JF1936: Lost After College, Entrepreneur Turns To Real Estate Investing with DJ Scruggs

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Today we have the privilege of hearing about DJ’s real estate investing story. He had no clue what to do after graduating college, started and ran multiple businesses, before discovering his love of real estate. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You don’t have to be a jerk, but you can always ask why” – DJ Scruggs

 

DJ Scruggs Real Estate Background:

  • Has owned and operated multiple businesses for over twenty years
  • CEO of Blue Spruce Holdings
  • He has filled many roles in business and as a real estate investor including raising capital, marketing, sales, and software development
  • Based in Denver, CO
  • Say hi to him at http://realbluespruce.com/
  • Best Ever Book: The Book of Why

 


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TRANSCRIPTION

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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, DJ Scruggs. How are you doing, DJ?

DJ Scruggs: I am great. How about you, Joe?

Joe Fairless: I am great as well, and looking forward to our conversation. DJ is the CEO of Blue Spruce Holdings. He’s owned and operated multiple businesses over 20 years, filled many roles as a real estate investor… That includes raising capital, marketing, sales and software development. Based in Denver, Colorado. With that being said, DJ, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

DJ Scruggs: Happy to. And thanks again, it’s an honor and a privilege to be on this show. My background was — if we wanna go all the way back to college, I was a classic literal arts major, I had no idea what I was doing when I got out. I was a music major. I realized by my senior year that that was not gonna be a good career for me, just because financially it’s not always the best, and the people who really are good at it – to them it’s like crack; they can’t not do it. And I wasn’t one of those people.

So I got out of college and really did not know the first thing about business. I’ll fast-forward to say I started reading a lot. I read The Wall Street Journal, Inc. Magazine, lots of books… This was in the early ’90s, before blogs and even websites really. And around ’95, I remember very specifically it was Thanksgiving of ’95, I got on the internet — I had been on the internet before, but it had been through America Online, and stuff like that, so it was a very degraded experience… But this was the first time I was on the internet, in the wild, and I thought “Oh my god, this is the biggest thing ever. This is gonna be enormous. I’ve just gotta figure out a way to start a business.” And I would say the takeaway from that — a lot of people say “Well, how do you start a business?” or “Am I smart enough to start a business?” It doesn’t matter. Just start.

What really motivated me is I read this — it was actually in Inc. Magazine, they did an article about the early beginnings of great companies. And back then, great companies meant Apple – it was still a great company – Hewlett Packard, Motorola, Microsoft… And almost to a T, every single one of them when they started it was just one or two people with an idea. They had no idea what they were gonna do, they had no idea they were gonna build billion-dollar companies, but they just sort of said “We’re gonna do something different.” And it hit me like  a ton of bricks – everything you see around you, literally everything, except maybe for hiking in the mountains, is because someone had an idea. Someone said “I’m gonna build a desk for you to sit at. I’m gonna design a computer that you’ll like to use. I’m gonna create software that allows people to do interviews over the internet.” It’s all about having an idea and then just getting started.

Joe Fairless: Yup.

DJ Scruggs: And that’s what I did.

Joe Fairless: So what was it?

DJ Scruggs: This was back when Java was a new thing. Java, the programming language. It was actually still in beta then. Java now is considered a dinosaur; it’s ancient. But the basic business plan was “Do something with Java.” That was enough to get me excited, pretty much. And what it turned into was to create customer service software for email.

I used to go pitch investors — this was in Chicago, and this is like ’96(ish). I would pitch investors, some of them very sophisticated, who just did not think email was gonna be that important. They thought it was just a toy, they all had AOL accounts and that was fine for them, they didn’t need anything more… So it took a lot of convincing to say “Online customer service is gonna be more important than call centers.” But that was the basic idea.

Joe Fairless: Okay. Congrats on that. Do you still have the business?

