JF1427: Debate 03: Fix & Flip Vs. Buy & Hold with Eric Kottner and Mark Dolfini

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If you’ve been wondering which of these strategies are best for you, then tune in and hear what the respective experts in their field have to say about why they chose their strategy. Even if you know your strategy, these debates are extremely informative for everyone, no matter the experience level. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Mark Dolfini Real Estate Background:

  • Husband, Father, and U.S. Marine Veteran
  • Currently oversees the ownership, operation, and management of $40 Million worth of Real Estate
  • Volunteers with various veteran’s causes as well as Junior Achievement
  • Based in Lafayette, Indiana
  • Best Ever Listeners can get a free pre-release version of his new book at www.LandlordCoach.com/BestEver
  • Say hi to him at https://landlordcoach.com/
  • Best Ever Book: Think and Grow Rich

 

Eric Kottner Real Estate Background:

  • Full time investor since 2006
  • Started flipping in 2011
  • Joined a high volume flipping company in 2015, where they did 5-7 flips per month
  • Has done 15 flips since going back on his own
  • Based in Cincinnati, OH
  • Say hi to him at:

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, welcome to another round of the Best Ever Debate. Today we’re pitting Mark Dolfini versus Eric Kottner. Mark’s gonna be representing the buy and hold approach, Eric is gonna be representing fix and flip. The purpose is not to prove which strategy is superior, but rather which strategy is best for you.

We’ve got four categories:

1) barrier to entry

2) risks

3) potential returns

4) if it’s maintainable in a downturn.

They’re gonna be talking about their approach based on those four categories, and you can go to BestEverShowCommunity.com (I think BestEverCommunity.com works too, you can just do that). That will take you to our Facebook page, where you can jump in the conversation, talk to Mark, talk to Eric and tell us which strategy is best for you based on this episode, or just ask them some questions that you have about the content and the conversation that took place… So enjoy the episode, and we’ll talk to you tomorrow.

 

Grant Rothenburger: Alright, it looks like we’re live. Hi, everyone. Thanks for tuning in to the third Best Ever Debate. Today I’m joined by Mark Dolfini and Eric Kottner. How are you doing today, Mark?

Mark Dolfini: I’m doing great.

Grant Rothenburger: And Mark is here to argue the buy and hold side of this debate. A little bit about Mark – he has been a previous guest on this show, and he is a  husband, father, U.S. Marine Veteran, so thank you for your service. Currently, Mark oversees the ownership, operation and management of $40 million dollars worth of real estate. He volunteers with various veteran’s causes, as well as Junior Achievement. He is based in Lafayette, Indiana, and he has a new book that has recently come out… Or is coming out, Mark?

Mark Dolfini: I’ve got two books. The Time-Wealthy Investor published last year in July, and I’ve just released The Judge a week ago, Friday.

Grant Rothenburger: Okay, cool. So LandlordCoach.com/BestEver, and you have something set up for the Best Ever listeners there.

Mark Dolfini: They can get a free copy of the download of The Judge, and also there’s some videos on there as well, explaining the VIP process outlined in the Time-Wealthy Investor.

Grant Rothenburger: Perfect. And Eric Kottner is a personal friend of mine here in Cincinnati. He’s joining us — you’re in one of your flips at the moment, aren’t you?

Eric Kottner: I am. We’re actually gonna get the professional photos done today, and hopefully get it on the market this weekend.

Grant Rothenburger: Very cool. Obviously, Eric Kottner is here to tell us about the fix and flip side of this argument. He has been a full-time real estate investor since 2006. He started flipping in 2011, and in 2015 he joined a high volume flipping company for two years. They were doing 5-7 flips per month. Since, he has gone on his own again and has done 15 flips personally.

Today, obviously you guys are debating buy and hold versus fix and flip, and we’ve got four points we’re gonna hit: barrier of entry, risk, returns and how maintainable is your strategy in a downturn.

With that, we’ll go ahead and start with you, Mark. Do you wanna tell us a little bit more about yourself? Then we’ll dive into the barrier of entry after that.

Mark Dolfini: Sure. I started in real estate back in the late ’90s. I proceeded to make every mistake you could possibly make in real estate… So if there’s one out there, I’m not sure that I haven’t made it… A couple times, because the first time wasn’t expensive enough. You learn pretty quickly that way. [laughs] But I’ve done a lot of different things. I’ve done some flips, I’ve done a lot of different things in terms of contract sales, and holding paper, and trading paper, and stuff like that… But it’s all been centered around real estate.

But my strategy which works best for me is buy and hold. I’ve always bought things with the eye towards holding onto them, and really it’s been a strategy that’s worked out well for me, and maybe it will work out for some of your listeners as well.

Grant Rothenburger: I think it already has, and hopefully we can encourage some more, unless Eric has something to say about it…

Eric Kottner: I mean, just like Mark, I’ve been in this since 2006; I actually started as a landlord, owning rental properties, along those lines… And throughout the few years I’ve been doing that, I made every mistake in the book, just as I’m sure Mark has as well, and I learned over these few years that just me being that landlord just really wasn’t what I wanted to do, it wasn’t what matched my skill sets… So down the road, I’ve hired a property manager back in 2008-2009, I got my real estate license, tried my hand at being a realtor in 2009, which was — once again, we talk about mistakes we made in real estate… That would be one of those. [laughter]

In 2011 I saw that there’s an opportunity to buy properties low, fix them up and start selling them. And actually, in 2011, when I did do my first flip, I had it under contract within three days, and it was one of those things that I learned that (as we’ll talk about later) there are things you can do in a down market that will still get you to sell your houses fast and make a good profit on them.

But yeah, I learned that I do a lot better dealing with problems that are in front of me, with construction work, or houses, along those lines, than so much dealing with emotions of other people, along those lines, and having to talk with tenants and everything along those lines… And just fitting that skillset, fix and flip is good for me, and also for making sure that when I go into a project, I do it 100% because I know I’m gonna be selling off to somebody else. So it benefits me to make sure I put an extra little bit of money into it, knowing that I’m gonna sell it to a homeowner down the road, and just only keep it for a short period of time.

