JF1579: Scaling To 75 Units Using Creative Financing with Jason & Carrie Harris
Jason and Carrie are partners in life and partners in real estate. Together they have built a big portfolio of real estate, comprised of mostly small multifamily buildings. They have also been able to acquire a lot of them through seller financing. Hear how they are able to find and close on so many seller financed deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Jason and Carrie Harris Real Estate Backgrounds:
- They control around $11M in real estate with $1M in gross scheduled income
- They own 75 units, most bought through creative financing
- Based in Lindon, Utah
- Say hi to them at www.creativegainsrealestate.com
- Best Ever Book: Tax Free Wealth by Tom Wheelwright
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Joe Fairless: Best Ever listeners, how are you doing? 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 only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jason and Carrie Harris. How are you two doing?
Carrie Harris: We’re doing good!
Jason Harris: We’re doing great!
Joe Fairless: I’m glad to hear. A little bit about Jason and Carrie – they control around 11 million dollars in real estate with one million dollars in gross scheduled income. They own 75 units and bought most through creative financing. We’ll get into that. They’re based in Lindon, Utah. With that being said, do you two wanna give the Best Ever listeners a little bit more about your background and your current focus?
Jason Harris: Yeah, thank you, Joe. This is Jason speaking here. We’ve lived in Utah – or I have – about ten years. I’m a financial advisor, I do financial services, but I actually started in real estate in 2010. I became an advisor in 2012, and have been blown away by the returns and just benefits real estate has provided us from a passive income standpoint and tax strategy… So I fell in love with it in 2010 and we’ve just continued to grow since then, and wish we would have grown even faster than maybe we have.
Joe Fairless: Cool. So let’s talk about the 11 million dollars that I have in your bio. I read you control 11 million dollars in real estate… So what does that comprise of?
Jason Harris: Almost all of that is multifamily units, two to four units or buildings. We have about 24 buildings right now that we’ve purchased, and most all of them are in that two to four unit range, duplexes and fourplexes.
Joe Fairless: I did not see that coming… Wow. You have 11 million dollars in two to four unit buildings. That’s unique. Why did you take that approach, versus buying in bulk?
Carrie Harris: When we started out – we started when we were in college, and we didn’t have a lot of money, or maybe even the know-how to buy more in bulk… So we actually started out owner-occupying a fourplex, and I think that’s when we started our focus on small multifamily units, instead of larger apartment complexes.
Jason Harris: And to complement that, Joe, I think it had everything to do with financing. We didn’t have a lot of money. The FHA loan we learned about, where you could do as little as 3,5% down, and we barely were able to qualify for it while I was going to school. That set us on a path where we realized “Wow, multifamily units cash-flow is better than that of single-families from our market, or at least in general what our market does.” But also, the financing terms are much better when you’re purchasing property four units or less, versus five units or more… And due to not having a lot of capital in the beginning, not having strong incomes, that was going to be our only option, unless we could come up with other creative strategies.
Joe Fairless: So at the beginning you had little capital, you started in college, you started early… When I do the math, I take 11 million, and say you’ve got 24 buildings, that’s 458k a property… That’s a lot per property. They’re averaging about 460k per property, valuation?
Jason Harris: Yeah. Fourplexes in our market will go anywhere from a low end of 500k up to as high as 850k. Now, this is current numbers.
Joe Fairless: Sure.
Jason Harris: Back then it may have been 300k. We’ve had some good appreciation over the last 8 or 9 years, but duplexes – yeah, anywhere from high 200k to even as high as 600k if it’s a really big six-bedroom four-bath duplex per side. But that’s not very common. Usually, it’s anywhere from high 200k to maybe low 400k.
Joe Fairless: That’s great. I’m not familiar with where Lindon is relative to the big cities in Utah, assuming that Lindon is not a big city… How close is the biggest city, and what is it, to where you’re at?
Jason Harris: Orem comprises of maybe 190k-200k people. The metropolitan of Utah County is over a million, but we’re about an hour South of Salt Lake City and that metropolitan area as well.
Joe Fairless: Okay, got it. 24 properties – how are you financing them?
Jason Harris: Great question. Well, we started out owner-occupying. We bought a fourplex in 2010 with and FHA loan, 3,5% down, fortunately, got a first-time homebuyer credit, got prorated rent, security deposits and a month and a half of not paying a mortgage, so all the capital we put into it we could have back in two months… That’s when I started learning more about the velocity of money and how if we can minimize how much money we put into a deal and get that money back out as soon as possible and retain the asset and help that asset cashflow better and better over time, I can continue to scale and build and buy more without having capital be my biggest hindrance from buying more.