DJ Scruggs: No. I ended up selling it, and this was probably another lesson for people… It never hurts to ask. We were pretty hard-pressed for money, partly because we were in Chicago. Chicago is not a great — I don’t know about now; I think now it’s probably a lot different. But back then, starting a software company in Chicago was not optimal. Lots of consultants, because of the banking/financial sector, but starting just a pure-play software company – that was not very common, so it was hard to find talent, it was hard to get investors interested… But I’d gone out to Silicon Valley, and of course, they’re biased towards Silicon Valley, right? They want a company that’s within 20 minutes Sand Hill Road, where all the venture capital firms were.

So we were running out of money, and I was like “I’ve gotta find some money.” I ended up making a bunch of cold calls to venture capitalists, and the one who returned my calls, a guy named Brad Feld, who’s now considered one of the top 50 venture capitalists in the world – he’s based in Boulder, Colorado… And one thing led to another, and I ended up selling my company to a roll-up that Brad was running. This was closed in 1999.

Joe Fairless: Nice! What did you sell it for?

DJ Scruggs: Well, it was an all-stock deal, which – there was a hard lesson learned around that, too… But it ended up being about 20 million dollars. My investors did really well, they made about eight times their money in a year and a half.

Joe Fairless: That’s a good deal for them. [laughs]

DJ Scruggs: Oh yeah, it was great for them. For me, it ended up not being quite as exciting.

Joe Fairless: And why was it an all-stock deal? Can you elaborate?

DJ Scruggs: Yeah. Basically, I got shares instead of cash, and I didn’t get them all at once. I had to earn them out over a two-year period… And I couldn’t touch any of them for the first year. So during that first year, the stock price ran up really high, so I was loving life. In that second year, it went really low, so I wasn’t loving life… And they were dragging their heels about – I don’t think it was malice; I think it was just incompetence – actually getting the [unintelligible [00:06:49].23] They were locked up in some kind of escrow, or trust, or something I don’t quite understand… And it’s one of those things where I didn’t realize my own power.

At that point, I was the largest single shareholder who was an employee of the company. I should have just raised absolute hell, and I didn’t. I was a little too nice about it. But hard lesson learned.

Joe Fairless: Well, on the raising hell versus being too nice, have you come across that situation in real estate, where you’ve since raised hell because you’ve learned that hard lesson early on?

DJ Scruggs: Yeah, I would say so… It’s not so much raising hell, it’s just figuring out when someone’s bullshitting you. I don’t know if I’m allowed to say that on your show…

Joe Fairless: That’s fine, yeah.

DJ Scruggs: Because here’s the thing… So I sold the company — like I said, I was a music major. There weren’t blogs or anything to learn from. I’d read a few books and kind of knew a little bit about business, but not a lot. There weren’t online courses I could take, or mastermind groups I could join, or anything like that. So when I sold the company, I remember thinking “Thank goodness. Now the experts are gonna run things.” Because it was all — a senior vice-president with an MBA from Stanford and ten years running traditional tech companies, and stuff like that. So I deferred a lot to them.

But after a while I just started noticing… Like, I remember when he hired this one person – I don’t wanna name names; she was a good person, I like her, and she had a pretty senior role. Everyone liked her. But I noticed pretty quickly that her solution to everything was to throw money at it. And my company — we had raised a little bit of money; we raised about 1,5 million, but it was all in drips and drops. So it’s not like I ever had 1,5 million in the bank to start with. It was always just trying to make payroll… So I would always stay at the crappy airport hotel, I would rent the economy car, I would take the overnight flight to save money. So I get there and these guys have a lot more money; they’re not making money, but they’ve got a lot more money…

Joe Fairless: They have access to more money.

DJ Scruggs: They have a lot of capital, yeah. So suddenly, we’re staying at the nicer hotels, and we’re renting the nice cars, and I remember thinking “Well, I’m not sure that’s how I would do it, but maybe that’s the way you do it when you’re big.” And this woman I mentioned – everyone loved her, and I noticed that her problem was she threw money at everything. “Let’s hire more people, let’s buy more software, let’s buy more equipment…”, and I thought “Someday the money train is gonna stop, and what’s that gonna look like?”

