JF1007: How This Kid Used GOOGLE to Fund 11 Properties in a Year and a Half!
Portfolio loans from small banks found using Google! That’s right, he searched for small credit unions and banks in his local market and kept calling until somebody said yes. It wasn’t all Google, there was perspiration involved and that’s what it takes to become successful in real estate.
Best Ever Tweet:
David Zheng Real Estate Background:
– Analytics Consultant at Wells Fargo & Real estate investor
– Currently owns 10 properties and rent out 9, with having been investing since December 2015
– Goals are to reach close to 50k in passive income and own a management company
– Based in St. Louis, Missouri
– Say hi to him at djzheng6 AT gmail.com
– Best Ever Book: Redwall Book Series
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We don’t get into any of the fluffy stuff, we only talk about the best advice that moves your business forward.
With us today, David Zheng. How are you doing, David?
David Zheng: Good, thank you.
Joe Fairless: Nice to have you on the show. A little bit about David – he is an analytics consultant with Wells Fargo and he’s also a real estate investor. He currently owns ten property and rents out nine of them, having been a real estate investor since December 2015 — wow, that was quick out of the gate! Based in St. Louis, Missouri, and his goals are to reach close to $50,000 in passive income and own a management company… Good luck to you on that one, my friend! I don’t want any part of that second goal.
With that being said, David, do you want to give the Best Ever listeners a little bit more about your background and your focus?
David Zheng: Sure. Funny you mentioned that, I’m actually closing tomorrow on another apartment building, so I’ll be up to 11 properties now. But yeah, a little bit about myself – I’m actually pretty (I guess) young at this. I’ve started investing in December 2015, that’s when I picked up my first condo actually. Funny enough, it was a pretty hard kind of a deal – it was an unwarranted condo and there was a whole bunch of lending loopholes I have to jump through to get that actually financed.
Essentially, I started December 2015 and since then I’ve picked up those ten properties as you’ve already mentioned. I started off with a condo, and the first four that I picked up were all condos, and I moved into single-families. I picked up three throughout the summer of 2016, and then after that I got into multifamilies, so that’s kind of where I am right now – self-managing all my properties by myself, all the rehab… I’m kind of being the GC for it as well, it’s a whole other experience I could go on and on with.
It’s been an exciting adventure, things have been moving really fast for me, so I could talk days about this, but I’ll get to the important points.
Joe Fairless: Well, I’m sure “adventure” is a great way to describe it if you’ve grown this quickly in this short amount of time that you’ve been investing. December 2015, so what is that – two and a half years or so? You started out with condos, you had four of those, three single-family homes… When you say apartments and multi-family, I wanna make sure I know what you’re talking about…
David Zheng: When I talk to my friends sometimes I say apartment buildings because it sounds better, but all the multifamilies that I currently have are 3-4 units, so they’re just kind of multifamilies more so than commercial great 5+ units. I will get there at some point.
Joe Fairless: Okay, so you’ve got four condos, three single-families, and then what do you have on the multifamily front?
David Zheng: So multifamily I have a three-unit – that will be a part of my story later for one of my biggest purchases. I’m closing tomorrow on a four-unit, and then in about a week and a half I’ll be closing on a duplex.
Joe Fairless: Wow, okay. We have to get to the bottom of how the heck are you able to close on all these properties in such a short amount of time – how are you financing them?
David Zheng: I’ve gone through a couple different ways… When I first started, I actually — because of the condo that I was in… The condo that I first bought was in a complex that essentially had like 80% rentals, so obviously lending on that, Freddie and Fannie didn’t like it, so I had to go through a portfolio loan on that one… That kind of already drove me into the deep end on the lending spectrum.
I have a whole bunch of portfolios – about 30% of them are portfolios, a couple just regular convenationals, throwing down 30%, and then the rest of them are all commercial loans, essentially.
Joe Fairless: Okay. When you say portfolios – will you elaborate?
David Zheng: Portfolio meaning I go through small local banks, and these are loans that the banks basically hold in their books, they don’t sell it on the secondary market or anything like that. It’s a little more lax in terms of what you need to qualify for them, and then the different kinds of properties — you have a broader range of properties that you’re allowed to buy. So again, usually those come with higher rates, balloon loans and higher down payments, but it gets the job done.
