year target, 18 months if you can. And then it’s a hundred dollars a week at a time. A hundred dollars a week is 10 grand over the, five grand, sorry, excuse me, over the course of a year. So if you can get the 500 extra, that’s 25 grand. Surely you can do that with some combination of just the two side hustles we talked about and over time, if you keep this front and center, maybe additional opportunities emerge to that extent so this is not fun. I can give you a path out of this whole situation if you want to hear that as well. So you don’t have to do that for the next year and a half, would you like to hear that one?

Josh:
A path. Yeah, sure. Hit me.

Scott:
Sell the property.

Mindy:
I knew he was going to say that.

Josh:
I’ve… Yeah. Okay, tell me more. I’ve thought of it. I’ve thought of that too, but not in a lot of depth.

Scott:
What’s the property worth?

Josh:
490.

Scott:
And your total debt is as far as I can see, 362.

Josh:
380. Because of the personal family loan too. So yeah, 380, 382.

Scott:
It’ll cost you 7% to sell the property. So what are we looking at? That’s 7%, 35 grand. Sell the property that leaves you with 180 to cover all of the, 80 grand leftover after you pay all the expenses associated with this thing, right?

Josh:
Yeah.

Scott:
Then you have 80 grand, you can pay off the mortgage, the HELOC, your two credit cards that you have there and your student loans. Start fresh with a pile of 50 grand, not have to grind for two years to pay off this HELOC and you can start with anew with a new house hack potentially, you’d have to get creative, you’ll be trading the low mortgage rate for something else, but that would be a path out of this situation. I don’t know what would put you in a better situation in two years, but you’d definitely be more flexible in January if you decided to sell the property today. So there is a path out immediately if you’re actually sure on that property value. Property values are declining in many markets right now, and so I think that would be a conviction test for you on that property value. What’s your reaction to that?

Josh:
Yeah, that’s an interesting thought. I had considered that as well in the summertime when I was realizing just how high the construction costs were going and trying to figure out what that break even had to be and get nervous about if the appraisal was going to hit it, the appraisal hit it, yes. But I listened to the BiggerPockets, I think it was the daily, whichever one’s the little short clips, I think it’s the daily one. They were talking about how rents are not, they’ve peaked, they’re not crashing, but they’re just mellowing out except in four cities and two of those cities are Minneapolis and St. Paul.
And so how much do I want to push that letter? I don’t know. Part of this whole thing was just about exploring and figuring out what I could learn and see if rehabbing and flipping a house was something that was for me and figuring out if being a landlord was something for me. We’ve learned a lot on the rehab and flipping side, but I still don’t know about the house hacking side and being a landlord and renting. So I hear that as an option. I absolutely hear that. I also, I don’t know if I need to be flexible in January, so it’s a good point that you make that I could be more flexible. I don’t know if I need to be.

Scott:
I think that’s right, but I think your choices here are sell it or grind. And I don’t think either’s a bad decision. We talked to another individual similar in many ways to you a few weeks ago, and that individual had like $900,000 in debt across two properties and a ton of consumer debt. And in that case it was clear, we got to sell everything and start over because this is, you’re going to drown in the situation. You aren’t going to drown. You have the ability to side hustle and figure this thing out. You have the ability to get tenants in this place. You can grind your way out of this, no problem, if you choose to, it’s going to be a year or a year and a half, maybe two of hard work and you’re going to be coming out the other side probably in a reasonable position.
Although prices may come down, I would bet rents are not going to fall a lot, but they might fall a little in the next year, yada, yada. Or you could say, I’m going to take this cash, clean up my position and go start another project right now. Both are fine. Just make that a decision, make that a conscious choice and be ready to be happy with it either way you go. I don’t know what the right answer is. You can do both because your fundamentals are going to be strong in about two months here when you get those tenants.

Josh:
Yep, I hear that. Thanks for that, thanks for that idea. And it’s definitely, I hear you about making it a conscious decision instead of just being, hey, this is the plan, this is what I wanted to do, so I’m going to stick with it. But I hear that. I’ll give that some more thought.

Scott:
And you’re not going to come out of it as a loser if you do decide to sell because you’ve got a year of experience and you should, I hope, take on a few more projects like this in the future using the lessons you’ve learned. You’ve been given a very thorough education in this kind of project, so don’t ponder that. Do it a couple more times in future years here.

Josh:
Oh yeah, I’ve learned a lot. It’s been a great journey and a great path through it. I’m definitely glad to be on the better end of exposed walls and new plumbing and to have things put back and looking better so.

Scott:
Well, anything else we can help you with here today, Josh?

Josh:
I don’t think so. We kind of hit all the big topics, big concepts for me. I appreciate both of your time.

Mindy:
I want to make one more comment. So if you are considering selling and you’ve already owned it since October of 2021, now we’re at a year and a month and then that’s two, three months. If you sell it a year and three months if you sell it in January. If you wait another nine months, you could earn some landlording expertise experience in nine months and then sell it and pay no taxes on the capital gains because it is your primary residence, up to $250,000. I believe you’re single.

Josh:
Yes.

Mindy:
Okay. And up to 500,000 if you were to be married. So that is a lot of money to not pay taxes on. It’s also, depending on who you listen to, either the market is going to go nuts next year or it’s going to decline further next year. So maybe it will be better and maybe it will be worse in October of next year. And that two year is to the day. So if you close on October 23rd, don’t close again before October 23rd. And we have a leap year, so give yourself an extra day just in case.

Josh:
I appreciate both of your times and perspectives and this is, it’s fun to hear other ideas and it’s what you guys bring all the time. So I really appreciate you guys and all you do.

Scott:
Awesome. Well thank you Josh. We appreciate it. You have a wonderful rest of your week and we look forward to hearing what you did decide. Please let us know.

Josh:
Yeah. You got it. Thanks.

Mindy:
All right. That was Josh and that was an interesting story. Scott, I have to be honest, when he first applied for the show, I thought we were going to be covering a lot about velocity banking, which is not my favorite way to manage money, but it turns out that he’s just using a HELOC to fund rehab, which I don’t think is our super favorite way to fund rehab. But he did and now we’ve given him a couple of options. I mean, his property sounds great and I think that if he wants to rent it out, I think he’ll be able to generate some good income while he is waiting to either hit the two year mark to pay no capital gains on his, no taxes on his capital gains or sell it now and pay a little bit of capital gains. He’s got a lot of options. He could keep it and generate, start the grind that you were describing.

Scott:
Yeah, Josh is a winning individual here. I really liked talking to Josh and really liked his approach. Now that I can understand it from the end of the episode here, the guy bought a house hack around this time last year, crushed it. Well it went way over his budget, but at the end of the day he added hundreds of thousands of dollars in value to the property, got it appraised at that amount and is on his way to doing a house hack. This is a risk that I think I would’ve taken almost identically to him in the same set of circumstances. It just, it went over budget and the project evolved in a way that got beyond his grasp. Probably would like to stay away from 1870s homes on your first house hack and remodeling project. That’s probably a wise move that folks can learn from, maybe stick to 1950 at the earliest, if not much more recently built.
But those learning things and he now has a really good experience set. The fundamental issue, and I don’t mind him using the HELOC to fund construction costs, the alternative to a HELOC is hard money, and I’ll do that all day. I don’t think there is a better source of construction funds other than cash maybe, although you can argue that’s not good than a HELOC. So I think he did it all right. He’s just now stuck with the reality of this property is going to, if you believe my assessment that a HELOC should be paid back in five years, then that property is going to suck cash out of his life until that HELOC is paid off. And I don’t think you should be buying more property when your current portfolio is sucking cash out of your life. I think you should fix that problem and then buy more property such that each property adds cash into your life.
And if every investor thought that way, I don’t think that they’d be having that much fear of short term market cycles or anything like that because you’re just like, no, every incremental property adds to my net cash flow. I finance it in such a way that, that’s always true. Never using HELOCs without understanding the payback considerations and the short term nature of that debt. And you’re going to be fine to be able to snowball it. And so he’s going to be just fine. I bet you he decides to go and just grind it out for a year or two because he can, because he can hustle and earn that extra income and pay it off.