Well, it was about a year later that the money train stopped, and what it looked like was she stopped returning people’s calls. She stopped coming to the office, because her go-to solution was no longer available. And it went from everyone loved her to everyone hated her.

To circle back to the question of when to raise hell – I just have a better sense of when someone really knows what they’re talking about, or if they’re just trying to snow me. I remember early on in this business we talked with a potential partner about working on a deal together, and the questions he was asking just from the very first phone call – I realized he didn’t know what he was talking about. He wanted to see our operating agreement. Like, that’s not material. You don’t need to see that. The deal was a separate entity.

And there was another guy who was supposed to be on the call who didn’t make it. He’d blown us off two times in a row. So Brad, our underwriter, asked “What do we do? Do we send the operating agreement?” I said “Absolutely not. This guy is trying to big-time us, show us how important he is, and he’s not.” Anyone who knows what they’re doing is not gonna ask stupid questions like that.

Joe Fairless: Yeah. And then if you don’t pick up on that, then you might get into a deal with that individual, and then you lose money.

DJ Scruggs: Yeah. It’s not fun to lose money, but also, if you don’t pick up on it, the temptation especially if you’re new to this is to defer to their judgment… And like I said, just because they have an MBA, or a track record with some other business, doesn’t mean they actually now what they’re doing. It just means they’re good at talking about knowing what they’re doing. You don’t have to be a jerk, but you can always ask why. “Why are we doing this? What’s the point of this? How are you making this decision?” And oftentimes they don’t really have a good answer. And if you do it in a non-threatening way, maybe you can reach a better solution.

Joe Fairless: I like that. You don’t have to be a jerk, but you can always ask why. I like that a lot. What’s your role as CEO of Blue Spruce Holdings?

DJ Scruggs: A few different ones. I would say what I spend most of my time on is raising capital. I talk with investors, and I do a lot of (I guess you could call it) content marketing, email, newsletters to keep people informed of the business, introduce the company… We’re relatively new to this; we’ve only been doing it a couple of years. And what I tell people is – in any business –  the best answer to the question why you should do business with us is “Well, I’ve been doing it for 20 years, and  we returned X% every year.” That’s the idea.

Joe Fairless: [unintelligible [00:11:32].04]

DJ Scruggs: Yeah. If you don’t have that, then you need to demonstrate competency some other way. So act professional, be respectful, and be respectable. Show up a lot. That was basically [unintelligible [00:11:46].21] strategy. He started doing meetups, and he was just everywhere; he was all over Facebook, he’s always at different events, and just by showing that he cared and that he was serious about this… And by the way, he’s a fun guy to hang out with, and get advice from. Those are the ways that you can demonstrate competence.

So a lot of what I do is around talking to investors, writing our newsletter, writing for the blog, and then just some technology support around the way we automate a lot of our systems. And then I guess the other thing is just more broadly — the best description I’ve heard of a CEO… I can’t remember who it was; this was probably 20 years ago [unintelligible [00:12:22].15] You’ve got three roles. One is to make sure that you have a viable strategy. The other is to make sure that you’re operating as efficiently as possible, and the third is to make sure you have the capital in place to manage your growth or any challenges you might have. I sort of dip and out of those roles pretty much on a weekly basis, in different ways.

Joe Fairless: You talked about tech support for automating the systems… Can you elaborate?

DJ Scruggs: Yeah. Ironically, that first company I mentioned — I didn’t write any code for that company. Well, I wrote a little bit, but it was for reporting, it wasn’t the core software. It wasn’t until later that I started writing software seriously, and then I wrote a lot of software over about 15 years.

So I got really good at that, but also, when I joined with Blue Spruce it was really tempting to get sucked into it, because it’s fun; it was like solving a puzzle, but it was not the best use of my time. So I look for tools that are more or less plug and play, if you have a little bit of tech  skills. Active Campaign we use for email system, I think it’s a great CRM; it’s got a great price/performance ratio. And if you know a little bit about integration, you know how APIs work, you can use it along with a product called Zapier, which allows you to connect different APIs together.