Joe Fairless: What portfolio lenders do you use?
David Zheng: One of them is actually the first community credit union; there’s another local bank here called the Central Bank of St. Louis. They’ve been really good to me, they’ve done three of my loans; all of them are the condos, so they’ve been good to me there. But yeah, most of them are just through local banks that I find googling it.
Joe Fairless: Wow. When you’re googling for the local banks, what are you searching for?
David Zheng: Google has been my best friend throughout this whole thing. I never grew up with a mentor or anything like that. Honestly, I googled “mortgage loan St. Louis” or “bank St. Louis.” I can’t really recall exactly what I put in, but you put in some very generic words and you just start searching. One of my biggest things that I did was sometimes on a deal I would have to call 30-40 people, even local banks outside of my area to lend on something. Again, it’s an umbrella search, and then after that I start digging down. Like I said, I just call a lot of people.
Joe Fairless: [laughter] I’m so glad that we have gotten to this part of the questioning in your story, because this is something that would likely get glossed over in the story, but it’s an important component, that you’re making 30-40 calls to lenders for one particular property. What were you seeking that you weren’t getting from the lenders?
David Zheng: Honestly, you can imagine the roadblocks I’m gonna hit, being a young guy who’s trying to invest in real estate.
Joe Fairless: How old are you?
David Zheng: I’m 26 right now.
Joe Fairless: Okay.
David Zheng: So you can imagine, a guy comes in calling your office, saying “Hey, I found a property I wanna buy. I’ve only been doing this for two months and I’ve already bought three more. My DTI looks absolutely horrible on paper because all they see are all these mortgages, they don’t see the rental income, because I haven’t filed my taxes for them. So you’re gonna hit all these lenders who say “We can’t do it. Our underwriting is not gonna approve this. Your DTI is too high. You don’t have a track record.”
The only reason why I kept calling people was because I was getting so many no’s, and the one thing I hate the most is being told no to.” So I was always on this track of just “I need to get this funded somehow; I will get a yes.” Thankfully, to this day, any property that I have put a contract on, I have not lost.
Joe Fairless: So you were just looking for a yes, it wasn’t necessarily that you were looking for specific terms… You were just looking for a lender to do a loan on the property. What were the terms and who was the lender after the 30-40 calls that you ended up going with?
David Zheng: I’ll speak to one specific deal – this was the hardest one that I had to get. First the condos, the single-families – again, they were pretty generic, kind of just calling around for conventional portfolio loans. It was this multifamily, the three-bedroom that I was talking about, I actually offered on it September, closed in October. That one was really hard, because 1) it was the first property that I was trying to go through just the listing agent. I was representing myself basically as a buyer and that was difficult enough. It was also a rundown place, it needed a lot of work, so I had to find funding for that. Someone I had to find the lender who would actually just purchase the property itself, minus the rehab costs. That was pretty difficult.
I called the banks that I’ve worked with previously, they didn’t help me. I called my portfolio banks, they never helped me out. I remember I called a local bank in Kansas City and even New York; I was like, “Hey, I’m in desperate need of lending for this, because this is a killer project for me. Can you help me out?” and they all rejected me.
Joe Fairless: And what was the reason…? For all those reasons you stated earlier, debt-to-income, no track record, distressed property?
David Zheng: All that and more because, again, this property needed so much work before I could even rent it out, so it wasn’t just like a turnkey where I could just flip it and then rent it out. All the other properties I had, I rented them out within a week, which is great, but this one, I needed to do a lot of work and the banks were hesitant. It was my first multifamily purchase as well, so that was hard.
In the end, I just fell back on what everyone else does – I went to a hard money lender, and even then I had to go through like five or six of them before I found one that had decent terms for me.
Joe Fairless: Yes, and you probably used in quotation marks for decent terms. What were the terms?