Mindy:
Yeah, that would be my choice. If I was in his same position, I would first focus on paying off those big box home improvement store credit cards that are at the 0% and making sure that I get the 0% rate, so paying those off before they’re due. And then I agree with what you’re saying, Scott, don’t go buy another property until this one isn’t sucking cash out of your pockets. I would increase my side hustle income, my hockey coaching, and my CrossFit coaching to as many days as I possibly can so that I can generate as much income to throw at that HELOC.
I think that as long, that was a good point that you made to make sure that he does still have access to the money. As long as he has access to the money that could be his emergency fund. He could use that as an emergency fund while he is throwing every single dime he has at that HELOC to bring it down as fast as possible. I would put all the rent that he collects in there. I would put everything in there. And I want to just underline what you said one more time, an 1870s home is not a good first investment.

Scott:
And I agree with everything you said Mindy. While I’m doing that, I’d be extremely uncomfortable about the fact that I’m relying on the HELOC as my emergency fund. So I would not be comfortable or sit or restful or feel like I have a good financial position until that HELOC was largely paid off and I’m not relying on a HELOC as my emergency reserve because that can evaporate with a market downturn. So I’d keep two or $3,000 in cash, but seven and a quarter is high interest rate debt, I’d pay it down. I think that’s right. And I don’t think, I think there’s trade offs involved in not stockpiling cash and not paying it down early.
And as long as his cash flow is strong enough that’s probably going to work for him. So yeah, not a great option. But look, that’s all in the context again of the $80,000 in equity value he created out of 12,000 actionable, that’s after transaction costs, not before taxes. It’s a great point you brought up there. It’s actually a significant tax hit if he sells now. So I wouldn’t be surprised if he does wait until next year.

Mindy:
I would, yeah, I would at least wait the two years if I was going to sell it. But I mean, it could be a really great property if it’s close to the hospital and he can do month to month rentals for travel nurses or other people that are, I’m totally blanking on who uses month to month rentals. If only I had a book like 30-Day Stay Scott. The new book from BiggerPockets Publishing. You can get it wherever books are sold or at biggerpockets.com/store.

Scott:
Awesome. Well that [inaudible 00:55:59] should we get out of here?

Mindy:
Yes. Okay, that wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, see you in an hour sunflower.

 

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Toronto is well-known for high housing prices, but there are still areas with more affordable homes available if you know where to look. Finding a decent property in Toronto under $600,000 can be a bit of a pain, but there are a few options depending on what you need.

The average home cost in the Toronto area was $1,155,345 as of October. To make informed decisions, prospective first-time buyers should do ample investigation and pricing analysis for the houses and neighbourhoods that fit their financial situation and lifestyle requirements.

Keep reading to see details on houses in Toronto under $600,000, as well as a breakdown of different information on the Toronto real estate market.

How Do I Search for Cheap Homes for Sale in Toronto, Ontario?

Using online listings can help you find options for the cheapest houses in Toronto. You can use search filters to narrow the search and compare prices easily. This is essential if your main concern is price.

Getting in touch with decent real estate professionals can also give you another avenue of discovery for cheaper homes in Toronto and the surrounding regions. Remember to do lots of research and shop around to make sure you’re connecting with the best professionals in your area.

Another way to find good deals on houses in Toronto is by checking out the condo market and open houses. Although the Toronto condo market is a bit more expensive than Vancouver, they are still typically more affordable than other types of real estate.

How Many Cheap Properties Are Available in Toronto, On?

Despite high prices compared to the rest of Canada, the real estate market in Toronto is still fairly active. Online listings show over 1,000 homes available for less than $600,000. If you’re willing to stretch to $750,000, this number increases to over 2,000 homes.

When searching for cheap properties, it’s important to be patient and use all of the tools at your disposal. Don’t just check one listing website; check several. Don’t just consult one area of professional services; shop around and try to find one that works for you.

There is also the cooperative selling system, which is a type of non-profit housing that first appeared in the 1800s as a result of the co-operative movement, but it wasn’t until the middle of the 1960s that it truly took off in Canada as a way to provide families with cheap accommodation.

Homes for Sale in Toronto Under $600,000

There are a number of listings up in Toronto for properties under $600,000:

s101 – 455 Front St E

306 – 135 Leeward Glwy

• 3 bedroom
• 2 bath
• 1,000 sqft
• Listing

955 Bay St

407 Coxwell Ave

• 3 bedroom
• 2 bath
• 1,000 sqft
• Listing

2067 – 100 Mornelle Crt

• 2 bedroom
• 2 bath
• 1,000 sqft
• Listing

Cheapest Homes for Sale in Durham Region

Durham East of Toronto is known for its affordable real estate options compared to other Toronto areas around Lake Ontario. It has several small cities, including Oshawa, Ajax Clarington, and Whitby along with small towns such as Scugog and Uxbridge. In October, average home prices in Durham were $987,354.

Cheapest Homes for Sale in York Region

The York region is situated north of Toronto and includes several major towns such as Newmarket, Markham, Richmond Hill, and Vaughan, along with rural regions such as Georgina and King. In October, home-buying costs averaged $1,376,939 for this town.

Cheapest Homes for Sale in Peel Region

Peel Region was situated east of Toronto and comprises cities like Brampton, Mississauga, and Caledon, the larger region of rural Ontario. In September, the average price for homes for sale in Peel Region was $1,065,595.

Where Is the Cheapest Place to Buy a House Near Toronto?

With an average price of $774,500, Brock, a tiny town in the northern part of Durham Region, northeast of Toronto, is the most cost-effective location to purchase a detached home.

Second and third place with average values of $964,097 and $967,753 respectively are Oshawa and Orangeville. The GO Train is accessible from Oshawa, and the Bruce Trail and lovely parks are close by in Orangeville.

The average price for single-family homes for sale in Essa or Scugog, both in Durham Region, is less than $1 million.

How to Identify Real Estate Professionals in Toronto

When selecting a real estate agent in Toronto, there are a few rules of thumb you can use to help identify one that is right for you:

• Go with an agent who knows the area you’re looking in
• Check user reviews and referrals for home realty
• Inquire about all the services provided
• Ask questions and shop around
• Honest and forthcoming communication is key

Canadian Real Estate Association Comments on Toronto Disclosure Laws

When shopping for cheaper homes in expensive cities like Toronto, it’s important to make sure you’re not getting scammed into buying a home with major issues. Aside from major issues that are legally required to be disclosed, there is a phenomenon called “property stigma”

Basically, some properties have negative qualities that realtors are not legally required to disclose. Barry Lebow, a realtor in Toronto, explained in a CREA blog that “nowhere in Canada other than Quebec does a formal law require sellers to disclose property stigma to potential home buyers”.

Is It Cheaper to Build or Buy a Home?

It is important to know the costs involved in buying and building homes before you decide which option is better for you. The cost associated with buying or renting real estate includes closing expenses, insurance, property taxes, or homeowner’s association fees.

There is also the cost to repair or replace existing equipment in addition to renovating homes when they are not new. The cost of new construction carries varying costs. There may also be unexpected maintenance needs that do not come to light during an initial evaluation.

In the end, your decision should be based on your situation and what you’re willing to invest in. If you have the skills and funds to build a home, and there are attractive lots available with favourable conditions, then the building may be for you. Otherwise, buying is probably better.

David:
This is the BiggerPockets Podcast show 695.

Andrew:
But between 10 and 14, I was really getting into books and really obsessed with Warren Buffett. And when the market crashed, it was all over the news. And that’s when I was like 14, like what’s the stock market? I mean, I was already doing grain and I was doing other things. And so I went and just threw $4,000 into Ford at 99 cents. Bank of America at $3, just bought a bunch of random stuff. And that’s $4,000 between 14 years old and about 15, 16. So like a year and a half went to $80,000.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, and the baddest real estate podcast in the world. Here today with an amazing show that is sure to blow your mind with my co-host, Henry Washington. In today’s show, Henry and I interview future billionaire, Andrew Abernathey out of North Dakota of all places who is building a business and real estate empire based on sound principles and smart business choices. And we share all of it with you today. Henry, what are you thinking after just talking to Andrew?

Henry:
Oh, no, I think this was a phenomenal conversation. Man, it reinforced a lot about… Well, for me especially, I got into this business to improve the lives of my family and he was a beneficiary of some fantastic financial knowledge imparted on him by his parents at a very young age. And it was imparted on him in a way that it actually stuck and he started to implement it at a young age. And the lessons that he learned then have just created this stair step that he’s used to build this real estate empire that he has now. And it started with this foundation when he was probably younger than most people would think you would want to start educating some people on advanced financial topics. And so it just reinforced to me that I should probably spend more time talking to my kids about the intricacies of what I’m doing and not just showing them through my actions.