Grant Rothenburger: Okay. I love how you did a little bit of foreshadowing there for the maintainable in a downturn… Okay, so let’s talk about barrier of entry, and we’re gonna grade each one of these on a scale from 1 to 5. So barrier of entry, difficulty to entry, 1 being low, 5 being high… When we get to maintainable in a downturn, 1 will be easily maintainable in a downturn, 5 is very difficult to maintain in a downturn. So with all that being said, Mark, will you kick us off with your argument for barrier of entry for buy and hold?

Mark Dolfini: Yeah, I rated that as a 4, and I’ll admit that it is hard to get into — that’s the one thing, that’s the one constant that I hear when people are saying “I wanna get into rentals, but I’m gonna start with wholesaling, and maybe do some flips, and then get some cash, and then buy some rentals.” So from that side of things, I will tell you it is difficult.

Back when I was starting out in the early 2000’s I just needed to understand how the banks were thinking, what they were looking for in the underwriting process, and that’s what I showed them. It wasn’t anything other than just learning that. Now, the banks have gotten very sophisticated in terms of what they’re looking at; they question everything, and it is a lot more difficult to even buy a property that you live in for a few years and turn that into a rental. It’s much more scrutinized than it was even just a few years ago.

So it’s not as easy as it was, but I didn’t rate it as a 5, because I didn’t wanna make it sound impossible. I rated it as a 4, just because there is significant capital that you’ll have to have to get into a decent property, and not buy a property that — if you look at the money and it’s $30,000 to get into a rental, for that $30,000 rental property you’re like “Oh, my gosh…” That’s not the type of property you really wanna be getting into in every market. In some markets it’s okay, but not every market is conducive for that. So I rated it as a 4 just because of the capital outlay, that you’ll have to almost always have cash or cash equity in a deal.

Grant Rothenburger: Alright, cool. Eric, do you have a response or a question to what Mark just said?

Eric Kottner: He made some very good points. With all of real estate, especially rentals or fix and flips, there’s gonna be a lot of capital involved, and raising capital, depending on what market you’re in, can be the easiest or the hardest to do, depending on your skillset levels, along those lines. But I completely agree with him – getting the capital, talking with the banks is probably one of the more difficult things to do right now.

But for my difficulty level on fix and flips, I actually had it a little bit lower… And the only reason I say that is because I had it at a 3. The main reason for that was mainly for the fact that in a fix and flip there’s a couple ways that — you can either come into it like I did, with a lot of capital, with your own money, to start fix and flipping… I actually refinanced my rental properties to start fixing and flipping back in 2011, and that’s how I got my start.

In this market right now though, I’ve been seeing a lot of people that [unintelligible [00:09:09].10] either joint-venturing, people that actually had done construction work, or had been a general contractor for years are not partnering with actual experienced real estate investors to get their foot in the door, to start fix and flipping properties themselves.

So if you don’t have the capital and you have the skill to be able to turn a house around – that’s one way I’ve seen a lot of people pretty much start on fix and flipping before they can build up that capital like I was talking about to actually start doing fix and flips on their own.

So I’m essentially stating that if you have the skill or the mini-skills, you can pretty much learn [unintelligible [00:09:42].22] somebody, similar to what I did with the high-volume company a couple years ago… Or you can use your own money to do fix and flips, which obviously at this point it’s a lot higher to get that money to start off with. But then after you have a couple flips under your belt, you can start easily qualifying for hard money loans, going to a bank like Springs Valley where you can put about 15% down and get a lower interest rate than hard money loans, along those lines.

But if you have the handymen skills or the money, you can relatively jump pretty quickly into fix and flips.

Grant Rothenburger: Alright, cool. Mark, do you want to rebut or have anything to say to Eric?

Mark Dolfini: Yeah, I have a question on that, because I think that you were spot on, and everything that you just said is 100% correct. The question I would ask though, because your barrier to entry that you have so far, that you’ve identified, is capital, and I think that is THE barrier that most people can’t get through… What about skillset though? Because I think that is a significant barrier, where it’s not just being able to do the thing… It’s being able to do the thing that’s appropriate to that property.

You’re in the Cincinnati market, and it’s a great market, but there’s still gonna be areas where you know what – marble is not the best use to put on this countertop… But you know that, because you’ve done that. You’re laughing because you’re thinking “Yeah, I know people who put marble in a not-marble neighborhood.” So what would you say to a skillset in terms of it being a barrier to entry in terms of what’s appropriate, so you don’t over-fix a property and remove the emotion from it to say “Okay, you know what, I need to look at this clinically” and say “You know what, this is a Formica type flip”, and you’re not fixing it to what you would like, but to what the buyer would like… So how would you address the barrier to entry there?

Eric Kottner: The barrier to entry along those lines would be essentially going to the REIA meetings and talking with actual experienced investors. When I talk to people that don’t have the skillsets to be able to go in there and do the properties, I say that their most easiest way of entry is actually partnering up with an experienced investor… And hopefully, the experienced investor is gonna tell them “This is Formica, this is granite, this is quartz.”

It’s funny that you bring that up, because this is actually the first property I’m in now that I actually used quartz in, because I’ve found it for $55 a square foot. So I went a little bit higher for my materials on this one, but you’re exactly right – am I over-improved here? Did I hit spot on? Now that we’re in a deep sellers’ market, with these upgrades on there… I’m not saying you have to go [unintelligible [00:12:06].24] level, where they spend like $40,000 more and raising the price $70,000. There’s no way that’s gonna work. But an experienced investor is gonna tell you, “Okay, if we can upgrade from granite to quartz here, if we go a little bit nicer, spend that $5,000 more, we can push this price point of 230k”, which is what I’m gonna be asking for this one, and just kind of see how the market takes it.

We’re not going too deeply up on there, so for someone starting that has the skillset of being a handyman, I would recommend that they job-shadow a reputable flipper… That way they understand the price points of what to put in for the cabinets.

For the ones that have the capital, that have the money and wanna start right away, I would say make sure they go to a REIA group, make sure they just talk around… Because then once you talk to people, it’s like “Oh, $150,000 – yeah, you know…” If it’s in a questionable neighborhood where it’s like half rentals, half flips, I might put granite just for a sparkle factor, because no one’s really doing it, but I won’t go completely all out about that. That would be my one special feature to it… Whereas if it’s a $230,000 property, I’ll put a backsplash, I’ll put quartz to try it out. If it’s doesn’t work, I’m just gonna readjust on my nest flip that’s close to it.