David Zheng: The terms on that – it was a 12-month interest-only loan. They basically funded — I think it was 80% LTV for the purchase price, plus up to 100% of the rehab costs as long as it was 65% of the ARV. So I’ll just speak on the numbers… I got this building for 230k, and then I actually fell extremely short on my rehab. My budget was actually around 110k, but I had to somehow smoosh it down into $86,000, because that was about how much they would be able to lend to me. I said, “You know what? I’m gonna make this happen, I don’t care if I have to do everything that doesn’t need a license-bonded contractor, I will do it myself”, and I basically told them that. And in the end I did a lot of that.
But 12-month interest-only payments, 10.75% was the interest rate, so that came out to be around $2,250/month in just pure interest, and then of course the lump sum, the loan was due at the end of the 12 months. Of course, refinancing as quick as possible was important. My down payment was — I don’t remember the upfront points, but it ended up being around $80,000 to fund the whole thing, upfront.
Joe Fairless: So how has the project turned out?
David Zheng: It was great. I was really worried about this thing originally, and it turned out to be my biggest success story. Like I said, it was in for $230,000, and then I spent another $110,000 to rehab it. At that point I’m $330,000 of value into this property, where I’ve put down $80,000 cash. That was in October when I closed. I finished in January because I pushed my contractors really hard; I pushed myself really hard to finish this as quick as possible.
I rented it out in January… $8,100 for the whole building, so essentially $2,700/unit. After that, I went straight into my little calling phase again. I was calling commercial lenders all over the place, most of them local, and finally one of them said, “Hey, we’ll do a cash-out refi without the six-month seasoning for you. It seems like you did a really good job.” I gave them the leases, I showed proof of all the work I’ve done. They brought an appraiser out there, they came back and they said “This thing appraised for $680,000.”
Joe Fairless: Bravo!
David Zheng: I’m not gonna lie, I basically sat an hour, I just looked at the appraisal… [laughter] And just like, “No, no…” And of course, at that moment I was like, “What if I get 80% of that in the cash-out refi? I’d be pulling near $300,000 out.” Of course, not everything turns out as good as it is, but they ended up giving me a loan, 66% LTV, so I was still able to pull $200,000 out of it after I paid the $250,000 I already owed to the hard money lender.
With that $200,000 I ended up buying the four-family, the duplex, and I’m also — since I’ve rented out my current condo that I’m living in next June, I’m using part of that down payment for another single-family for my house, essentially. So this deal was definitely a killer. Not only did I get a crazy cash-out refi, I got all my cash back, I’m also renting it out for a great cashflow.
Joe Fairless: So that one deal helped you buy one other deal, right?
David Zheng: Two and a half other deals.
Joe Fairless: Two and a half other deals, because the money that you used from it allowed you to put in the down payment for two and a half other deals… That is three and a half deals, and you’ve done how many total deals?
David Zheng: I would have ten rentals at this point.
Joe Fairless: At this point, yeah. I know you’ve got some — you’re closing on a duplex a week from now, but let’s just do this point. So at this point that’s three and a half deals, and the money that you put into that deal originally came from working as an analytic consultant?
David Zheng: Yeah, so I was fortunate enough that when I was a kid — I’m not [unintelligible [00:14:11].16] I was kind of a loser… [laughs] I worked a lot, I was a busboy at a high-end restaurants. I worked 3-4 nights a week. I didn’t really do anything with my friends, because I was such a money hoarder, so I would just sock it away in a mutual fund since I was like 16 years old.
Then my parents had saved up a pretty hefty university fund for myself. I went and I did really well in school, I studied hard, I got a full ride to the university where I wanted to go, and essentially they said, “Well, you’re not using any of your money because you’ve got a full ride, so it’s yours.” Then I still didn’t do anything with it. I didn’t use it for vacations or anything, I just kept it in that account that they had set up for me.
Once I got into real estate investing I was like, “Huh…” You know, I started reading up on returns and things like that, on the stock market, in real estate, and I was like “I might as well give it a shot.”
So funding – a lot of it came from that university fund that I didn’t use because of that. A lot of it came from me saving up over years and years and years worth of internships or busboying or other side-jobs — which I also actually do have a nightlife company on the side as well that I own. I rent out a lot of audio and lighting production to local night clubs and venues and things like that. And then also, of course, analytics consultant… I don’t live too lavishly right now, so I socked away a lot of my earnings since I started working. My checking account – I just kind of left it there. Now I’m putting all of it to work, essentially.