David:
Yeah, that’s a great point. I mean, we’re going to get into that more in the interview, but I like what you said about his stair step because Andrew just got started early with a great foundation and never stopped climbing. He just keeps going. Every time he hits a new level, he says, “Okay. What would be the next step?” It’s always very practical and even simple in some ways, and anybody can follow that path. Now, not everybody’s going to go into want to climb to the levels that Andrew’s at, but everyone can be climbing higher than where they are right now. Today’s quick tip is very simple. Consider bringing your kids into your world in ways that you might think they’re not ready for. Andrew tells a story about being 10 years old and being introduced into stocks and 14 years old buying his first property. And that sounds crazy to hear right now, but when you consider the mentorship that he had from the people that were in his life and his father, it actually doesn’t sound that crazy. And he makes a really good point too.
He always looks for people’s passion and he only hires people that are passionate about what their job is to do. If you’ve got kids that are passionate about business, that like looking at spreadsheets or they like looking at CRMs or they like being involved when you’re meeting new people and networking, bring them along with you. Kids don’t like it when you make them do something that they don’t enjoy, but if they enjoy it, they probably want to be a bigger part of your life. And for some of them that could be real estate.
And before we get to Andrew, if you’ve got a quick second, please go give us a five star review wherever you listen to podcast. We want to stay the biggest, the best and the baddest podcast in the world. We can’t do it without your help. You, us, we are in a relationship together and we need your support just like you need ours and bringing you this information. So if you could just go to wherever you listen to the podcast, Apple Podcast, Spotify, Stitcher, whatever it is, and leave us a five star review. We really appreciate it. All right. Let’s get to Andrew. Andrew Abernathy, welcome to the BiggerPockets Podcast. How are you today?

Andrew:
I’m good. I appreciate letting me on. I’m excited.

David:
Yeah. Well, thank you for joining us. We’re excited too, because you have an incredible story. I don’t want to beat around the bush. Okay. Take me back to the first time that you decided that you were going to make money through investing. Okay. Where were you, what were you thinking about, and how old were you?

Andrew:
Oh, good question. Yeah, I was the ripe old age of 10 years old, family farm in North Dakota. And my dad noticed I enjoyed numbers. I was a little bit of a nerd and he started having me doing the marketing on the family farm, selling grain futures, puts calls, all the goods.

David:
Okay. So you knew what puts and calls were at 10 years old? We need to unpack this.

Andrew:
I learned it at that point.

Henry:
Did you just say you were 10 years old and you talked to your dad and then started trading puts and calls? When the kids in my neighborhood are thinking about making money, there’s a stand outside and they’re selling some random lemonade juice from inside the house. But you started trading stocks, puts and calls? I need a little more information there.

Andrew:
Little more detail. Yes. So I love numbers. When I was before 10, like six, seven, I would take stuff from one sibling’s room and sell it to another, right? So just always obsessed with it. Dad’s like, “Hey, I’ll give you $5 an hour if you want to do the marketing.” And I thought I was doing it all on my own and making the calls to the brokers. Found out later on, my dad was calling the broker after like making sure they were good trades and stuff. But just the learning experience was phenomenal.

David:
Why don’t you unpack what a put and a call is for everyone listening who doesn’t know what the heck we’re talking about here?

Andrew:
Yeah. I mean, basically it’s buying on paper, right? So you either write it or you don’t. So if you’re buying a put, you expect the markets to go down. If you buy a call, you expect it to go up, you pay a premium to have the option. If the market does the opposite of what you thought, you’re out to your premium. That’s it. And if it does the opposite of what you thought past your premium cost, you make profits. So some guys actually write the paper, there’s a lot more risk on that end. We were just trying, so we had a few hundred thousand bushels of commodities on the farm at all time. And then we would buy some on paper and sell it on paper too. So we were dealing with both concrete grain and also paper grain.

David:
So you were basically speculating what the market’s going to do?

Andrew:
Pretty much. Yeah. And the nice thing is what we always did is the opposite, so it’s almost like an insurance policy, right? So I said, “I’m going to buy a put on this so if it goes down, that must mean that there’s a lot of crop in out there, which means that we have it.” And if it’s a drought, it means the crop’s going to go up, which means we’re not going to have it. So we’ll make money on the paper. So it’s basically an insurance policy on what we were growing in the fields because usually it’s the opposite of what we would produce.

Henry:
So you were hedging?

David:
And you were being taught how to hedge at a very young age by your dad, is that right? Was he your first mentor?

Andrew:
Correct. For sure, 100%.

David:
All right. Now this is cool because the family business is a farm, right? It’s funny that you mentioned Warren Buffett because you’re in North Dakota and he’s in Omaha, Nebraska. And this is probably not cool to admit, but in my head that’s like the same thing because I’m in California and we don’t know-

Andrew:
It’s Midwest,

David:
… how the Midwest works. That’s exactly right. Omaha and Fargo. I might have thought that’s just a different name for the same city. I’m Joking. I’m not that-

Andrew:
I’ve heard that before. That’s all good.

David:
There’s something about very, very powerful minds that come out of these places. So that’s what we’re trying to dive into today. So here’s what I’m curious about. I’m imagining that your dad has a strong emotional connection or relationship with the family business that’s a farm. So he’s constantly thinking like any good owner or investor would be, “How do I protect myself from the downside while maximizing the upside?” And that’s where you’re being taught these concepts like puts and calls and insurance policies and hedging and all this stuff at 10 years old.
Tell us what those of us who did not grow up on a farm don’t know about farms. Like the business side of this, because when we picture farming, it’s like, oh, you get up in the morning and you milk a cow and you got a John Deere tractor somewhere in the front yard that you sit on your grandpa’s lap and he’s got his coffee and you’re listening to George Strait as you’re plowing a field or something. I have a feeling that there’s a whole lot more entrepreneurialship and numbers that go into it. Can you share with us that are ignorant of how farming works a little more what that lifestyle is?

Andrew:
First off, I love George Strait. You got that part right. But yeah, so my dad always said back in when we started back in the early 1900, it was whoever could just work the hardest, right? That was farming. It was just 99% hard work. And then in the ’50s and the ’60s then it was like, “All right. You really got to be really good at business, but also 70% work still hard.” And nowadays, and I’m not saying farmers don’t work hard. They do, but what I’m trying to say is 90% of the money now is made in the office, right? It’s a globalized economy. It’s become more globalized as technology has come around.
So yeah, I mean, you’re in the field, you have to be a mechanic, you have to know how to market, you have to know how to pick which crops you’re going to put in. You have to know how to negotiate with vendors on input costs. I mean, you basically have to wear 17 hats. It’s one of the most unique things ever. And it’s really cyclical. I mean, it’s one of those businesses where you’re really reliant on weather and cyclicality. So you’re literally putting all your money out, going to hedge as best you can and hope the weather doesn’t mess it up. So when we were young, news was always on the weather and my dad was pretty good, but his mood was dependent.

David:
It’s so crazy. You’ve got all this money invested into this asset that you have no control over, the main thing which is weather, which is probably the most volatile thing in nature, right?

Andrew:
Yeah.

David:
You think about the market can shift with real estate investing or the economy can shift, nothing changes as unpredictably or wildly as the weather and that’s the baseline that you’ve built this entire thing on. What does that do to someone mentally to have to live with that level of uncertainty when they have this much money invested into an enterprise?

Andrew:
Well, though are some of the first… And that leads me some of the first books that I was reading in 10 to 13 was human nature because I think every dollar behind it has a person, everything’s human related. So that all leads to that point is I learned how to manage emotions and I learned the different mental states you have to be in, right? I mean, you can’t control the weather. If you’re stressed about something, focus on things that you can control and your stress lowers. And I had to learn that at a young age with weather and prices of crops and all of that. I mean, you can’t control it. It is what it is.

Henry:
So I imagine that’s where the hedging really came in for your father in teaching you, because if you’re reliant on something as unpredictable as weather, then you darn sure better be playing both sides in the event that the weather doesn’t do what you need it to do, that you’re not just out all of your money, that you hedged against it and then hopefully maybe you break even?

Andrew:
Yeah, you try to have as much upside as possible with protecting your downside. And also vertical integration was something I was introduced to early. My dad started selling fertilizer, drive fertilizer and hydris. Anything that he could do, he started selling seed. Anything to cut our costs down on our input costs, anything that we could do in-house.

David:
Because that’s how one of the ways that you protected your downside, right?

Andrew:
Correct.