Mark Dolfini: Right. So what would you say to the person in terms of barrier to entry that has no skillset in terms of being able to rehab? I mean, they might be able to hold a paintbrush by the right end, but that’s about it. Because I think that’s a significant barrier, where most people are trading their time for money, and that’s the definition of a job, right? So if they’re trading their labor to do all the work themselves, what would you say to the person that does not have that skillset?

Eric Kottner: It’s essentially along those lines of just getting into corporate America; you can either do an internship, or a job-shadowing of an experienced investor. Right now investors, the ones that are pretty much picking up more properties, they need somebody to either help — if you’re good with numbers, which I learned I was really good with my accounting background of doing numbers… I could do the comps and repair estimates relatively quickly.

Now, my repair estimates – I always give a fudge factor of about 10% in homes that are 1970’s and more. If I’m dealing with a 1920 home or more, or in that range, then my fudge factor is close to 15%-20%. It also depends on the level of rehab.

So I’ve always been really good with numbers, and that was the one reason I did join up with the high volume company that I did, was because of the fact that within two or three minutes I can give you a valuation of property, I can give you an idea of what it needs for repairs… And yeah, we were pretty much within 5%-7% of the numbers I said.

So I’m not handy at all… I make the joke of it as well where every time my contractor is seeing me on the job site, they make sure no tools ever get in my hand… [laughter] So my strength was my numbers, and you could have somebody that is just wanting to evaluate the deal – “Hey, what does this look like?” and be able to job-shadow them, and then get hired on as an asset manager or acquisition manager for the title of the company, while you’re learning and fix and flipping on your own while learning under an experienced investor.

Grant Rothenburger: That makes sense, but on the same note, Mark, can someone also partner with a more experienced landlord and kind of get the same on-the-job training?

Mark Dolfini: Yeah, it’s a  little bit differently, from my perspective… I think the barrier on that side is perceived to be less, let’s just put it that way… Because a lot of times when I’m seeing people that are making mistakes in the landlording business, or even the property management business, is they don’t know what they don’t know. That’s the problem.

In this particular case, you could get someone that would go in and say “Okay, what’s it gonna take to renovate this bathroom?” and you can get three estimates and you know the number; you can interpellate the number… Based on what they see, of course; you get in and there’s termites or [unintelligible [00:15:43].06] but those are the sorts of things — that’s why you bake in 10%-15% on overage…

But in this particular case, what I’m finding most often, especially when I’m coaching or consulting other landlords, is the fact that they don’t know what they don’t know. They don’t even see the risks that they’re taking because it hasn’t been a problem yet, and they don’t see the problem where them just driving around and picking up rent – they don’t really ever value their time, so they don’t even see the few things that they’re making mistakes on. They go, “Well, if I don’t drive around, I won’t get it”, and I’m thinking “That’s a game not worth winning”, and you’re not setting up the proper infrastructure to replace themselves as quickly as possible.

So more often than not, I’m seeing mistakes of just ignorance, or just things that they just didn’t think about because there hasn’t been an issue. You could shadow another landlord, but I almost think it’s — from the tribal method, you’re learning more bad mistakes, to be honest with you.

Eric Kottner: I do have a question for Mark, if that’s okay.

Grant Rothenburger: Yeah, sure.

Eric Kottner: One of the things you might hear on this barrier of entry, people wanna talk about “What if I get a property on land contract, or I can buy it with seller financing?” – that obviously if you can find a seller that wants to sell on a land contract or their own financing… That would lower your barrier of entry. What advice would you give to somebody who would try to rebuttal you and saying “It’s easier than what you’ve previously stated, because I have these options in place”?

Mark Dolfini: Well, that’s certainly one of the things that you can do – you can buy a property on contract, but the contract is gonna have to allow you to do that, because a lot of contracts, a lot of owners may not want you to purchase the property for the purpose of renting it out. The contract may stipulate that you’re not allowed to do that. So that would be one thing that I’d be careful about.

But as long as you’re allowed to do that, you can get into the property, but you’ve gotta understand from that side you can lower your risk, but then again, I think from that side of things where if you can mitigate the risk by getting very favorable contract terms – like if you’re gonna have a balloon that’s gonna be pushed out into the future and you’re not gonna be looking at a two-year balloon or three-year balloon… Because this is the whole point – they wanna get cashed out, right? So if you can mitigate those risks by having a very favorable contract that allows you to do what you need to do, then I don’t see a problem with that whatsoever. In fact, I’ve done that a couple different times; in fact, that’s how I was able to build up a part of my portfolio back in 2006 and 2007.

There was a guy who had 20-something units that he just — he didn’t wanna be a landlord anymore, and he sold them to me on one contract. So from that side of things I think it’s great, but you have to make sure that that contract is written in a way that it allows you to do what you need to do as a landlord.

Grant Rothenburger: Easy enough… Well, easy said, anyway.

Mark Dolfini: [laughs] There’s a lot of people out there that are in pain, though. And Eric, you bring up a great point – there’s a lot of people out there that don’t wanna be landlords anymore because they’re just so emotionally spent, because they’ve never set it up as a business, they’ve never set  it up to be scalable to where they are removed as the bottleneck for all the information to pass through… And it’s their fault; they won’t admit it, but it’s their fault.

That was the problem that I had back in 2008-2009 – I was running 92 rental units all by myself, and my life was a complete, total disaster. I’ll own it, because I was the one that created that problem.

Grant Rothenburger: That sounds like a disaster, like you said

Mark Dolfini: If you can imagine a photo of the Hindenburg… That’s kind of what I looked like.

Eric Kottner: We’re getting into a great segue for risks here, so…

Grant Rothenburger: Yeah, we are… And you’re gonna start us, so go ahead, Eric.

Eric Kottner: One of the things when it comes to fix and flip is there’s a lot of great risks involved… As Mark was just talking about, dealing with headache landlords and people that just wanna sell out… The risks usually are not any less when it comes to fix and flips. You have to know what area you’re buying in, you have to know what’s on the property.

For someone starting off, on there you can mitigate those risks by hiring a professional inspector to come in, or even a general contractor to come in and point everything wrong with the house. You’re gonna spend a few hundred dollars to make sure the first few times you do it… You’re gonna spend about $400-$600 to make sure that you have everything pinpointed that’s wrong with the house… Even more if it’s a foundation inspection.

With those inspections, you can mitigate your risk on any property that you’re going into. And for people that say “I don’t wanna spend $400-$600 on the inspection”, from somebody who has made mistakes, you’re going to spend thousands and thousands more if you decide to go at it alone.

One of my current flips I have right now – there’s sump pump irrigation that pumps water to the outside, but the inspector found a sump pump on the inside and was trying to find out what’s going on with it. Now, because it had the sump pump inside, they pretty much wanted a first-time homebuyer say “We want this company specifically to fix this issue”, and instead of $4,000 it was $7,000, just to remediate that fix, to put a sump pump [unintelligible [00:20:22].22] Yeah, there’s no way I can really go against that unless I just want to back the buyer out, and then try to find another one. But for me, it’d be easier to deal with this one, because it was a strong buyer, so I went ahead and went with it and got it taken care of. But I didn’t have an inspection done on that one; that one I’ve been hurting a little bit on… But I also have two other flips where I’m gonna make good money on. The one I’m currently in right now, I should be set to make about $25,000… Which is okay in the Cincinnati market, at least in the $230,000 price point.

But yeah, with fix and flips you have to find every problem, because it’s not like a tenant is gonna move in there and they can live with the older bathtub for a little bit. An inspector is gonna come in that’s a professional, that’s hired by the buyer to find everything that’s wrong with your house, and then it’s gonna be up to you to make sure that that gets fixed.

Grant Rothenburger: Right. Mark, anything to question or add to that?

Mark Dolfini: You’re 100% right, because I ran into the same problem with people that — if you’re talking about inspection, that’s kind of your insurance policy before the transaction, right?

Eric Kottner: Yes.

Mark Dolfini: On the front-end. Well, I run into the same problem — I cannot believe the amount of people that look at credit reporting, or when you’re running an application on an applicant as a tenant… And they look at that as a commodity. You know that there’s good inspectors and there’s bad inspectors, and just like there’s good credit reporting and bad credit reporting. It’s just a commodity. They get it 30-60 days [unintelligible [00:21:46].10] and meanwhile, this person is currently being evicted today. And there’s certain of them out there that it’s just a data dump. They just, you know “Okay, pull their credit, check the box”, and that’s in. Meanwhile, that individual is getting evicted that day.

So you really have to value not just the information, but what the information represents and how you’re getting it. So I think that that’s very good in terms of risks.

I don’t know if you actually value that as a number, but one of the things in terms of the risks that I have a question for you about is what happens when you’re in — you obviously have a preferred set of subs that you use, which kind of removes you as the bottleneck from doing all the work, so that’s great, and this is something that I deal with as a property manager all the time – what happens when one of those subs gets flaky?

Everybody right now is having the same problem in terms of labor. There’s a huge labor shortage out there for just people to show up for an interview, for god’s sakes… Right? [laughs] I feel like I wanna give away a free Vespa for anybody that wants to show up for an interview. But my biggest concern–

Grant Rothenburger: Come on…

Eric Kottner: [unintelligible [00:22:48].12]

Mark Dolfini: So that’s to my point though – how do you mitigate the risk for when one of your subs gets flaky? …whether it’s them, themselves, or their guys don’t show up, or anything like that. How do you mitigate that risk?

Eric Kottner: I’m glad you brought this up, because the way how everything is going along those lines – contractors are probably very similar to tenants, where on paper they’re gonna look very good, [unintelligible [00:23:16].18] Google reviews look good, but they completely flake on you when they get a better-paying job with a retail client… They just completely go off.

So one of the things we actually do is we always have our general contractor have a — I’m trying to think of the proper terminology for it right now… But it’s a contractor contract, along those lines; it states “This is what you’re put in the job for, this is who’s providing the materials for this job. Here’s a W-9 that we also need you to fill out, so that way we can report for tax.”

Then one of the biggest things that we have in all of the contracts is a deadline date. So if I have a contractor that says “This is gonna take about 4 weeks to complete”, we’ll say “Okay, we’ll just put it on this contract. We’ll put the contract 6 weeks out, and then if it’s still going on after 6 weeks, we’re deducting $100/day from what your proposed quote is.” That’s one way to mitigate that… But once again, once you get into that and you get into a dispute, you have to take it to small-claims court, just as you evict a tenant, go into [unintelligible [00:24:15].07] But I have that contract going out there, and actually, the last contractors I got were referrals from other investors.

Generally, the GC that I have right now pretty much works primarily with me and the other investors that referred him to me. He’s very selective on the investors he chooses, which is good for me, and I’ve used him in four projects right now, and other than the hiccup we had with [unintelligible [00:24:40].12] everything else has gone absolutely smooth. I’m very lucky to have a good general contractor now, but yeah… He signed the contract, did the W-9, I did a [unintelligible [00:24:48].20] report on him, along those lines, just to make sure that he is what he says he is. He’s been in this business for over 6-7 years, he’s been in  construction for over 20 years, and he doesn’t have a criminal record, which to me — that was actually the question I was gonna ask you here shortly… What’s the biggest criteria you have for your tenants? Because I know for my properties on there, I care more about the formal reporting, eviction report, than so much for the credit report.

Mark Dolfini: So in  terms of risks, where I see it — I’m gonna go so far as to rate it as a 1. I think that real estate is one of those things that is absolutely completely and totally forgiving if you buy and hold. Even in your own industry, what’s the fallback? Well, I can’t sell it, so I’ll rent it. And if you hold on to that long enough, eventually the equity will catch up, and where does cashflow come from? Cashflow comes from equity. So it’s very forgiving, and that’s the one thing where even if you’re not getting — people say “Well, I’m gonna lose money every month because my mortgage payment is $800 and I’m only able to get $600/month out of this rental.” Well, okay, I get that, but you’re still getting someone paying two-thirds of your mortgage for you. And then obviously you’re gonna have other expenses, but my point is it’s very forgiving.

So if you have to contribute to this annuity on the front-end for five or maybe ten years, you’re gonna get the annuity payment at the back-end eventually… Unless you just bought something completely underwater, on the banks of Chernobyl, it’s not gonna work out that way. But realistically, real estate is very forgiving when it comes to that. That’s why I rated it 1.

But in terms of mitigating the risk for the residents, my background is in accounting as well, so this is like a nerd-fest, I love it… But you’ve gotta understand the metrics that you’re getting into. They’re climbing in the bed and they get so wrapped around other things that don’t matter, but it’s those intricacies — I don’t care if you’re looking at it cash-on-cash, or cap rate, or IRR, or however you wanna slice and dice it, you have to consider how those metrics are gonna be delivered, how is that going to happen? What’s the management, what’s the boots on the ground that’s gonna get you to those metrics? And a lot of times, especially with landlords, they say “Oh, well I can get this property and I’ll rent it for that much” and they don’t ever value their time, the time that they’re gonna put into it. So that’s the problem.

But from what I’m looking at, to answer your question, Eric, when I’m underwriting someone, I underwrite them just as if I was gonna extend them — if it’s $1,000/month, as if I’m gonna extend them $12,000 worth of credit. That’s how I underwrite it. And I look at it, and it’s not just, like you said, criminal background reporting, which is extremely important, because most drug crimes are actually happening within rental properties, and that’s a fact… You don’t want that nonsense going on in your rental property. But you wanna make sure that you’re making a calculated risk and you’re not setting anybody else up to fail.

So underwrite them just as if you would underwrite anybody else; look at their expenses, look at their credit. Maybe they’ve got a bad score, but what is the score about? What’s making up their credit report in general? Look at their payments. What payments are they making? Are they making these payments? Those are the things that are really much more important than someone coming to me with a 720. I wanna look and see what their expenses are, based on the job that they have. So I’m underwriting it just like I would any other bank loan, to be honest with you.

Eric Kottner: I completely forgot to add, I’m glad you brought up the ranks of what we’re doing – for fix and flips I would actually put it at a 4. There is a lot of risk involved with it. As you said, we have to buy it at a certain price to be able to make sure we make a profit.

Also, the fact is that once you’re out to sell it, you have people that are literally working against you to make sure that they can either get the best deal possible, or make sure the house is in the best shape possible. So if you don’t do those properly to begin with, it’s gonna hurt you when you’re trying to sell it.

Mark Dolfini: And the thing that really annoys me about people — not in your industry… But I think it’s unfair – they’re gonna look at you and they’re gonna say “Well, what did Eric pay for that property? Well, I’m not paying that… He paid $150,000 two months ago, I’m not paying $225,000. That’s ridiculous. He’s ripping me off.” They don’t look at value, they look to see what you paid for, as if that’s some metric that should matter. It doesn’t matter that you put 30k in improvements and now the house may be worth 250k, but they don’t wanna pay that 225k. It’s very unfair, but unfortunately that’s also one of the things you’re up against.

Eric Kottner: I’ve been fortunate enough where I’ve never had that issue. I’ve had people ask [unintelligible [00:29:16].00] I’ve been upfront with them too, and then I tell them exactly what I put into it. So I’ve never had that pushback, and it could be because of the market. [unintelligible [00:29:25].05] seller’s market, saying “Well, if I’m gonna back away, I have two more people that are gonna take my place.” [laughter]

But yeah, I’ve heard stories where people think exactly like that… But yeah, when you go to sell it, they are people that are gonna fight against you about the house, and that’s why to me it’s a heavier risk than a buy and hold is.

Grant Rothenburger: Great. And before we moved on, I just wanted to mention to all the Best Ever listeners and viewers watching and listening to this – you can head over to BestEverShowCommunity.com and vote on which strategy you prefer or who you thought debated better… And I’m pretty sure — didn’t we say the loser is gonna do some burpees? [laughter]

Mark Dolfini: I’m doing mine offline.

Grant Rothenburger: We’ll just take your word for it.

Eric Kottner: [unintelligible [00:30:08].29] but I don’t wanna do burpees. [laughter]

Grant Rothenburger: Okay. You guys covered everything with risks, and we’re on to returns now. Mark, we’ll head back to you. What do you have to say about returns on the buy and hold side?

Mark Dolfini: Buy and hold side – you have to buy them right. It’s the same thing with what Eric was saying, but I’m gonna do some voodoo math here, because I’m gonna rate it as a 4. And the reason why I rate that so high is because there’s one nuclear button that I can’t understand even why the IRS allows this… But the 1031 tax-free exchange that happens when you sell a property, and you can roll that into another property… If that didn’t exist, this number would be far less. But when you can get those properties — and I have to give my disclosure, because I am a  licensed broker and I can’t give tax advice and all that stuff, so definitely talk to a good tax preparer that get you into that, and get you the right information…

But when you have a property that you’ve held for a while, and again, you’ve got substantial equity in the property and the equity returns — you can get more cash that can make more returns for you, absolutely… It makes sense to roll that. But if that 1031 exchange did not occur, I’m telling you, the returns would be far, far less. And that’s a big plus, because you can take that equity that you got on that property, roll that into another property tax-free, and man, that is a huge, huge plus.

And then it resets the depreciation clock, and everything else, so there’s a lot of pluses there. I think the returns — I rated it as a 4 only because I know you can get some [unintelligible [00:31:43].23] flips out there, and you buy a great property and it makes a lot of sense to not hold it for very long, and you can turn it…

I did one this year actually, but it’s all part of a larger strategy in terms of – I take that money and put it into more buy and hold stuff. So that’s why I rated it as high as I did.

Grant Rothenburger: It makes sense. Eric, do you have a question or anything for Mark?

Eric Kottner: No, he explained it greatly. One of the biggest benefits for rentals is the fact that you can pretty much sell a few of them that are like-minded properties and be able to roll into higher properties, higher apartments at a tax advantage. Once again, I’m also a licensed agent, so I’m not disclosing CPA or legal advice.

Grant Rothenburger: We have all the disclaimers here. [laughter]

Eric Kottner: But yeah, that is one of the huge benefits, and as we talked about with fix and flips, just to give the example of the one that I’m in right now – all-in, including my closing costs for this property, I’m probably at about 195k. Because we like easier numbers here, we’ll just round it up to 200k. I had it listed for 230k.