Joe Fairless: Okay. So that was the money for that property. Then what about the other six and a half properties? Where did the money come from for those?
David Zheng: That was a combination…
Joe Fairless: …of everything you’ve just said?
David Zheng: I would say 80% of what I’ve invested was from myself, and then about 20% I’ve gained from friends and family. I’ll be honest – the way I did it, I kind of used their money to pay for my food, my personal living expenses, so I could sock my living expenses into the real estate. It’s kind of unconventional, but essentially in that regards… There’s a lot of lenders who are like “Well, you can’t use your family or friend’s money for it”, and I was like “Yeah, I get it.” So I was like “Well, in that case my parents could just help me pay my car insurance etc. out of their account”, and essentially all my earnings are still mine, so I’m free to use that.
I kind of played around with how I used my money, but like I said, 80% of it was my own that I’ve had forever, so I used it pretty heavily.
Joe Fairless: And you said as far as the financing goes – because that really is the key… Well, there’s a couple keys here, and I’ll summarize later, but the financing is a big part. Clearly, your fiscally-responsible approach is also a big part, and then finding these deals is another component to it. But the reason why I believe most people don’t go as quickly as you go is they don’t have the money or they haven’t exercised their resourcefulness to get the money. In your case it’s both – you were living fiscally responsible and also you were resourceful in a way that got more money to bring the deal.
What type of arrangement did you have with the 20% of the income that you did get from relatives? What arrangement did you have with them?
David Zheng: I actually used a rather unconventional method… It was relatives and friends. Believe it or not, it kind of stems from me being very outspoken about myself. I’m pretty active on social media, and when I do these deals I don’t post the exact everything, but I’ll say “Hey, I closed on another house and I’m getting great rents. I’m doing great, this is awesome, this is fun”, and I keep on doing this. Like I said, the first couple of deals all came from myself, my own money etc. Once I started posting success stories — I’m not like one of those gurus out there who are just like “Oh, you need to pay for my thing” or “You need to go to this free seminar”, I’m just posting my stories on Facebook as a status and I’m saying “Hey, I’m doing well.”
After my fourth and fifth deal one of my friends actually came and messaged me. He was like, “Hey, I was wondering if we could do a deal together, or something like that” and that’s when it hit me… I was like, “Wow, this is gaining attention.” I reached out to my family and friends who were interested, who constantly liked my posts, commented on it or said something or asked me questions. I’m like, “Hey, if you want to, you can be a loan shark with me for my deals.” Especially my parents, they trusted me; I told them all the numbers, so they know I’m doing well, but with my friends, especially when I was showing how well I was doing, they trusted me with their money and they said “Hey, let’s do it.”
So we worked out something like a hard money lender, essentially. It’d just be like “You loan me a certain amount, I’ll give you a percentage back. At the end of the 12 months or any time before that I will give you your lump sum back and you get to keep whatever interest you’ve accrued over these months. I’d actually just stick it to them at a 10%, because my rents generate a lot of cashflow. It’s not that I’m worried about not getting the money the later and returning, it’s like I just don’t have that money right then. I know that the rents are gonna come in, they’re gonna cover that interest and then I’ll be able to pay that lump sum within a couple months, so that was never a concern with me.
So these were the kinds of deals that I worked with, and the biggest thing is I tell them, “Hey, you know, your money is sitting in your checking account right now, or in a .01% or whatever it is in interest. You’re not doing anything. If you’re not gonna buy a house or a car or have a kid anytime soon, you might as well stick it with me and then get something back over the next couple months”, and 10% is still better than a lot of people are making in other investments.
Joe Fairless: Are you securing it with something?
David Zheng: A lot of it is trust. I’m not gonna lie, a lot of it is trust. Another thing is I tell my friends, I would rather work at some fast-food place 24/7 to pay you back than not pay you back. And lastly, of course, [unintelligible [00:19:59].23] I’m like “Well, if something ends up going wrong, I’ll sell one of my properties, grab the equity out of that or whatever I have down into it and I will pay you guys back. I will sell the properties that I first bought.” That already accrues into over $100,000 worth of equity, so… They felt very safe. Again, they very much trusted me and what I did. I had a couple things going for me to show that I was trustworthy, and I did write contracts with all of them that basically amortized the loan and showed them month-by-month what they would be getting. So I spelled it out pretty clearly to them.