David:
Now, I don’t want to gloss over this. This is actually wildly intelligent. This is what business is, for people that are in their business, they understand it is all about maximizing upside while protecting downside. In fact, it makes me think a lot about poker. One of the things you learn… And I’m not a super good poker player, I play once every four years, but I play enough to understand how the game works. It’s not about winning more hands, it’s about when you win, how big was the pot that you won. Okay. You could lose 20 hands in a row and win one big one and you’re now in the best position on the table. That’s what business is. And I think a lot of analysis paralysis comes because people are looking to eliminate risk. And if they see risk, they’re like, “Oh, I don’t want to do it.”
Whereas the successful athletes, entrepreneurs, business people, they know you don’t eliminate risk. Their confidence comes from their ability to reduce it while maximizing the upside, because if I can hit a home run on a couple deals, I’m not afraid of taking an L on a couple other ones. And it separates you from the power of the fear where you’re like, “Oh, God, if I lose everything and I can’t lose.” I see you smiling. It sounds like this is something you got introduced to at a young age. Can you tell me, am I on the right path here with how your brain works?

Andrew:
100%. And it’s Warren Buffett would say the best thing about investing is it’s a sport where you have more than three strikes. In baseball, if you strike out three times, you’re out. Well in investing, you can watch 1,000 deals fly by before you take a swing. So you always try to take calculated risks, stay in your circle of competence, the basic stuff. I’m more of a baby boomer than a millennial, I tell you that much. But no, you’re absolutely correct.

David:
Yeah, that’s just something I want everyone to notice because you had a huge advantage getting taught these lessons at 10 years old when your brain is forming. And I can only imagine how comfortable you got with this concept of risk and how to manage it versus you at your whole life, and no one really gets introduced to risk on purpose when they’re young. You go sit in class and you get good grades by just memorizing what you’re told and waiting for a bell to tell you where to go, right?
You just follow rules and to succeed. And then you get out of school and you get into this what we call the real world, and no one cares. And following rules doesn’t get you wealthy. It can actually keep you trapped. And so you have to learn how to do the stuff that you’re thinking and I think it’s amazing that you learn this. And I hope more parents are teaching their kids how to do this at a higher level than just the lemonade stand that we typically expose kids to. Now, you also learned a little bit about managing money, right? So my understanding is you were making $5 an hour when you were young. Tell me what this work agreement was that you had and what you did with that money.

Andrew:
Yeah. So 10 years old, I mean, I was not only marketing grain, but I was running grain cart combine in the field and I was getting $5 an hour. And during harvest and springs work, I’d be taken out at lunch, my brother and I from school. And so we were getting 12, 13, 14, 15 hour days in during the busy times of the year. And then I was cleaning equipment at the local John Deere dealership for seven, 25 an hour. I was flying out to Rehoboth Beach, Delaware, working at a Chinese restaurant in a bed and breakfast for cash onto the table. I mean, anything that I could do to get cash. And anyways, by 14 I saved up $6,000. I actually only had $4,000 left because I bought a go-kart for $2,000, a red go-kart. I mean, can’t really blame me, I was 14. But-

David:
Of course.

Andrew:
… the $4,000 I had left is actually when I entered the investment market. I wanted to have my money work for me and that’s when it all began.

David:
I’m falling in love with North Dakota right now. You guys have John Deere dealerships.

Henry:
John Deere-

Andrew:
It was the worst job. I mean, a great dealership, but cleaning combine sucks. I mean, oh, my God.

David:
I think of a dealership like a Porsche dealership or equipment.

Andrew:
Yeah, mostly equipment. They were possible the same as a Porsche. But yeah.

David:
So they have the showroom tractor, like the big-

Andrew:
Oh, yeah.

David:
… shiny cool one that has all of the cool attachments that you could buy with. That’s like what they’re upselling you, right?

Andrew:
My job with waxing that thing, making it pretty.

David:
If this was a transformer, it would turn into this. That’s really funny.

Andrew:
Only $500,000.

David:
Yes, you got to take a huge loan out to get the John Deere $4,000 that can… It’s got this rating of it can do this many square feet of hoeing in a certain period of time. This is hilarious to me being in California and not exposed to that. So you got exposed to hard work managing money, learning a lot of cool business principles at a very young age. At what point did you transition into actual real estate investing as opposed to go-kart investing?

Andrew:
I love it. So actually, so the market crashed when I was 14. It was about March 2009 is my 14th birthday. And fortunately that was only a few days after the bottom of the market. Again, lucky didn’t know, but between 10 and 14 I was really getting into books and really obsessed with Warren Buffett. And when the market crashed, it was all over the news and that’s when I was like 14, “What’s the stock market?” I mean, I was already doing grain and I was doing other things. And so I went and just threw $4,000 into Ford at 99 cents, Bank of America at $3, just bought a bunch of random stuff. And that $4,000 between 14 years old and about 15, 16. So a year and a half went to $80,000.

Henry:
Geez.

Andrew:
And that’s when I took it out and got into real estate.

David:
Henry, you had a strong reaction to that. Tell me what you’re thinking.

Henry:
Yeah. Yeah. So I think what’s going to happen is a lot of people are going to hear this story and first they’re going to make some assumptions, right? They’re going to make some assumptions that you were some rich well-off kid whose dad just gave you a bunch of money to play with. That’s not the case, right? Your parents taught you about financial education and then you went and worked your butt off to save money and then you were smart enough to… Yeah, have some fun, but then put those principles to work by investing. But then you also had the good fortune of entering the market at a good time. And some people will see that as luck. And sure there’s some element of luck to the timing, but had you not done all those things before, had you not positioned yourself to be able to jump into the market at the time you did, you wouldn’t have done it, right?
And so it’s not just all luck that you jumped into the stock market at that time. It was the culmination of all the lessons you had learned previously, all the information that your father had passed onto you and then you actually applying it and implementing it and you still had to have some discipline to go ahead and be able to take the money you worked hard for. And as a 14 year old, think I can’t spend all of it. Right? That’s super powerful And I want people to understand that when they hear this story because you get a lot of naysayers, it’s like “Ah, well his parents did it for”, that is not the case at what’s happening here. And you didn’t get lucky by entering the market at that time. You had put in the work, you had put in the effort, you had put in the discipline to be able to be ready to invest when you did. And it just so happened to be a really good time. So I think that’s super cool and I want to make sure people really understand that.

Andrew:
I appreciate that. Yeah, success is when preparation and opportunity meet. I spent four years preparing and looking for opportunities in 2009 and opportunity came up and I jumped on it.

David:
There’s something else I’d like to dive into with this with you being 10 years old, 10 years old, 14 years old.

Andrew:
Yeah.

David:
Either you’re some kind of savant Doogie Howser esque. Do you know who Doogie Howser is actually?

Andrew:
Yeah, that’s actually my nickname from my friends.

David:
You look a little like him.

Andrew:
Yeah, they call me Doogie.

David:
Neil Patrick Harris, right? That’s the actor’s name from How I Met Your Mother. He was in this really old TV show where he was a doctor at 14 years old or something like that. And the movie or the show would portray the challenges he faced as a young kid. And I remember at the end of every show, he’d be like typing on his computer because computers weren’t very common when I was really little talking about what he learned in journaling. But he was this pheno, either you’re that or teenagers and preteens are capable of more than what we think. That’s what I started thinking about, right? We typically take kids, send them to school, say whatever your teacher teaches you, whatever curriculum they have is all that you have to do. I’m not responsible for educating or training my kid, I just go to work and do my own thing.
I put them through the system and I hope that they turn out well. But I just think some kids can understand deeper concepts than what we think. If you’re at 10 years old able to understand puts and calls and you’re watching your dad playing on the computer and he’s talking you through the logic of how he’s looking at this or you’re learning how to take apart complex machinery and clean it and put it back together when your brain’s being formed, it’s learning mechanical aptitude and how several pieces fit together, which is actually a very important thing if you understand how the economy works. And we’ve already talked about mitigating risk and increasing reward. It sort of sets this example that young children and teenagers are actually capable of dealing with some adult level stuff if you introduce it to them in the right way. I see you smiling at this comment. Is this something you also believe? Is this something you plan on training your kids in when you get them?