So that was our biggest goal – to get into a position to buy the next duplex or the next fourplex, until our family grew to where we didn’t wanna do that to our kids anymore. So we started with single-family homes, with legal accessory apartments, so that we could still take the rent income from the basement to offset our mortgage, and allow us to continue to invest and build.
Joe Fairless: You started with single-family homes with legal — what?
Jason Harris: Legal accessory apartments, where we could take a part of our home – the basement – and instead of occupying it ourselves, rent it out to another family.
Joe Fairless: Okay, so there’s gotta be a separate entrance…?
Jason Harris: Correct. And that was our primary focus – to take on a $1,500 mortgage, but get $1,200/month in rent from the basement. Now my out-of-pocket expense from my day job is $300, as long as we keep it filled. That allows us to save some of our hard-earned income or our passive income from real estate to buy and acquire more property.
Joe Fairless: Okay. So basically you started with the fourplex, the first one, with an FHA loan, and then you held on to it… Have you done cash-out refinances, or it was new equity coming from the full-time job that you both have?
Jason Harris: Correct. While we lived in that first fourplex, I was new to this, but I would do what I could to try to improve the value of the property, so that I could increase the rents from my neighbors and tenants. So as we did that, equity was built where we were able to refinance out of that FHA loan and into a normal, conventional loan. There are portfolio products in our market that helped, but there was at least 25% equity where I could use that equity as the down payment, refinance out of the FHA and then have it available again to buy another property with an FHA loan. We did that twice; we bought the first one and then we used an FHA one more time.
Joe Fairless: So you only did cash-out refinance twice on all your stuff?
Jason Harris: No FHA loans specifically. You can only have one, unless there’s a qualifying reason.
Joe Fairless: Oh, right.
Jason Harris: We found out in our market there were other lenders that would allow for as little as 10% down on multifamily investing if you were owner-occupying, so we took advantage of some of those products as well. But eventually, we found other ways to not have to owner-occupy property anymore. We had enough capital or income from our rentals where we could build up enough to just buy more multifamilies without having to live in them.
Joe Fairless: And what were those loan programs?
Jason Harris: The ones that we’ve used most here require 15% down for up to a fourplex. So instead of doing the typical 25% down or more, we’ve been able to acquire multifamily properties for 15% down or less.
Joe Fairless: If the equity for those down payments comes from the W-2 job or the company that you have…
Jason Harris: It could be from that. However, a lot of it comes from cash-out refinances and improving the value of our properties and taking the equity from those to acquire more… But obviously, it’s a combination of all of those things.
Joe Fairless: And with those cash-out refinances, a pro is you have that money in your bank account and then can reinvest it; a con is it increases the amount of debt you have on the property, so your cashflow is decreased. How do you balance that whenever you’re approaching your investing?
Jason Harris: Correct, and often that was the biggest indicator – could I do better with the return of equity by taking it out of the property and putting it into another one, knowing that it would impact that cashflow? That was often taken into account and often the interest rate was higher, and since it’s a larger balance, obviously the debt load or service was increased as well… But we were improving the value of the properties and increasing the income along the way, so we could absorb a higher monthly mortgage and still cash-flow. So that ultimately was my main driver – making sure that we stayed within certain ratios.
I like to have 55% or less total debt to income on all my properties, but I mainly care about that from a global portfolio standpoint. So I look at all of my properties separately, but I use an Excel spreadsheet to make sure that the combination of them stays within 55% or less. Then we try to have all of our expenses be 25% or less.
When I say 55%, I should say that’s including insurance and property taxes; so principal and interest is less than 50%, and then the expenses are roughly 30% or less. So as long as I have a 20% or better profit margin per property and globally, that’s kind of what my aim target is. I am working, now that we’ve scaled and have a lot more property, to get that number closer to 75% or less total.
Joe Fairless: And the loans that you all have on these properties – are they portfolio loans that have a balloon payment due at a certain period of time?
Jason Harris: Great question. This particular one does not. It’s a 30-year amortization.
Joe Fairless: That’s nice.
Jason Harris: Yeah, it’s a great product, and there’s a couple different lenders who are able to offer it. Not all the time though have we had to use the portfolio product. Often times those types of products limit you to how many you can have. Some of our projects made sense where there was enough equity to just do a rate and term refinance or a cash-out refinance using traditional loan products, just doing the normal conventional loan at 75% loan-to-value or better. So only certain times we would use the portfolio product, and most of the time it was to acquire property, so that we’d be able to take title and ownership with as little money of our own out of pocket as possible.