Joe Fairless: How much across the board in rent is coming in?
David Zheng: A lot of my rentals are actually students. There’s high turnover, but it’s higher rents. Starting 1st August 2017, my maxed rents will be at $34,000/month. Right now I’m only hitting like $27,000, but of course, I still have three other properties I need to account for in terms of rents, and then another couple that I’m rehabbing to get higher ones. But yeah, $34,000 is what should be coming in 1st August. Those have the leases in, deposits and everything.
Joe Fairless: Do you still have some hard money loans out that you have to pay back?
David Zheng: I do not. The only hard money loan was the one I did back in October. The two multifamilies that I’m closing on tomorrow and then a couple weeks later it’s actually another local business bank; they’re doing commercial loans, only 20% down. It’s nice getting to a point where banks are like, “Hey, we trust you. You have a great track record… We’ll do 20% down. We won’t make you do 25% or 30%” and whatever. So it’s nice that lenders are willing to work with me now. But yeah, I have no other hard money loans outstanding right now.
Joe Fairless: What is your best real estate investing advice ever for someone who wants to replicate this model?
David Zheng: I would say “Sell, sell, sell.” What I mean by that is you need to be constantly on your game in terms of networking. For my example, I’m selling to tenants. The reason I can get higher-paying tenants is because I sell myself as a landlord. They love a young guy who’s flexible, who’s understanding, who can communicate at a second’s notice – which I do. It is tougher on me, but again, you’re there to serve your tenants, essentially.
So I’m selling myself to my tenants, I’m selling myself to the lenders… Like I said, I’m calling 40-50 people sometimes on a deal, saying “Hey, look at me. I might be young, I might be starting out, but I’m getting a track record, I’m doing well. Here are my leases, here are my expenses. Look at the spreadsheets I put together” and I’m throwing it at them and selling myself as a borrower, as someone who’s trustworthy. I’m selling myself to the agents. When I’m even offering on a property — there will be other investors who are in there who want a piece of that action, and I’m sitting there like “My offer may not be always the highest, but I can assure you I’m gonna close on it”, or “I can assure you I’m gonna take care of this place” to those who are more emotionally attached.” So I’m selling myself to them… To my investors as well – I’m selling myself as a person who’s gonna manage their money well and who’s gonna take care of it and give them the return that they deserve.
A lot of this is networking, a lot of this is talking. Some people say it’s having a silver tongue, essentially. So you’re always just trying to make people feel comfortable with you, make people trust you – which they should; I’m not saying I make them do it and screw them over, but you always want to bring up your own reputation and then sell yourself to whoever it is you’re talking to. In those regards, you’re going to get the best deals, the best tenants, the best investors.
So that’s a part of it, and then the other thing is don’t take no for an answer. You’re gonna get it, but you’re gonna find someone else who’s gonna say yes eventually. As long as you sell yourself, show that your reputation is good, show that you have a track record and you can do it. Of course, that comes with working hard all the time, especially doing the rehab project of the last building. I still have a full-time that I’m doing 40-45 hours a week on top of self-managing over 50 tenants and trying to do a rehab project while picking up other deals, and doing a nightlife business on the weekends at night.
Like I said, you’re doing 100-hour-weeks all the time, back to back to back. I don’t have a wife and kids, no pets or anything like that. You’re not gonna be seeing many vacation days… It’s funny, because for many months, actually, my vacation days were — because I would use my vacation hours to go to a closing, or because my contractor would be like “Something’s wrong” and I’d have to run over there.
I’m kind of going all over the place, speaking about all the kinds of things you should kind of take away from my experiences, but hard work is the generic answer. It really is that if you don’t put in the time and the work, you’re not gonna succeed in this business. Number two, you don’t give up. Perseverance is so important. Don’t take no for an answer and keep searching for that yes. Then finally, being able to sell yourself, know what you can do and what you can offer.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
David Zheng: Yes, let’s go.