Andrew:
Yeah, 100%. And I just want to add, I’m a big believer in passion. I hire based on passion and I think kids should be directed on passion. What I mean by that is… There’s six kids in my family and I remember as a kid we’d sit around the dinner table and my dad would throw out topics, random topics, farming topics, money topics, whatever it may be. And whoever’s head turned the kid wise, and you could see their eyes would change, spark and their voice would change, you could tell they were intrigued. And then he would spend one on one time with them on that topic because his belief was I want to help my kids find their passion at an early age and do what I can to help them down that road.
Because if you do something that you’re passionate about, the odds of you succeeding are much higher. So for example, one of my sister is a doctor, one works at the church, one’s a teacher, my brother farms, I’m in finance. My point is we all followed our passion and we’re all wildly successful at all of our fields. And it’s not about the money, right? I mean, luckily what I do is makes money, but my sister, she’s an amazing teacher and finances are different. So we were taught to follow passion, not money. And I think that kids have so much ability if the parents can do that.

David:
So we had started to get into how you started investing in real estate. The market had crashed. You said you were 14 years old and you got your first property, is that right?

Andrew:
Yeah. So yeah, I turned the $4,000 $80,000 and I realized I wanted to be in real estate. This is funny story. So I go and I grab the $80,000. So my brother and I were renting my grandma… Grandpa’s and my dad’s equipment in custom combining in South Dakota trying to make some extra money. I mean, there’s a lot of little things that I was doing during this time. And anyways, when we were driving back through Bismark, the state capital North Dakota, three hours south of where we lived, I was 15, 16, I saw this apartment for sale. It was a 16 plex, two buildings, $1.2 million. Nice old couple. I called him up like, “Hey, like to buy your building.” “Great.” So I sell my stocks, I put $20,000 earnest down nonrefundable. And I go back to Mohall, my small town of 800.
And I go to my buddy’s dad, he’s a banker and I’m like, “Hey, I need a $1.2 million loan, here’s $80,000 down payment.” And I’m like 15, 16. He’s like, “Andrew, that’s awesome, but you need another $300,000 and a balance sheet.” And that’s when I was like, “Well crap, now I got to raise money. How do I do that?” So I went and printed off Warren Buffett’s original 1956 partnership agreement and whited the names out, because I couldn’t afford a lawyer. And I went to Crosby, a local town and I convinced someone to invest $300,000 in the project with me.

Henry:
Okay.

Andrew:
So I’m going to stop there.

Henry:
So first of all, here’s my first takeaway. You turned $4,000 into $80,000 and your first thought is not let’s run it back in the stock market, but let me pull it out and go invest in some real estate that I have never done a transaction in before. And so what spurred that thought versus just continuing to invest in the thing that you had success in?

Andrew:
Yeah. So I went and I thought real estate was going to be a good play. So anyways, I mean, stocks are great. There’s a control issue, there’s the leverage issue. And Charlie Munger when you read that he actually got in with Warren later on, but they were friends and they say the quickest way to make money is in real estate, but at some point there is a diminishing returns. Once you get billions and billions and billions, there’s diminishing returns due to scalability.
So I knew that the quickest way to get a jumpstart was real estate. So that’s why I wanted to get into real estate. And then I’m also a history buff. And in 1980 the oil boom hit for the first time in North Dakota and real estate markets were flying up in the ’80s. Williston went first, mine at second, Bismarck third. Well, in 2000… Well this is probably 2010, when I did these apartments, Williston was inflated because the Bakken hit. And Minot was 90% inflated and Bismarck was sitting there like nothing’s going on. So I’m like, “I got to buy some real estate in Bismarck. I mean, if history repeats itself, that’s the place to be.

Henry:
Man, that’s super cool, because it sounds like you did a ton of research, right? Then trusted that research and then acted on it. So you take this $80,000 and you see and you’re like, “Oh, there’s an apartment building in this town where I feel like they’re going to have an appreciation pretty soon.” And then you go and you put $20,000 down nonrefundable before you have the rest of the money, which-

Andrew:
That’s risky.

Henry:
Which forced you because you put yourself in a position where you had to go find it, you had to go raise the money. And so there wasn’t this thought of “I can’t do this”, there was a thought of, “I absolutely have to do this”, right? Which is I’m sure what made that transition necessary is I think the word I want to use there. And so then you thought, “Okay. I’ll go ask people with money.” And I think you used the word, “I convinced a guy”.

Andrew:
It’s convinced is the right word.

Henry:
To loan on this project. So go into the details there, what does convinced mean? What were you, 15, 16?

Andrew:
Yes, 16 I think now.

Henry:
How did this 16 year old convinced this wealthy… What was he? A farmer to invest in your real estate deal that you just drove by and saw on the side of the road?

Andrew:
I made it a no-brainer. I mean, I literally went to him and said, “Hey, I’m going to throw an $80,000, you throw in $300. I’ll work for free. And the first $80,000 we lose if we do can be mine.” So I’m first out of the money if something happens. So the guy sitting there, like, “Well geez.” I mean, how do you turn that down, right? I mean, it’s hard real estate. He’s going to do all his work for free. $80,000 is first money out. Pretty good cushion.

Henry:
Yeah. Yeah, that is a pretty good cushion. That’s a creative way to think about the solution. I talk to people all the time about borrowing money. So I’ll talk to different private money lenders about borrowing money and it’s similar to me. I’m trying to make this a no-brainer for you. How can I creatively structure this to make it seem like, “Hey, if anybody’s going to lose here, it’s not going to be you, it’s going to be me because I’m going to make you whole.” Right? And you can get creative when you’re using private money to be able to do that. I think that’s super cool.

Andrew:
Exactly.

David:
And how old were you? Remind me when you’re putting this deal together.

Andrew:
I was about 16.

David:
Okay. 16 years old. Now, did you have your dad or anybody else advising you like, “Hey, here’s how you should structure this or here’s how you should present it”?

Andrew:
No, because I mean all the family did was farmland. So when I went and did this apartment thing, it was actually a foreign concept really. I mean, I was really just going off reading and I watched some Harvard classes on YouTube and learned some stuff. But yeah, no. So anyways, we got the apartments, 16. I felt like the history was going to repeat itself. And again, I hate to use the word locking call what you want. It happened, I mean, the Bakken formation hit in a city. So I bought these apartments. There was six apartments right next to this middle school in Bismarck. We owned the two right in the middle. And I got a call from the city saying, “Hey, we need to buy your apartments. We’re doing an addition because of all the kids coming in from this oil boom.”
And they said, “We’ll give you $1.5 million.” And I said, “No, no, I’m good.” And this was like six, seven months after we bought them for one too. And then anyways they bought the other ones, they tore them down. We were the last man standing. Finally, I accepted an offer. I think it was about $2 million. So 15 to 16 months we owned them. I was a junior going into my senior year in high school. After paying the loan off, we had $1 million from that original $380,000 roughly a little over.

David:
Yeah. Speechless here. I mean, I’m just trying to think of what I could even compare this to you, like how you hit this many grand slams your first time.

Andrew:
I know, it was weird. I have some losses later, so don’t worry about that.

David:
Okay. I was about to ask, have you lost yet?

Andrew:
Yes.

David:
Because without any losses, you might just be floating in space with any form of… I don’t know what the word I’m looking for here. There’s no framework to put this in. So I’m glad to hear that you’ve lost in some way. Not that [inaudible 00:28:52]

Andrew:
I got my tissue kicked in 2017, so we’re good there.

David:
Okay. And that brings some balance to the force and gives you… Probably makes you succeed even more.

Andrew:
But the nice thing is when I went back to this guy that gave me the $300,000 he’s like, “Andrew, that was impressive. How about this-”

Henry:
Do it again.

Andrew:
Yeah. He said, “There’s $1 million here, give me $500,000. You keep $500,000.” Even though I was supposed to only get like $200,000 or whatever that number was, $250,000. So he gave me $500,000 of the million and then he is like, “And keep my $500,000 and I want you to invest it and charge me this time.” So that’s how that was left off.

David:
What kind of people are in North Dakota that they’re willingly giving up their profit? You’re going to have a rush of people, like I want to raise money out there. Now I’m guessing this person probably knew you knew your family, right?

Andrew:
Yeah. I mean, farming communities, again, I found an opportunity and I bounced on. I mean, farmers are very niche. You are a farmer, you’re not, they’re very… Some guy coming in from New York could never raise money. It’s just they’re very a niche thing I guess.

David:
So I know at one point you had some success, but you said that you weren’t really being fulfilled. What was that like to win this big, that young?

Andrew:
Yeah. That is tough, right? Because it’s like a drug. I mean, you get these hits and then… Because I’m a big believer in slow and steady wins the race, but you get these grand slams and you get these highs and then all of a sudden normal life doesn’t feel that exciting, and I mean that in the best way. Not like I was depressed or anything, but you know what I mean. Gosh, you get those highs before you’re 18. Like gosh, that’s a high benchmark.