My purchase and repairs – I bought this for 122k; I think I’m about 50k into it, so I’m at 172k. I’m a licensed realtor, so I can save about 3% on the list side as well when I list the property, so I’m saving money there as a caveat. My closing costs would only be about $15,000, and that’s at the highest end.

So at that, I’m about let’s just say 200k for easy math. So if I sell it at 230k, that nets me 30k on (let’s just say) a six-month project, because I bought this late March, it’s late June right now, and let’s just say it takes another three months for me to close it, which it definitely shouldn’t be in this market. So $30,000, six months, my own cash into this is about $40,000, so over that time I’m making over 100% return on my money, just because if you use the APR on an annualized basis, along those lines, technically I’m making off my $40,000, $60,000 off the annualized, for only holding it six months… So yeah, I’m over 100% return, just as he was talking about.

So the returns can be very high, but they can also be very low, where I’m [unintelligible [00:33:48].05] and that one I had for about four months. You can do the percentages if you really want to on there, but that return was not worth it, in my opinion. The only benefit to that one was the fact that I put out my own bandit signs that looked like realtor signs out in front, and the house I actually bought in that area was actually a lead from my bandit sign.

So I’m using a house that even though I made a horrible return on, I got another house project in the process.

So on the good ones you can usually make very high double-digit returns; I would say triple digits may be a little bit of a rarity, unless you wanna use the breakdown number I did… But it’s very common to see over 30% returns on good fix and flips that have properly been done and properly calculated.

Grant Rothenburger: So that’s kind of interesting… Mark, I’ll let you rebuttal as well. I also had a question – “I know you’re an experienced flipper and we’ve talked many times, you definitely know what you’re doing… How come McCauley turned out the way it did? The reason I ask is because, you know, you think with experience you avoid things like that happening, but apparently with experience things like that still happen.”

Eric Kottner: It’s very simple. One of the cardinal rules when it came to real estate – [unintelligible [00:35:04].03] It was an off-market property with a realtor, which as of right, realtors can provide you good off-market deals if you wanna find a way to get connection with them to do so.

So with this property I thought it would be my way in to go in there, so originally when I looked at the numbers, we did $95,000 for $30,000 into it, along those lines, and then we were gonna sell it at $150,000. So that $30,000 became $50,000, including the inspection contingencies. Then also I actually sold it for a higher price, but with my closing costs attached to that, it just became more of a wash, along those lines.

So yeah,  I was at 140k, my closing costs I think were about $12,000, so 152k, and then there’s a few other things in there that kind of negated the $8,000 return. I haven’t done the full numbers on it, so it may be more than a $1,000 what I was expecting… But I was buying it on lower margins that what I usually do, because it was an off-market realtor property, and it was on a decent road in a very hot area that I really wanted to flip more properties in, so I was willing to take the lower margin because I knew I could put one of my signs out there and get more leads on the properties. Because one of my biggest leads – and I’m thinking of a proper term… Where she will know you’re a closer; so your confidence factor… Credibility – that’s what I was looking for.

When people see that you’re already flipping a house in their area, you have that credibility factor when they call you and they wanna sell a house, knowing that down the street you’re already flipping another house. So I took a lower margin onto it, I didn’t have the inspection done, which was one of my biggest mistakes on this one, because it was a [unintelligible [00:36:36].18] and that was one of the biggest things that hurt me.

Mark Dolfini: That’s something that I wanna talk to you as well, because every time we make a mistake – in my own property management business or as a landlord, it’s almost always when we go outside of our system. That’s where I have a question for you, Eric – one of the things that I teach specifically is how to make this systematic; how can I put a system in place that you do the same thing every single time… The inspection is a perfect example. So one of the things that I do, and that’s one of the things that I teach, is “How do I build it as a business?” Because my biggest thing that I wanna do is I wanna create time-wealth for people; I wanna create the ability for them to control their calendar, and I wanna give them more life output, so they’re not beholden to doing this thing.

From the landlording side, I see that it’s actually not that difficult to do. On your side, I see it very labor-intensive. There are obviously companies that can do that and that have been very intentional about building a system around it, but I think for the individual person – and again, this is just because of my belief window… I see this being so much easier to put a system in place; yes, you’re right, you’re dealing with the human factor a lot more than in your side, but you’re still dealing with the human factor, right? You’re still dealing with subs, and you’re still dealing with inspectors, and you’re still dealing with other realtors, which is — talk about egos, right? We both know what that’s like. But that’s the side that I see to be the most challenging to make that systematic, where you just didn’t create another job for yourself.

Granted, you may have great returns sometimes, but when you look at opportunity cost on that $70,000 deal that you had, you actually lost money from an opportunity cost perspective… And I’ve done the same exact thing – whenever we make a mistake with a resident  or an owner that we bring on board, it’s almost always because we go outside of what we’re good at.

So my question to you is “How do you make that systematic?” Or do  you just have to do it to where you just get so big, then you just are able to do that? How can a small individual investor make this systematic where they’re not just creating a job for themselves?

Eric Kottner: That’s an amazing question as a rehabber, because yeah, ultimately when people talk about real estate, they say “The way you’re gonna get to true passive wealth is do landlording, buy and hold, syndications and everything along those lines”, but essentially, what they say is wholesaling and fix and flips are gonna be the steroids that boost up to what exactly you wanna do.

The way that people have built businesses throughout fix and flips was 1) it all depends on your skillsets. If you would much rather be on the field, checking out your properties each day, then you can hire out the subs, get a lower cost, get a lot better return. If you don’t wanna do that – I’m one of those people that I proudly announce of how lazy I am. So me – I interview probably 7 or 8 general contractors to make sure that they knew exactly what I was talking about… And I interviewed them just as I would a middle manager, a project manager, an asset manager, or anybody else along those lines, that I’m eventually gonna want on my team.

So I checked out their projects, I saw what they did, and the GC I have right now has their own operations manager. So the only managing I do is either through text messages… Now, because I still wanna be diligent, I always check out my properties at least twice a week, but I only stay about 10-15 minutes per house, along those lines. And if there is an issue when we go on there, we put it down in writing. I’m out within 30 minutes usually for most of the time; they have it in writing of what exactly we need to do to solve the problem, and they go and just set it in motion.

So for those who wanna kind of back off, you are gonna spend more for a general contractor than you are gonna be subbing it yourself… But like you said, your value is ultimately your time. For me, I only spend about an hour a week in each one of my properties when I’m fixing and flipping, and then the operations manager, GC take care of their own subs and everything along those lines.

Now, I do wanna add in there is a risk to that, making sure that for each job you do, make sure that you get the release of waiver from the subs as well once the project is finished; that way, if there is an issue with the general contractor not paying a sub, they can’t come after you through the property. So I will add that to the risk of something to keep a lookout for.

But yeah, ultimately when it comes to your business, you set “Here’s what I’m willing to do, here’s what I’m not willing to do.” For me, handyman skill side – it’s not my forte, so I wanted to pay more for somebody that I knew was knowledgeable and trustworthy. And just like with any other business, you’re gonna hire slow and fire fast. So I went through seven general contractors – or I interviewed seven general contractors. This is probably my third rotation on an actual team, and they’ve already lasted about four projects for me, where usually the average has been about two or three for me before I’m passed. So this one’s already at four, we’re still going strong, we still have a great communication record.

The thing that made it easier for us as well for communication was we went into a program called Buildium, which is a high-end program which pretty much outlines everything in an app format, that way there is no questions back and forth along those lines. That way I can focus either on raising money or buying new deals – the things I really wanna do.

I also recently hired an acquisition manager that meets up with the sellers, along those lines, where if I can’t, [unintelligible [00:41:48].17] they know how to lock up the contract and send it to a title company, and then I can just focus in on getting the money for it.

So yeah, as you’re building up, first and foremost it’s gonna be your crew. You want a good general contractor, you want a good insurance agent, and then just, as you say, very slowly building up; you buy from one rental property, to the next one, to the next one, then you do a 1031 to a multi-unit… You would just build up that way.

Grant Rothenburger: Did you have a number – assuming you buy right, follow the cardinal rules, what would you say the returns…?

Eric Kottner: The returns I usually [unintelligible [00:42:20].22] $150,000 house, that needs about $30,000 in work, I essentially want a $40,000 gross. So that means my all-in – I have to be at $110,000 for that 40k gross. And then with it being a 30k rehab, that means I need to buy it around $80,000. Starting at 75k for a little bit better, and then start at 80k, knowing that my top number is 80k.

But I don’t do it like percentages, really; I do that when I’m about to sell it and see what my returns are… But when I go to buy it, I do it with the minimum gross amount that I do just for the easier math as I walk through the house.

Grant Rothenburger: In terms of 1 to 5 for our debate, what would you give it?

Eric Kottner: I think if done properly, that would definitely be a 5.

Grant Rothenburger: Okay. “If done properly” is definitely a big part of it.

Eric Kottner: Yes. I think that’s a caveat for all real estate. If done properly, you can make a fortune.

Grant Rothenburger: Yes. So we’re on to our last point, which will be maintainable in a downturn, and I just wanted to point out — I know we allocated an hour, so I wanna be respectful of everyone’s time… We’re coming up on about eight minutes, so if you guys wanna move a little bit faster, or if you have a little extra time, I will leave that up to you guys. Maintainable in a downturn – I think, Mark, you started with…

Mark Dolfini: Yeah, I started with barrier…

Grant Rothenburger: Okay, so you’re up on maintainable in a downturn.

Mark Dolfini: Okay, so… Me or Eric?

Grant Rothenburger: Eric is, you’re right. Sorry. [laughter]

Eric Kottner: Thanks, Grant. So… Maintainable in a downturn – I would probably put it at about 2. Now, is this for difficulty, or is it just for maintaining? Because I have it at relatively difficult, so…

Grant Rothenburger: Yeah, 1 would be easy.

Eric Kottner: Okay, I’ll put this at a 4 then… Because essentially what this is gonna be is in the downturn you have to have a higher level of clientele that can qualify for mortgages and everything along those lines. So in a downturn, you’re gonna realize that it’s now a buyer’s market, and you’re gonna have to adjust for it. So it’s one of those things where if you see that you’re getting into a correction or a downturn, houses are currently selling for 155k – even with you putting all this work into it, you might adjust your numbers to say “This is probably gonna sell at 145k or 150k. I might be able to get 155k, but I’m gonna be paying every closing cost under the book as well”, so I would adjust downward at least 5%-10%, depending on how the market is moving, and definitely keeping a sharp eye on how the credit market is going and how the number of refinances on mortgages is being applied for… On the stock market, watching CNBC for  those numbers, because that’s gonna give you an idea of how to differentiate your percentages and how to calculate it. But yeah, for a 155k house, I would probably do 145k just to be safe…

And then one of the things we always talked about is in a seller’s market you can go for almost any level you want as long as you know the ARV. I’m doing a lot of higher end type things just to try to test the market and test really what the top is. In a down market, you’re gonna have to kind of put in these flashy features, knowing that you’re gonna have to sell it for less than what’s being sold for right now as well.

So where right now I’m testing out [unintelligible [00:45:29].17] testing out backsplash, testing out Bluetooth speakers on there, I may have to put those in any way and still readjust my price in a downturn market, knowing that it’s like “Hey, these are cool features, but now I have the upper hand.” So I’m still gonna negotiate this and find a middle ground for you. It’s gonna help your property sell faster, but in a downturn it’s not gonna really increase the value-add as to what you’re gonna see for right now.

So you would definitely have to be very careful with mixing in those [unintelligible [00:45:57].20] in the house and what it can truly sell for. So yeah, in a downturn it’s gonna be difficult to maintain, and along those lines is too where if you can’t get the number you want into it, you may have to look into selling it on a land contract or a lease option, to sell your home a few years down the road and not be completely bit. Or you might have to sell them, just take the loss and move on to the next one.

Grant Rothenburger: You could be a landlord.

Eric Kottner: Yeah, [unintelligible [00:46:19].02]

Mark Dolfini: [unintelligible [00:46:24].14] back-up plan as being a landlord. Okay… [laughter] No, but that’s absolutely right, and I think that you’re being fair to yourself in terms of risk rating. I do agree with you, I think it is a lot more risk, because we all know there’s gonna be a correction, we just don’t know when and what it’s gonna look like, and that sort of thing. Of course, the last correction was more of a labor market correction than it really was a real estate correction, even though — I mean, it was a labor market problem, right? I was having problems for eight months when the guys on CNBC started coming on and saying, “Wow, things are really starting to get bad out there.” And meanwhile, on the bellwether for the tenants that are not paying rent I had $65,000/month coming in in revenues, and that went from 65k/month to 30k/month, and that was month-over-month-over-month, and that sucked… And mostly because I was over-leveraged; not so much financially – I mean, I was overleveraged financially, but I was overleveraged in time, as well. That was a whole other issue.

So I think I’m rating this as a two in terms of being able to weather a down market, if you are appropriately leveraged. If you’re overleveraged, there’s nothing that’s gonna be able to save you. Even in an up market you’re gonna have problems. But if you’re appropriately leveraged… And I can’t tell you what that is; that doesn’t necessarily mean that — I mean, you can buy a property with 100% in, that’s fine. If you’ve got 30k in the bank that can help you weather that storm, or 50k, or whatever that is, whatever that number is for you to help you weather the storm for 12 months, then you’re okay… But I’m talking from a global portfolio of being deleveraged. So you can buy property fully leveraged, but you’ve got cash in the bank – that’s fine. If you wanna put $50,000 down on a $100,000 house, that’s fine, whatever it is… But I’m just looking at global leverage there.

From my aspect, I put it as 2, because — again, if you don’t get someone that fully pays the mortgage, even if they’re only paying 80% or 90% of it, they’re still paying a good chunk of it, and that’s gonna get you to the other side of that bridge to help build that annuity.

Eric Kottner: I do have to do a couple of remarks here, because I feel like the tables have definitely turned on me for a little bit… One of the big things you mentioned there is if the tenant is paying you, along those lines, where if we had the labor market really go in – the one main downside I know I had on there, where I had a lot of mechanics that were in some of my buildings… And when I say “a lot of buildings”, I own like 30 units, so I’m not trying to sound like a big shot here, but we had like five or six mechanics on there that got laid off, and they pretty much were living off their savings for about two years, and when they couldn’t afford to pay, those five people pretty much dropped all at the same time. Now, for a non-payment or rent issue, at the beginning of the month “pay or get out”, give a three-day notice, and two weeks later you can get them out. If you deal with any tenants that are just being unruly and you wanna get rid of them, we have to do a 30-day notice, so you’re stuck with them for 30 days knowing that they are about to be kicked out 30 days later; that might cause a little more issues to the property while it’s not being paid…

Mark Dolfini: Eric, I think you make up a good point though, because it is gonna be based on location. I know if you’re living in the People’s Republic of New York, you’re just wrong; you’re wrong for being a landlord, get used to it, that’s the way it is. I grew up in that state, so I’m sorry to all my brothers and sisters and friends out there that are living there, but you know… You chose to stay there.

In a state that’s so legislatively against you every step of the way, it’s hard for me to defend against that, so you’re right there. Indiana is a very landlord-friendly state. I think it’s reasonable; I’m not gonna say it’s all about the landlord (it’s not), but it does tend to favor the landlord compared to other states. So it is gonna matter the location in terms of the legislation and the ordinances that you’re up against as well. That’s a very valid point, and that could certainly skew the difficulty in a downturn, and the risk factor as well.

Eric Kottner: I did make those remarks as well, but as you said, there are a few states out there that could be very beneficial for a landlord, whereas for fix and flips, the inspectors in the permit departments that you’re gonna have – I like Butler County up here in the area because I can normally get permits done relatively quickly. But one of the things that could slow down in a flip is having an inspector in the city of Cincinnati, or just scheduling one to be about two weeks out, and if they find one small issue, you’re now scheduled another two weeks out to get that taken care of.

Now, granted, if you have a good crew that knows what they’re doing, they can go off to other projects around the house, but you’re still stuck those two weeks until you can get that taken care of. So yeah, just as it is for landlording laws on there, your permit inspections – and that can even vary by county as well, for good counties and bad counties, for your fix and flips to get permits and making sure you’re doing your job properly.

Grant Rothenburger: Alright. Well, thank you both very much for that. We’ll wrap it up now with some closing statements, and I do believe I have my order right this time… We’ll start with Mark…

Mark Dolfini: I think that fundamentally if it comes down to someone who really wants to be able to control their calendar and create time-wealth in their life, where you’re not looking at the number of transactions you have to do in a certain period of time, honestly, I think this strategy would be for you.

Grant Rothenburger: Eric?

Eric Kottner: The ultimate road to wealth is through passive income, like Mike said, but to get the steroid boost and everything along those lines you’ve gotta know real estate, you’ve gotta know values. The best way you’re gonna be able to do that is in the front lines, either wholesaling or fix and flipping. Once you get in a few good fix and flips, the good, bad and the ugly, you’re gonna know so much more about real estate than if you just passively invest your money, throwing into it.

So starting out with fix and flips, going from there… Keep doing them to earn another 20k, 30k, 40k per flip. If you’re gonna get over 100k/year just off of four properties, it can really help your portfolio down the road. And even at a part-time basis, four houses a year is very manageable for the experienced investors, too. So it’s definitely good to have something in your repertoire and continue doing it, because once you master it, it’s gonna be that nice income… And if you know how to adjust for the downturn, even though it is gonna be a lot more of a risk, you know exactly how to negotiate with your contractors, you know exactly what you need to do in a downturn market to continue getting those $20,000-$30,000 net checks that will help you get towards that passive wealth.

Grant Rothenburger: Alright. Well, Best Ever listeners, thank you for tuning in to the third Best Ever Debate. Again, this will be in the BestEverShowCommunity.com, which is our Facebook group. You can go on there and comment, let us know how we did today, let us know who you think won the argument.

Me, myself – I kind of like a combination of the two, with the famous BRRRR Strategy. Maybe we need to have someone come on and be the third debater here. [laughter] Anyway, I hope everyone has a best ever weekend…

Mark Dolfini: Very good. Eric, so you do seven burpees and I’ll do eight then. Does that sound like a fair compromise?

Grant Rothenburger: That sounds fine.

Eric Kottner: That’s fair, you know… [laughter] I can make that deal, so…

Mark Dolfini: Okay… [laughs]

Grant Rothenburger: Thanks, guys.

Mark Dolfini: Thank you!

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