Joe Fairless: Let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
David Zheng: Don’t laugh, Redwall series. I’m gonna give a little background. This is basically a children’s book; it’s not The 4-hour Workweek or Rich Dad, Poor Dad, it’s actually a children’s book. I grew up reading it. I love them so much because a lot of the characters inside, they persevere through a lot of hard times. They’re always striving for something and it inspired me. I took that all through my elementary, middle school, high school, college years, and I was like “If they can do it, I can do it.”
Joe Fairless: Best ever deal you’ve done?
David Zheng: It was that big cash-out refinance that we were talking about on that three-unit. Again, that thing really catapulted me into the multifamily business, so it was definitely the best deal.
Joe Fairless: Best ever way you like to give back.
David Zheng: Setting example. Like I said, I’m very active on social media and I like to post up inspirational things, whether it’s a deal I did or just a quote I found, or some kind of meme. And people come and ask me questions, or they come to me and say “Hey, you know what? That status just really picked me up one day.” I’m like, “I’m gonna keep doing it”, and hopefully I’ll inspire more people.
Joe Fairless: How about a mistake you’ve made on a particular deal that you can think of?
David Zheng: All roads lead back to that three-family, but essentially, with the rehab project, the most mistakes I’ve ever made was not looking up local laws, permits, occupancy, things like that. I almost got condemned on, I was almost sued… It was all over the place. I finally got it straightened up, but I had no idea about any of these things until push came to shove.
Joe Fairless: Who was gonna sue you?
David Zheng: The local government. They were saying I had tenants in there when they weren’t allowed in there, I had outstanding [unintelligible [00:27:16].25] my contractors were supposed to take care of, but they didn’t. Again, another story for another day, but the local government – they were trying to put all these things on me, essentially.
Joe Fairless: And how did you not get sued and navigate around it?
David Zheng: Basically saying, “Hey, I’m in the wrong, I’m sorry. I’m gonna pay a couple fees to you guys to get these things taken care of.” I called my contractors to clear it up… Essentially, anything that I could shove on to them because it was their fault, I did. Things that were my fault – again, I basically just ponied up, said “Hey, I’m sorry. I’ll pay the fees that I need to. I’m not gonna argue, and I’m gonna get these things taken care of right away.” Selling myself as a young real estate investor trying to make the area better – which I was, so they respected that. But it was still a lot of headache that I had to deal with, but we did get a result.
Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you?
David Zheng: Most likely just e-mail. If you guys can end up finding me on Facebook, feel free to follow or add me as a friend. My e-mail is email@example.com. I’m very active, so I usually respond to the e-mails promptly.
Joe Fairless: And will you repeat that e-mail again?
David Zheng: Yeah, it’s firstname.lastname@example.org.
Joe Fairless: Alright, well this has been a power talk on how to scale quickly. Two and a half years, over ten properties, and you did a phenomenal job summarizing earlier… I’ll take a crack at it as well for your keys, and I’ve written down five of them that come to mind. One is your resourcefulness and persistence – you don’t take no and you find a way to get the job done. Two is being fiscally-responsible; you’re making money and you’re working hard at making the money and then you’re keeping the money, and then you’ve reinvested the money. Three is finding deals – we didn’t even touch on that, we didn’t have time, but you’ve been finding these deals that work. Four is you’re someone who people trust; that is something that might be talked about a lot – people do business with those who they know, like and trust, but it really isn’t something (I don’t think) that can be taught, it’s just something that if you’re either a good person with genuine interest to help others and grow your business or you’re not, and if you are a good person and you’re true to your word, then people trust you and they do more deals with you. And then five is what you mentioned – you said “Sell, sell, sell”, and I thought you were talking about selling properties, but then you didn’t talk about that at all, you talked about selling yourself. You’re always networking, you’re selling yourself, to the tenants, to the agents etc. Those are the five keys that I wrote down for your success, and thanks for going into the case study on how you got the loan, how you had to do 30-40 calls with lenders etc.
I hope you have a best ever day, David. This has been an inspirational conversation. We’ll talk to you soon.
David Zheng: I appreciate it, thank you for having me on.