David:
Yeah. So what were you going through? What were you feeling when you actually had that happen?

Andrew:
I mean, the toughest thing too was not being really normal. My siblings were all really good in school and popular and good at sports, and I really wasn’t any of that. And so I think just being different was tough. But again, looking back now I’m blessed. I’m so glad. But in the moment, it is tough to not really know who you are.

David:
So what did you do when you decided you were going to niche down? How did that decision come to fruition?

Andrew:
Well, when I went to Fargo and I decided I didn’t want to farm, so my brother and I are partners in the farm, but I’m not an active involvement, and that was my big decision to tell my dad. And that’s tough in the farming community to go tell your dad that you don’t want to farm and you’re one of the two sons, but he was very understanding. And that’s when I figured out that I need to raise so much money to follow my dream, right? Because that’s my answer is just follow my dream, be me and don’t pretend I have to farm. Because up until 2013 I felt like I just had to farm. This was going to be a side hobby when really my hobby is what I love the most. So that’s really how I just jumped into it two feet.

David:
So did you end up going to college?

Andrew:
I did for about two semesters and then I dropped out. So my dad called me. So when I was a year into college, I already had a $15 million raised because I kept raising money. And my dad called me and said, “Andrew, you either need to give the money back and go to college and I don’t blame you because I went to college and I had fun. Or you need to get out of college and manage this money because these people that invested in you deserve your full attention.” He said, “Make a decision. I don’t judge you either way.” Well, I decided to drop out and here I am.

Henry:
You didn’t figure you’d make a $500,000 net from getting your first job out of college?

Andrew:
Correct. Yeah, I figured pass that.

David:
So what was your real estate investing like during those times?

Andrew:
Well, that was actually my confusing years a little bit. So I went and raised a blank check fund where I basically could invest and do anything I wanted. So I raised about $15 million and I went and bought an equipment dealership in Great Falls, Montana, Warren Buffett play. I bought insurance company out of Alabama that was on the Nasdaq and actually I became the largest shareholder through stock purchases and I had to change the laws in Alabama to become a board member when I was only 23 at the time. And then I bought some HUD building commercial… That was the point, right? Those are my last years. Everything I was doing was working, except for the helicopter company. I lost my butt on, lost 15% of our portfolio, but we don’t need to talk about that right now. But anyways, everything was working. But that’s when I called Gary, I did my cold call and that changed my life.

Henry:
So what do you mean? So everything was working, you were seeing the success you were hoping for, you had raised the money and then you thought, “I need to call somebody and get some help.”?

Andrew:
Yeah, I wanted to call Gary because when I look at billionaires, I read something once that billionaires are created on focus and its wealth is preserved on diversification. So I looked at people in even Fargo, Ronnie Offutt, John Deere dealerships, Harold-Newman-Signs, they all became very successful on one thing. They were the best at it. So I cold called Gary Tharaldson, he’s a North Dakota billionaire. I actually called the top 10 wealthiest people in the state. He was the only one that really called me back and gave me any time, which I’ll take the richest one I guess.
And I called his secretary, said he is not in, I just called his office because he didn’t know me from Adam. I mean, I grew up six hours away from here in a small farm. He didn’t know who I was. And she’s like, “Yeah, yeah, he’ll give you a callback.” And I’m like, “Okay. Sure. Yeah, okay. Sounds good.” So I leave my number and my name and a month later I get a call from this Vegas number and I pick it up. I thought it was the telemarketer. I was about to be like, “Don’t ever call me again.” But before I could say that, this old raspy voice comes in, it’s like, “Hey, this is Gary Tharaldson giving you a call.” And I’m like, “Oh, Gary.” Right? That hit, I’m just speechless. And then that’s when we talked for like 45 minutes.

Henry:
So what do you say in that… You cold called him, he called you back and you’re in shock. And then what is it you say to keep the man on the phone?

Andrew:
I think I blacked out because I was so shocked. It’s like when you ask your wife to marry you, but I said things just like, I like, “Hey, I’m from a small town.” I knew a lot about him. I creeped on him a lot. Similar things, “Here’s what I’ve done. I’m in Fargo, I’d love to just have some pie.” And Gary’s the guy that I later on learned, loves to share his story and he loves young people that have ambition. I was the perfect person to tutor for him. I mean, it was great. Match made in heaven.

Henry:
That’s perfect. It’s super cool. The reason I was asking those questions is one of the marketing methods that I like to use, and especially that I encourage younger investors to use is network marketing. So sending out marketing with the intention of making a connection and networking with somebody more so than the intention of buying their property. Because when you can network with… And I specifically tell them, you look for older people who have a handful of properties who have owned them for years. And the idea is that you connect with these mom and pops, right? And then you have lunch or coffee instead of saying, “Hey, I want to buy your place.” You say, “Hey, I want to talk to you about real estate.” Because that group just is wildly passionate sometimes about younger investors going down the same path and you’re able to build this strong relationship.
And then they always know all the people, they always know old so and so down the road, who’s got this business or this thing, they’re looking at selling or got this opportunity and you can go learn this. And they’re so connected and you can gain so much just from those networking relationships. And I think 100% totally agree with you that there’s a lot of people who are older who have been around the block. And you can use your youth as an advantage because you have the drive and the hustle. They see a lot of themselves in you at that age. And you can use that to your advantage, not in a bad way, not taking advantage of anybody, but you can use building that relationship to your advantage greatly. And then the idea is that when you get there, you do the same thing. You give it back to somebody who’s got that same ambition.

Andrew:
Exactly. And that’s what they love. When you get older and you make a lot of money, normally the thing that they want is to leave something behind a legacy. And they want someone that wants to learn, they want somebody to want to listen to their story really.

David:
Well, they want to feel significant. And that creates significant. So they know if you can learn from my story and the lessons I went through and you don’t have to go through the same, then that it’s a rewarding feeling for someone. It’s hard when we’re in the grind or the struggle for money or building mode. It’s hard to even conceive of what it would be like to not have money on your mind. And I don’t mean money is in greed. I mean, once you build a decent amount of wealth, I’m sure this is probably where you’re at, Andrew, you seem like someone who’s halfway into offense. How do I build, how do I scale? And that’s my next question for you. But then you’re halfway into defense. How do I protect what I’ve already got? How do I not lose it? And so not all of money is about greed and yachts and super cars and trying to look cool.
A lot of it is just, “Okay. I’ve got responsibility for all of these people that work for me and people that have invested in my company and my family that leans on me and I don’t want to lose what I’ve already created.” And so it just occupies a lot of the space in your head. And you get to a certain point of wealth, like your mental, you’re a billionaire where… I mean, if you think about being a billionaire, no one actually knows what their net worth is when they’re a billionaire because it’s not being measured in money in a bank. It’s various companies that are worth different things. And all of that’s fluctuating as far as stock values and the reports of what revenue was for that quarter. It’s like billionaires, it’s very tricky to know how much money they actually even have. They have so much of it that it doesn’t mean the same thing to them that it does to us.
There’s not a connection anymore between buying something and having a price you paid for it. So obviously their mind’s going to be focused on different things. And I think it’s fascinating to see if I didn’t have to worry about money, which most of us will spend our entire lives on earth without having that luxury, what do I think about? And it sounds like what this person was thinking about was legacy and significance and wanting to feel like their life mattered and shared something. What were some of the biggest lessons that you took from those conversations with Gary?

Andrew:
Yeah, I’m glad you said that. So we started, he said, “Yeah, let’s meet up.” So every week we were meeting up having pie at the Village Inn in Fargo. And we started just talking. And I actually, when we first met, I asked him to invest in me. And he’s like, “No. I’m like, “Oh, okay.” So then I’m like, this is more of a mentorship, sounds good. But what I learned was he saw me, we talked business, him make mistakes, all that. And his model was very simple. In the 1980s, Gary wanted to print an asset. He said, “Billionaires, no matter what they’re in their manufacturers.” What he means by that, he’s like, “I was in the hotel business, but I manufactured hotels. I printed hotels.” He opened a new hotel every eight days in his peak. He built 500 hotels and only sold 100 of them to continue to build.
But he also vertically integrated. He was the best in the business. He didn’t touch anything but hotels. He used the Marriott brands for branding. He owned the construction, he owned the wiring company, he was the realtor, he was the best at it. And that’s what he taught me. So when I was doing all these things and making money here and there, and then I went and invested 15% of our portfolio in a helicopter company for all things and it went bankrupt and we lost 15% for the first time. Our share value actually dropped some and it wasn’t a kill the business investment, but it was a good drop. And I was at [inaudible 00:40:28] and I told Gary about it and he looked at me and said, “Andrew, you’re good at a lot of things, but you’re not great at anything.” And that sunk in. And that was when I knew that I needed to figure out who I actually was instead of just dabbling in a lot of things.