For example, we use Zoom, as you do, for our webinars, and when you register for a webinar on Zoom, that data gets pushed through Zapier into Active Campaign. That way we have you in our CRM, we don’t have to download from one system and upload into another. Once you really dive into Zapier, you realize “Man, there’s a lot of things you can do.”

One of the companies I used to be with – I was one of the early partners at a company called SurveyGizmo. As you can imagine, they did surveys; they were like a Survey Monkey, basically. They were a little geared toward more professional uses of surveys. So I got really good at using that software. We have a whole system of — when you first go to our website and sign up, you receive an email that says “Hey, thanks for signing up. We need to know more about you to be SEC-compliant, so please fill out this profile form.” And if you take that form, it looks kind of like the investor questionnaire section of a PPM. They ask you “Are you accredited or not?” And then we ask a few extra question. We ask them what their birthday is, so we can send people birthday cards…

Joe Fairless: What other questions do you ask besides birthday?

DJ Scruggs: We ask about their investing priorities. We have four options: safety of principal, total return, cashflow, or tax benefits, and then we ask you to rank those in order. We make sure to get their mailing address at that point, because — we haven’t really done much besides the birthdays, but we intend to do that… And we do an annual letter that we send out every December, so that gets mailed.

Joe Fairless: What do you have in the annual letter?

DJ Scruggs: Well, it was our first one. The first part was just saying “Here’s what this thing is you’re gonna be getting from me every year”, and I just kind of talk about some highs and lows of the business. The real model was Warren Buffett.

Joe Fairless: Right.

DJ Scruggs: So I say “Here’s what we were good at this year, here’s what we were not so good at, here’s something we tried that didn’t work, here’s something we tried that did work, and we’re gonna double down on…”

Joe Fairless: What was the thing you mentioned that you weren’t good at?

DJ Scruggs: I would say our acquisitions was really haphazard last year. They always say – and it’s true – pick a market and really get to know that market, and we were still just kind of trying to figure out what our business even was, in terms of who was gonna do what… So we were just very — we like to say “opportunistic”, but a better word is “scattered.” We would just look anywhere that it looked like a good deal.

So after that, at the end of last year we decided we were gonna focus this year on Oklahoma City. So that was  a good opportunity — we did a series of webinars in December… Some of them were just pure value-add, things you should know as an investor, and then there was one that was just about the different markets we looked at and why we like them, and in particular why we were focusing on Oklahoma City. We’re about to announce three more markets we’re focused on, but we’re not quite ready to do that.

Joe Fairless: What’s one thing that you all have done that didn’t work out, separate from not having a particular market to focus on? Just tactically speaking.

DJ Scruggs: Our very first deal was a very small deal, it was 16 doors, and we made the mistake of using the existing property manager…

Joe Fairless: Because they knew the property, right? [laughs]

DJ Scruggs: Right, exactly. And it turned out that person was fine at just sort of the basics of leasing and dealing with tenants, but was just awful at communications. Awful. I would literally ask 3-4 times for the same thing. It’s not like I was a jerk who would blow up her phone three times a day. First I would email, I’d wait a couple days, then I’d send another email saying “Hey, have you had a chance to look at this?” I’d wait a couple more days, then I would text… It was outrageous.

So I had no visibility into what was going on with the property, and it turned out that there were a lot of things not going well. So we had to replace that person at the end of last year. We have a new one, and it was a little bit of a tough cookie to swallow, because it was more expensive… But it’s night and day, the new firm. They do what they say they’re gonna do, when they’re gonna do it, they proactively communicate… We still do weekly phone calls, but it’s pretty much just sort of checking a few items that we talked about last week to see if they got done.

Joe Fairless: Based on your experience as an entrepreneur and real estate investor, what’s your best real estate investing advice ever?

DJ Scruggs: Get started. You’re never gonna know everything you need to know. I’ve been doing this for a while and I still don’t know 20% of what I wish I knew. But I remember hearing an interview – I think it was the Farrelly brothers, the guys who made Dumb and Dumber… And they were shopping that idea for a while. And they had one agent who wasn’t doing a very good job, so they met with another agent; they would go into meetings and say “We’re trying to make this movie”, and the agent said “Stop saying that. From now on you’re saying ‘We’re making this movie.’ Here’s the plan, here’s what we’re gonna do, and here’s the people involved.” And it just changed the perspective in the meeting. It wasn’t a couple of guys who maybe had a pretty good idea, but maybe not… It was a couple of guys who were gonna do something.

So I would say just however you can get started, if it means just going to a meetup and committing to going to that meetup every week or every month, or spending an hour every day listening to your show… Make it a habit of moving forward, as opposed to thinking about moving forward.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

DJ Scruggs: Sure!

Joe Fairless: Let’s do it then. First though, a quick word from our Best Ever partners.

Break: [00:19:15].04] to [00:19:50].17]

Joe Fairless: What’s the best ever book you’ve recently read?

DJ Scruggs: Right now I’m reading a book called “The Book of Why: The New Science of Cause and Effect.” It’s not about real estate at all, but it’s about how we think about — you know the saying “Correlation is not causation.” It’s sort of the history of that idea. Because for a long time, correlation was causation in the minds of — “If we sacrifice this virgin, the gods are gonna be nice to us, and bring rain.” That was what cause and effect used to be. So that’s one that I really like, that I’m reading right now.

Joe Fairless: How could you see that helping you as a real estate entrepreneur?

DJ Scruggs: Well, I guess I’ll bring up another book that I really like, that I’ve read recently, which is Ray Dalio’s Principles.

Joe Fairless: Well yeah, that’s an obvious one how that can help  you.

DJ Scruggs: Yeah…

Joe Fairless: But the other book though – because I see parallels; I’m just curious how you’re thinking about it.

DJ Scruggs: Well, one leads to the other, because his whole thing was he made a horrible call on national TV back in 1980 about the economy, and was really wrong, and lost millions of dollars. And it wouldn’t surprise me if he’s also read this book I’m reading, “The Book of Why.” Because his whole thing is instead of asking “How am I right?”, you ask “How am I wrong?” So you look for “Am I assuming causation with something that’s not really there? Is it just a correlation?” So that’s where I think that book helps.

For example, I think – I’m sure you know, everyone’s talking about a  recession may be coming, or maybe not… What I have noticed is a lot of people, especially if you go online to Bigger Pockets and stuff, people say “I’m wondering if I should wait till a recession to buy.” And I think in their mind a lot of them think recession is what happened in 2008. That was not a recession, that was a borderline major depression. We really dodged a bullet there, and still a lot of people got crushed. In places like Las Vegas they were losing 30%, 40% of home value there. And I think some people think it’s like that. “Oh, I’m just gonna wait till prices drop 30% or 40%, and then I’ll get in.” You’re probably gonna wait 70 or 80 years for that to happen.

Now, I could be wrong. Maybe we will have a big crash like that. It’s like with the military. Generals tend to fight the last war. I think a lot of new investors think “Well, the next recession is gonna be like the last recession”, and I just think that’s a spurious correlation there.

Joe Fairless: I hadn’t thought of it the way that you described, and 1) it’s refreshing, as a real estate investor and entrepreneur; it’s refreshing to think of it that way. And 2) it’s logical, as I’m considering what you’ve just said… Because I’ll put myself in that category of — when I think of a correction or a recession that we think about as real estate investors, or I think about, I think about 2008. [laughs] That’s the one I’m thinking about. I don’t think about a bump, I think about a crash.