Joe Fairless: How did you find the lenders doing that 15% program that you two have used a lot? Or — excuse me, is it 15% or 10%? Yeah, 15%.
Jason Harris: There was a product, it did change, but it used to be 10% down, and we used that one for a couple of years, until they realized that product was too good, and then it did change to a 15% down option… But that 15% right now is 4.75%. If you were to compare other lenders who require 25% down, they may quote you at 5.25%, 5.25%… So not often are you able to find a lender where you can put less down and get a better interest rate. So we’ve been able to maintain the cashflow that we’re trying to get without having to compromise cashflow.
Joe Fairless: How did you find them?
Jason Harris: We were in a real estate investment group, and we networked with other investors who were like-minded, trying to build and grow, and it was during a transaction that we found out someone who was buying a property for us, in order for us to take that equity and put it in a 1031 exchange to buy something bigger, that we found out about the product of what they were using, and obviously we were fascinated by it, so we wanted to learn more.
Joe Fairless: Do you two self-manage?
Carrie Harris: We don’t, not at all.
Jason Harris: We started out that way.
Carrie Harris: We started out managing, but currently we don’t manage any of our properties. We have a full-time manager for all of our properties.
Joe Fairless: Were you emotionally scarred from when you did it?
Carrie Harris: [laughs] Not at all, we were more relieved. It’s a lot of work to keep acquiring properties and also managing them yourself. We realized kind of early on that if we wanted to keep growing, we had to give something up, and we can’t do everything. Our time is limited, so if we can hire out the management, we can focus on acquiring good properties; that was kind of our thought behind it.
Jason Harris: We learned later too, Joe, that by hiring family members who were in lower income levels there’s great tax benefits… So we actually have a number of our family members who work with us or for us in different capacities. My parents actually help us too with the property management, so… They do that full-time.
Joe Fairless: So your parents are the ones managing it, or do you have another company? Or is it a combo?
Jason Harris: Yeah, the long-term goal too is we’re starting our own property management company, but my parents manage all my properties currently. It evolved to that, it didn’t start out that way… But now that we have a number of units, they now do that for us full-time.
Joe Fairless: Any tips for building a business with family?
Jason Harris: Oh, goodness… Yeah, that could be a whole episode or more… [laughter] Trust and honesty, which there is, and separating business from family events obviously is very important. I think for my family and my personality that that’s easy enough to do. It is difficult at times, especially when things aren’t going as well as planned, but all in all there’s great benefits, because who do you trust more than your parents? And it’s worked out very good; I hope it’s worked out really good for them as well. We’re excited about the long-term benefits that could be there as well, and doing it that way.
Joe Fairless: What’s an example of when something didn’t go as well as planned in this business?
Jason Harris: Well, it’s often not necessarily one person’s fault, but in our particular example, just something that comes to mind – there’s some learning curve where there wasn’t a clear expectation of what was needing to be done, and my mom took action on something that she thought was best, but we found out later it’s not legal, and you can’t do that as a property manager; there’s guidelines that you have to follow… So that comes back to either where I’ve gotten a little small lawsuit, or just had fines or penalties…
We’ve had some big surprises where water lines under properties broke, and there’s a big leak… Those end up being really cost-intensive. Things like that come to mind, but you learn from those, and you get better, and have better systems in place.
Joe Fairless: What is the biggest challenge that you two have had growing the portfolio?
Jason Harris: I think the biggest one usually is finding capital. You can always find good deals; it is becoming harder, I think, in our market, but having capital, even with our approach of minimizing how much we put into our property out of our own funds, every single time you buy property and you put capital to work there, now you’re feeling cash-poor again, especially if you’re wanting to maintain reserves for each financed property you have that the banks require… So even if there may be assets sitting there, they have to be there to take care of the other properties that you own. So lack of capital I think is always the thing that keeps you from growing.
Joe Fairless: And some would say it’s lack of good deals, or finding deals. It seems like you two have a knack for finding the deals… There’s always a challenge, in anyone’s business, that’s for sure. It’s just a matter of skillsets, and where you live, and how resourceful you are in certain areas.
Jason Harris: I agree, but I think many have a hard time seeing the highest and best use of property. Just because a property is performing a certain way, in my mind doesn’t mean that it has to always be like that… And I think we’ve done a pretty good job of identifying properties that have great value-add opportunity. I like to buy off current numbers, but I love to look at what the property potentially could do. And when you start finding ways to increase the income from that property and what it could generate, it allows you to find a lot more deals and not have to sit on the sidelines for so long.