David:
So how did you make the decision of what you wanted to be great at?

Andrew:
Yeah, good question. So I asked that question to Gary, “Well, what do I do?” There’s so many ideas. He said, “Andrew, everybody in the world thinks that there’s the idea. They wait around until they’re 50 until the idea pops up.” He said, “There actually isn’t the idea.” He said, “There’s millions of ideas, you just got to pick one, focus on it, put your blinders up and make it the idea.” So I took that and I said, “Okay.”
So the next week I came back and I had two asset classes I had interest in. One was self storage because it reminded me a lot of the hotels in the ’80s, it’s very fragmented. And at that time in 2017, public storage, the Marriott of storage for the first time was allowing people to use their brand just like Marriott did in 1982. And so storage was one of them and assisted living was one. And Gary just said, “Which one feels better to you?” And I said, “I’m a simple farm boy. So I like storage, there’s no toilets, there’s very little people involved. It’s simple, it’s scalable.” And he said, “Sounds good, let’s do it.” So we jumped on his plane, went out, met with Public Storage and Extra Space and started discussing third party management agreements. We were one of the first 50 to sign up.

David:
Okay. So that makes some sense why you’d want to get into self storage. What was the benefit of signing up with a company that was going to let you use their brand?

Andrew:
So Gary’s big model, so he pays Marriott 12% and he still has to run the hotels. So he’s got 3,000 employees today for his hotels and he pays Marriott 12% for the name. Public Storage and Extra Space and Life Storage, they just started this model in 2017 for the first time in history and they were only charging 4% to 6% of revenue, and they would manage the facility and brand it and use their algorithms. So Gary said, “I’m a big believer in being the best developer and owner there is. Let the people that have been doing it for 50 years that have built a brand that have $2 million views on their pages a day, that have the algorithms, let them do all the management for that. I mean, we’re not making much money. And second off, what do you want to do? Don’t swim against the tide. You’re going to go try to recreate their algorithms. What’s the point? Just be the best owner and developer you can be and own the rest of the process.”

David:
So that’s what ultimately you became great at was owning real estate and developing it. So tell me, from the perspective of becoming a billionaire, what are some things that you want to focus on within the project or the asset class or the business that you’re taking on?

Andrew:
So what we do now, so fast forward, we’ve raised… Because Gary did finally invest by the way. So that’s nice. So we’ve raised about $120 million in cash and then we go and leverage, Gary and I are the only personal guarantees on the loan. So his PGs on the loan, so is mine. So we’ve got about $1 billion in projects in the works here over the next five years. All self storage. So next year we got $100 million in Arizona breaking ground. So Abernathey Holdings, which is Gary and I and a hundred other people, I still own control. The other 100 people have thrown in anywhere from $300,000 to $5 million each. We own the construction company, we own the equipment dealership, we own the garage door dealership and we own the asset. So each building we builds about $13 million. The bank needs $5 million down. Gary throws in two and a half million cash. Abernathy Holdings throws in two and a half million cash, but we get to pocket $1 million from our vertical profits. So really we’re making 40% return before the doors even open on our projects.

Henry:
I like that you point out about how you’re making money before the doors open because a lot of what I’ve heard about building self storage is that you’re not making a profit until year three, maybe year five. And so how are you deciding where it makes sense to do this? And then how long does it actually take from the doors open to when you’re actually seeing a profit on your income statement?

Andrew:
So we try to focus on recycling cash. So it’s cool that we’ve raised $120 million in cash. But the problem is if… I mean, my goal someday and my team’s going to listen to this and laugh because I’m the dreamer, but it’s like I’d like to be building $1 billion a year in storage. Right now we’re at the $100 million, I’d like to be doing $1 billion a year. Well, in order to be doing $1 billion a year, you need a lot of cash. So my goal is to recycle the money as quick as possible. So with our current model, if we own 50% of the property and we have a syndication partner that owns 50%, we owe two and a half down. Syndication partner owns two and a half. But if Abernathy Holdings, me and my investors own 100% of the verticals and have exclusivity to do it, our profits actually take half that out.
Like I said, we get 40% to 50% of our money back before the doors open. The first step of recycling. Now the rest of it right now, we get out at stabilization. So to answer your question on the timeline, so when we find a site in Arizona, we have our own internal land crew about four guides. All they do is look for land, they find a site, they put an offer in, they spend about 12 months in titling it. And we do this whole process in cash. We’ll buy the lot, usually a million an acre in Arizona and then we’ll spend a quarter million or so on entitlement process. Lawyers, architects, engineers, things like that. Takes about 12 months shovel ready. And then we hand it to our in-house construction company. We have our own superintendents, project managers, they go and build it.
And in Arizona, that takes about 12 months at CO. That property that we built for 12 is worth about $17 million. So you had value creation plus, like I said, we got 40% of our cash back on what we paid our own companies to do the work at market rates. And now average in the industry is about three years to stabilize after doors open due to our lot selection, we’re about half that. So this whole process start to finish in Arizona’s three and a half years, we’re looking to get into California, that’ll be longer and cost more, but the upsides higher as well. So to me, what my focus on is recycling capital because if you can recycle your capital quick, then your upsides, your upsides is not as capital intensive, right?

David:
Yes. I mean, this is a very, very, very complex and grandiose per method in a sense. You’re building an asset, you’re stabilizing it, you’re getting the money out, you’re paying off your investors and then you’re saying, “Hey, I got another place to put your money to repeat this process.”

Andrew:
But the cool thing actually is Abernathy Holdings is like Berkshire Hathaway. So we haven’t done dividends in 10 years. So the company that I raised money for 10 years ago, we talked about this is the same entity and the same investors, it’s just the business as morphed into a different model. So it’s cool and unique too.

David:
You mentioned vertical integration quite often you talk about the verticals. What does that mean within the context of self storage?

Andrew:
So only as much of the process as possible. So for an example, Henry Ford, he used to require the people that sent him parts to manufacture to build his cars. He required them to send them in wood boxes, not cardboard because he would then use the wood boxes to put the floors in the cars. So he’d get it for free and then he would burn the extra and sell it for charcoal. I mean, again, he’s vertically integrated as much as he can and you create a product, sell the byproduct. So in storage, for me, I want to own as much of the process as possible, but I also don’t want a lot of headcount because again, employees are tough. Think it’s going to get harder and people, that’s where mistakes happen. There’s a lot of friction there. So for example, we’re our own garage door dealer because there’s about $150,000 of upside to be the dealer.
And it takes one person that’s already hired to push the paper. Pretty good. Net income per head. We’re our own construction company save about $700,000 of building and we’ve got one in a quarter guys per building because of project manager splits. And we are our own equipment dealership. We ship our own equipment site to site. We rent from ourselves. Very simple. You just move equipment once a year. Verticals that we do not do, thought about making our own signs, 50% margin. But now you’re in the manufacturing business, you got materials, parts, you got to ship them, you got labor, you got heads. That’s an example of a vertical we didn’t do. So that’s what I mean by that is we’re bringing as much as we can in house, but I really don’t want to have more than 50 people in my organization.

Henry:
So that was going to be my next question is about how many employees do you have and why haven’t you looked into verticals that have to do with lighting and locks and all the other ancillary parts of the business?

Andrew:
So we have 50 people. Everybody in our storage facilities are actually public storage employees. But we do pay through them through an expense. So I don’t include them, but we have 50 staff. We open to a supply construction supply company. So we do bulk order some materials to get discounts. We also negotiate with architects and engineers to get maybe 30% discounts. So things that we haven’t brought in house for various reasons we put on our negotiating hats or into our bulk ordering hats.

David:
So how are you structuring your companies or your deals so that everybody wins? Because I’ve noticed that’s come up a few times as you’re speaking.

Andrew:
So there’s three people that I’ve followed the model, Warren Buffett, Gary Tharaldson’s simplicity approach, and then Trammell Crow, he was a big developer in the ’80s. He had a partnership approach. So Jesus had 12 disciples. I’ve got six guys because I’m not as good as Jesus. So I have six people that I talk to on a regular basis. And it’s a Warren Buffett style. So we have a guy that has been in equipment for 20 years and he’s passionate about it, I mean he dreams about equipment, he runs that arm, that’s his job. He’s got his people, he runs it the way he wants. Him and I talk, that’s it. We have a guy that runs a development arm. He’s passionate about storage, he dreams about it. This passion is the focal point of our business. He has his people, so on and so forth. So I am the dumbest one in every room and I’m proud of it.
I bring the money to the table. I’m really good at connecting people and I’ve got the energy and the excitement and the dream and the vision. So what I’ve done is I’ve surrounded myself with smarter people in their said field. And then what we’ve also done is we give ownership to each and every said person through shares in the holding company. So a guy that came to us back in 16, he’s now a millionaire and he started with $0. I’m a big believer that the best ROI I’ve ever made for myself and our investors is actually giving more to our employees. They do most of the work. And if I have to give up 15% of every building, so be it. My goal is to make 1,000 millionaires and I’m only a handful in. So a lot of years left.

David:
All right, Andrew. So starting from scratch, somebody who wants to start a small business, maybe they don’t want to be a billionaire, but they would like some advice for how to structure creating a business. Maybe they’re good at buying rental properties, they’ve got one or two or three, maybe they’re a real estate agent that wants to grow their team or they’re a construction worker who wants to start his own business. What advice do you have for people who are in the trade and they want to actually scale into running a business?

Andrew:
No, I love it. Well, again, make sure you have the passion, but if you’re already in the trade, you probably already do and follow the lead. And again, there’s 1,000 ways to do it. So just because I did it this way doesn’t mean it’s the only way. But again, make a deal with someone. Make it a no loss deal for them, just like I did on my first deal. Work for free, work your butt off for equity, whatever it may be, do that and don’t be afraid to call. Don’t be afraid to ask questions. It’s a numbers game. Call 20 people to do a deal with you and you hope to get one that, and I know it sounds simple and generic, but that’s the biggest thing is you just got to get out there, start making calls, bring a deal. Don’t take no for an answer and have good energy. I can’t tell you how many billionaires have told me that my energy and excitement and attitude is a really big reason that they’re attracted. So just make sure you have a really good energy and excitement.

David:
Henry, you look like you’re deep in thought. Anything you want to add before we move into the famous four?

Henry:
Yeah, no, I mean, I totally agree. The energy is huge because people feed off every energy and you want to help people who are excited about what they’re doing because you get to feed off that excitement. And so energy’s big. I often, throughout the day today, I wasn’t feeling like I was a bundle of energy and I knew that I had some phone calls I wanted to be excited about and so I do… I watched a couple of funny videos, something that’s going to get me laughing. Get those positive vibes going to help me build that energy because it’s important.
I think too many times we will get caught up in the negative energy or just say, that’s my mood for the day. I’m having a bad day. And you don’t understand how much of an impact that can have on you as a business. So being intentional about keeping your energy up, there are some things you can do to control that. But I really, really enjoyed this conversation and I love the outlook that you have on life. I love that you took some lessons at a very young age and actually put them into action. I wish I was as smart as you. I wish I was as disciplined as you when I was 15 or 16 years old. I don’t know that I would’ve reinvested $500,000 if it fell in my lap as a junior in high school.

Andrew:
I appreciate that. Yeah, it’s the funny thing is I don’t know any different, been since I was 10. Everybody’s always laugh. I don’t remember when I was nine, so I mean I just always been like this I guess.

David:
All right, we’re going to move on to the last summit ever show. This is the famous four.

Speaker 4:
Famous four

David:
And this segment of the show, Henry and I will fire questions off at you. They’re the same four questions we ask every guest every week. I’m excited to hear your answers. So Andrew, first question, what is your favorite real estate related book?

Andrew:
So I would say the Trammell Crow building an Empire is a great one, it’s very expensive, but it’s classic learning how to grow through partners, partnerships. Gary Tharaldson actually has a book about his life, Secrets of Success: Gary Tharaldson, it’s a red book with his face on the cover. And then another one I like is Shoe Dog. It’s about Phil Knight’s story. I just love all his attitude and all the things that he overcame. So I’m going to throw those three out.

Henry:
Perfect. I’m not even going to ask you the second question because it’s about what’s your favorite business book and I think you just gave us some great ones.

Andrew:
Yeah.

Henry:
So what are your hobbies?

Andrew:
Good question. I got beautiful three boys under five, an amazing wife. So I hang out with them a lot. We’re going to Disneyland actually next week. So I’m jacked. I would say golf. Yeah, hang with family. I’m pretty simple. I mean, business is my hobby too, so that takes most of my time.

David:
I got to ask you, I’ve been considering golf, I never really wanted to do it was never exciting. But I went to top golf one time in Scottsdale and it was actually fun. What’s your advice for me on if I should take golf as a competitive perfectionist? That’s why I never did it because it’s very frustrating and I just don’t like sucking at anything or not being good at it.

Andrew:
I have never been so angry and broke so many things and when I started golfing it was so bad and to me it was a challenge to manage my emotions because I’ve been learning that it was probably the toughest emotional management I’ve ever had, because I’m just like you. So am I glad I did it. Yes, I’m actually pretty good now, but it was the worst couple years of my life, but it was worth it and I think it was actually a pretty good life lesson really for managing my emotions.

David:
I had this theory about golf that it’s one of the most insane things in the world to do. If you didn’t know what golf was and someone said, we’re going to put a hole this big 300 yards,

Andrew:
Like an alien comes like-

David:
Yeah, that’s exactly right. If you’re an alien and you came and you said, so you’re just going to put a whole, like imagine going to the desert, so we’re going to put a whole 300 yards somewhere else. You’re going to get this tiny ball and you’re going to get this stick and you got to hit it and try to get it there in three to four tries. You’d say, “That is impossible.” It could not happen. And it’s like amazing that human beings have both designed the equipment and practiced it to the point where this is even a thing that can happen. It’s like a miracle. Every time I see a person playing golf and we just talk about it like, oh, it’s just golf.

Andrew:
What I love though is it makes someone hang out with me for four hours. So it’s perfect. We can cover off topics. I mean-

David:
They’re going to be investing with you by the time they get done there.

Andrew:
Guarantee, my success rate. Oh gosh, got to be 99% at that game, the full deal.

Henry:
Do it, David, do it. I took it up recently. I love it. I’m terrible at it, but it’s so much fun.

David:
Okay.

Henry:
And there’s so much, so many life lessons that you learn playing golf.

Andrew:
Let’s play in Scottsdale here. We’ll go out.

David:
That’s a good point. I mean that’s Scottsdale is the Mecca.

Henry:
I will gladly embarrass myself in front of you.

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

Andrew:
Focus. Ignoring all of the shiny objects out there, all the deals, especially with our intention spans, as you know, books are getting shorter, all of that. So long term investment, a big believer in it focusing and being the best at something and ignoring everything. That was the hardest part for me is ignoring all the other good deals I could have done. And then just attitude giving up. I mean, gosh, is that even an option? So I just think it’s mindset, attitude and open to distractions.

Henry:
All right. And the last question is, tell people where they can find out more about you.

Andrew:
Yeah, I’m on Facebook, Andrew J. Abernathy, Instagram and I have a personal website, andrewabernathy.com. And then abernathyholdingsco.com is our company page. So any of those work?

David:
Absolutely. Henry, where can people find out more about you?

Henry:
You can find me on Instagram. I am @thehenrywashington on Instagram. What about you, sir?

David:
I am @davidgreene24, just about everywhere, including YouTube. Andrew, this has been fantastic. My mind is still spinning at some of the things that you’re working with. You are clearly the Doogie Howser of real estate and I can’t believe that we haven’t had you on the podcast before. Now, is there anything you want to share with our audience before we let you get out of here?

Andrew:
Just, I love it. It’s an honor and I’d love to be back if it ever works out. So there’s nothing better than just sharing my story and talking to great people like you guys.

David:
Awesome. Well, thank you for that. And if you have enjoyed this episode, please go leave us a five star review wherever you are listening to this podcast. Whether it be Apple Podcast, Spotify, Stitcher, whatever it is that’s your favorite flavor, please leave us a review there and then if you’re listening on YouTube, subscribe to the channel. All right guys, this has been fantastic. I really appreciate your time. Andrew, we will have you on again. This is David Greene for Henry [inaudible 00:59:38] savant Washington signing up.