DJ Scruggs: Right. Well, it could be a crash. The thing is, the nature of a crash — or let’s call it even something broader, an economic shock… The reason it’s a shock is because no one was expecting it. So the odds are if there’s a big economic shock, it’s not gonna be in something that everyone’s looking at and wondering if there’s gonna be a shock. It’s gonna be something totally unrelated, like a war in the Middle East that drives up oil prices, or a currency crisis in Asia. Something like that, that no one is thinking about. That’s what makes it a shock. If it’s something that everyone’s looking at, then there’s lots of hedging that goes on, banks are a lot more risk-averse than they were then, both in fact, and also they’re constrained by law. So it just seems less likely to me.

Joe Fairless: Best ever deal you’ve done?

DJ Scruggs: Buying my house in Boulder. [laughs]

Joe Fairless: What year was that?

DJ Scruggs: That was 2003. That’s an example of good market, but it’s also — at that time, Boulder [unintelligible [00:23:39].25] or sometimes the People’s Republic of Boulder. They limit growth there. They’ve been limiting growth there since the ’70s. So no matter when you are there, whether you bought in 1985 or you bought in 2005, you were like “Holy cow, this is expensive!” And that’s how I felt. I bought a townhouse for about 250k in 2003, and I remember thinking “This is crazy. Why am I spending so much money on a townhouse?” And this goes to the point of a good market.

During the financial crisis, Boulder did not crash. It went sideways for about three years… But prices held value, and then I sold it a few years later for about 500k. So I doubled my money. I did some modest upgrades to the place… You know, hardwood floors, and stuff.

But the best ever deal I’ve done as a professional investor is probably a flip I did here. When I first got into this, I started out with flipping, but I knew I wanted to get into multifamily. I just wanted to kind of get my hands dirty and learn about real estate… And it was my first full rehab project, and I made tons of mistakes, but I was in the right market, so I ended up making good money on it… And that sort of taught me the power of being in a  good market, but it also taught me — I don’t like building my business based on that. I’m a lot more conservative in underwriting now.

Joe Fairless: Real quick, what’s a tactical mistake you’ve made on a deal?

DJ Scruggs: Well, the one I mentioned, the 16 doors. We really botched the due diligence on that… Again, because we weren’t sure who was doing what. And it wasn’t until after the due diligence period was over that we got the insurance quote, and it ended up being way more than the T-12, because it turned out the seller was under-insured. And the insurance we had to get – it wasn’t an option because the lender was demanding it. So that cost us several thousand dollars a year.

Joe Fairless: Best ever way you like to give back to the community?

DJ Scruggs: You know what I like to do? Honestly, I just like to help the homeless. I did this last Christmas, and I still do this, but in a different way. You can go to Walmart or Costco and buy these boxes of cashews; kind of like airline size, but bigger, full of cashews… And I just give them out to homeless people when I see them.

And what I did over the holidays is I stapled five-dollar bills to them and put little Christmas stickers on them. I used to be sort of against that, because the thinking is “Oh, well, they’re just gonna go out and do drugs, or buy alcohol.” I’m kind of like “So what?” They’re having a really hard time; the least I can do is help them out somehow.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

DJ Scruggs: Probably the best place is just RealBlueSpruce.com. There you can see our portfolio, learn about how we invest, learn about me and the rest of the team.

Joe Fairless: Lots  of valuable lessons for entrepreneurs, real estate investors and apartment investors in particular. I’ve mentioned this already during our conversation, but I love the thought process of when something’s not jiving with you, then you don’t have to be a jerk about it, but you can always ask the question why. And then separately, when anyone is starting in a business, because they are starting out, they don’t have that long track record; so as you said, if you don’t have that, then you have to demonstrate competency in other ways… So be respectful and respectable, and demonstrate the competency in all the ways that you know how, other than having that track record. And everyone who ever starts something will come across that challenge. I think that’s a very valuable reminder. And then many other lessons along the way, too many to recap now.

Thanks again for being on the show, DJ. I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

DJ Scruggs: Thanks, Joe.

 

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