Joe Fairless: What’s an example of a creative way you’ve found income or value-add opportunity where perhaps someone else might have overlooked it?
Jason Harris: There’s a variety of things… Parking is good. We’ve been able to go from families to renting to singles, and renting per bedroom, per room. I could take an apartment that maybe is giving me $900/month per apartment and rent it out for $1,300/month per apartment by just going from families to singles. And that’s not a really big change, other than maybe if you have to furnish the apartment, which I’d be willing to do if I put 3k into the furnishings and I get $400 more a month. That’s 160% return on my investment. So those are great options.
You sometimes have enough land on the property where you can add storage units. Bigger families often always need more storage, so you can put a $1,200 storage unit in the back and rent it out for $75/month. That’d be $900 annually – there you go again, there’s a 75% cash-on-cash return; another great return on your money.
You could add carports – that’s a cheap way to add value, where they don’t have to scrape their ice and snow during the winter, and have the sun [unintelligible [00:20:47].09] inside their car, so people are willing to pay more for that.
Let me think of some other ones we do…
Carrie Harris: Renovating…
Jason Harris: Yeah, sometimes it’s sweat equity items – just making the place look nice from the outside. Cleaning up the garbage and trash, making the yard look nicer, and sometimes putting flower beds… We often try to paint our exterior of the building, which doesn’t often cost too much. All of those things could potentially be done for 3k or less, and now people have a lot more pride in where they live, and maybe willing to spend an extra $50-$75/month per apartment for that nicer place that they can be proud of living in.
All of those can be great returns on your money, and sometimes there’s just absentee landlords that aren’t aware of what the current market rents demand and what you could be getting, and I love potentially buying property from those, because they may be at $700/month, but I know they should be at $1,000… So after I take over and add a little value, I’m raising rents to what I think the market would pay for what it is.
Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?
Jason Harris: This isn’t something I learned myself, but I realized I’ve always believed it – minimizing how much of your own money you use to acquire as much real estate as possible, as soon as possible. In other words, buy as much real estate as you can, while using as little of your own money.
Joe Fairless: Very straightforward, and you have talked in detail about how you two have done that up to this point, so no follow-up question there from me. We’re gonna do a lightning round. Are you two ready for the Best Ever Lightning Round?
Jason Harris: Absolutely.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve recently read?
Jason Harris: Tax-Free Wealth by Tom Wheelwright. There are some great golden nuggets in there.
Joe Fairless: Did you get the idea of hiring your parents through that book?
Jason Harris: Yes. I’m reading it for the third time. There’s some great depreciation credit benefits, especially now since the Trump tax laws have gone into effect… Accelerated depreciation and hiring family members, including my children – all of those are great strategies to minimize your taxes.
Joe Fairless: What’s a mistake that you’ve made on a transaction that we haven’t talked about already?
Jason Harris: Carrie and I were talking about that… We’ve made a lot of mistakes, but none of them that have been really that big for us. I honestly feel like our biggest mistake is not taking action as soon as we would have liked. We’ve been in such a great economy and market of appreciation… It took us four years from 2010 to buy our next property, and we always wish that we would have been buying during those times, when prices were so much cheaper.
I feel like our biggest mistake – and many’s biggest mistake – was waiting too long to get started and to get involved and to start doing and start learning.
Joe Fairless: Best ever way you like to give back?
Jason Harris: Carrie and I have a great time taking younger couples out to dinner and sharing our story of what we’ve done. We do a lot of education events and seminars, both in our home and at local restaurants, and recently we’ve had a lot of people ask, so we’re working on writing a book now, to share different ideas and things that we’ve done to get to this point in our life.
Joe Fairless: And how can the Best Ever listeners learn more about what you two are doing?
Jason Harris: Shoot us an e-mail at email@example.com, or our website – we have different events or seminars that we offer: creativegainsrealestate.com.
Joe Fairless: Jason and Carrie, thank you for being on the show, talking about the portfolio that you two have built, how you approach the financing part, the equity part, and just the business model too, as well as adding value. I’m glad we got to the ways that you all add value: renting the bedrooms out versus the actual unit, adding storage units on the property, adding carports, and then doing the exterior renovations and cleanup, as well as — I’m sure you do interior renovations, too.
Thanks for being on the show. I hope you two have a best ever day, and we’ll talk to you soon.
Jason Harris: Thank you, Best Ever listeners, and thanks, Joe.Follow Me: