JF2607: From the Music Industry to Multifamily with Rich Frierson

With a background in music producing, Rich Frierson decided to go into real estate when he saw the profits he was capable of earning. Now, he’s the go-to for many others in the music industry. Rich is discussing how he balances his relationships with lenders and owners alike, how he is able to buy these properties on short sales, and his expectations for what the multifamily market might bring in 2022. 

 

Richard Frierson Real Estate Background:

 

 

 

 

 

 

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JF2606: Implications of Investing in Stocks vs. Real Estate | Actively Passive Investing Show 64

In today’s episode of the Actively Passive Investing Show, Travis is joined by Karlton Dennis to discuss why it’s so important to find a CPA that specializes in what you do, the implications of investing in the stock market vs. real estate, why he believes depreciation is the key to all tax deductions, and the benefits of being a real estate professional. 

 

 

 

 

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JF2605: The Impact of Inflation on Multifamily, Investors, and Other Assets with Travis Watts

Travis Watts is joining us today to discuss inflation and how COVID-19 has affected the market. Travis is talking about what might significantly impact real estate markets in the near future, how to mitigate fixed renewal rates for non-residential properties, and three ways real estate investors can make money in this climate. 

 

 

 

 

 

 

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JF2604: The 4 Steps to Syndication with Bastian Kneuse

Born and raised in Germany, Bastian Kneuse played professional basketball and worked in finance before pursuing multifamily properties. He now works a full-time job, and still makes just as much time to work on his real estate career. Today, Bastian is talking about passively investing while also working on his own syndications, four steps to syndicating deals, and his innovative idea for adding value to his tenants as well as the community. 

 

Bastian Kneuse Real Estate Background:

 

 

 

 

 

 

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JF2603: Finding Partners & Creating a Team with Stony Stonebraker

Although Stony Stonebraker wasn’t able to invest in real estate until after retirement, he went all in and is now a GP. Today, Stony is talking about his experience finding partners and creating a solid team, his due diligence process, and his main hesitation when looking at different asset classes.

 

Stony Stonebraker Real Estate Background:

 

 

 

 

 

 

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JF2602: From Single-Family to Almost 800 Doors with Edna Keep #SkillsetSunday

Edna Keep started her real estate journey after transitioning from financial advising. Now she owns almost 800 doors and coaches others to change their mindset and take action. Today, Edna is talking about how she encourages new investors who think multifamily is overwhelming, what you need to know about your network, and the #1 thing holding people back. 

 

Edna Keep Real Estate Background:

  • Owns 778 doors valued at $70 million of real estate
  • Started with single-family homes, but now primarily buys multifamily and does some development projects with other people’s money
  • Based in Regina, Saskatchewan, Canada
  • Say hi to her at: www.ednakeep.com

 

 

 

 

 

 

 

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JF2601: Becoming a Full-Time Passive Investor with Travis Watts

Growing up with a frugal upbringing, Travis Watts knew how to be careful with his money and live within his means. Now, he’s a full-time passive investor and helps other busy professionals do the same. Today, Travis is sharing his best advice for investors that may not have the capital for big investments yet, resources for the new investor, and how he deals with skepticism in the industry. 

 

Travis Watts Real Estate Background:

 

 

 

 

 

 

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JF2600: The Financial Advisor’s Guide to Passive Investing with Jim Pfeifer

Jim Pfeifer spent most of his professional career as an educator before becoming a full-time passive investor. Now, he helps educate others on how to do the same. Jim is sharing his four-step sponsor screening process, today’s hottest asset class, and red flags you may not recognize at first glance. 

 

Jim Pfeifer Real Estate Background:

 

 

 

 

 

 

 

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JF2599: Self-Directed IRA vs. eQRP Investing | Actively Passive Investing Show 63

In today’s episode of the Actively Passive Investing Show, Travis discusses the differences between self-directed IRA investing and eQRP plans with Damion Lupo. They’re explaining why you may consider paying for this service instead of a “free” account with a major brokerage firm, and how they’re squashing skepticism on these new plans. 

 

 

 

 

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JF2598: Top 3 Characteristics of a Quality GP with Lennon Lee

When Lennon Lee moved from Venezuela in 2010, he knew he wanted to search for passive investment opportunities to provide for his family. Today, Lennon is diving into the difference between being an LP vs. a GP in a deal, the role of the GP with investor communications, and the importance of capital raising through partnership building. 

 

Lennon Lee Real Estate Background: 

  • Invested his family’s life savings into real estate to build a solid future for his parents and siblings
  • Involved as both an LP and GP in the acquisition of over 2,000 multifamily units, with an approximate market value of $200M
  • Based in Miami, FL
  • Say hi to him at: bldcapitalgroup.com

 

 

 

 

 

 

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JF2597: Single-Tenant Net Lease Opportunities with Randy Blankstein

Randy Blankstein decided to take advantage of the high demand for industrial, single-tenant net lease opportunities at the young age of 26. Now, 30 years later, he’s been continually active in this niche. Today, Randy is sharing his fundamental criteria for properties, common misconceptions of triple net leases, and what specific type of real estate to buy for best returns. 

 

Randy Blankstein Real Estate Background:

  • Senior commercial real estate executive with over 30 years of experience focused on advisory services in the single-tenant net lease sector
  • Owner of commercial real estate investment brokerage firm
  • JV equity partner in one retail property, one flex property, and 12 industrial properties
  • Based in Wilmette, IL
  • Say hi to him at: https://www.bouldergroup.com/

 

 

 

 

 

 

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JF2596: Becoming a GP in Your First Syndication with Hendra Tambunan

Although Hendra Tambunan has been in real estate investing for 15 years, he officially made the switch into multifamily two years ago for higher income potential. Today, Hendra is talking about how he became a general partner in his first syndication, what value he brought to the table to earn that title, and why he’s looking to diversify his asset classes even further into commercial properties. Bonus: Hear Ash’s top tips for anyone entering the commercial market. 

 

Hendra Tambunan Real Estate Background:

 

 

 

 

 

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JF2595: Top 7 Benefits of a Solo 401(k) with Dmitriy Fomichenko #SkillsetSunday

After buying his first property 20 years ago and working full time for a real estate investment firm, Dmitriy Fomichenko started Sense Financial to help people gain control of their retirement savings. Today, Dmitriy is telling us about the Solo 401(k) for small business owners, how his business dramatically shifted when he introduced them, and why he thinks they’re a no-brainer when compared to traditional retirement savings strategies. 

 

Dmitriy Fomichenko Real Estate Background:

  • Founder and president of Sense Financial, a boutique financial firm specializing in self-directed retirement accounts with checkbook control
  • Passive investor, owns interest in multiple MF & self-storage syndications, private lender, and licensed California real estate broker
  • Based in Orange County, CA
  • Say hi to him at: SenseFinancial.com

 

 

 

 

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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. 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 the fluffy stuff. With us today, Dmitriy Fomichenko.

How are you doing, Dmitriy?

Dmitriy Fomichenko: Oh, Joe, I’m doing what are well, thank you for asking. It’s great to be on your show again.

Joe Fairless: Well, I’m glad that you’re back. If you recognize Dmitriy, well, you’re either on BiggerPockets a lot, or you’re a very loyal listener to this podcast, because last time I interviewed him was Episode 450, and that was many moons ago. I haven’t looked up what date that is, but that was a long time ago. And on that podcast, we talked about the checkbook IRA. But today, we’re going to be talking to Dmitriy about the self-directed solo 401(k). It’s been a game-changer from his experience for his clients, and it’s something that he felt compelled to share, and I’m grateful that he’ll be educating us about the pros and cons of the self-directed solo 401(k).

So first off, let me just say a couple things about you, Dmitriy, and then we can get into it. So Dmitriy is the founder and president of Sense Financial; it’s a boutique financial firm. He is a passive investor. He owns interest in multiple multifamily and self-storage syndications. He’s also a private lender. He is based in Orange County, California.

So with that being said, Dmitriy, first, do you want to give just a refresher on your background, and then let’s go right into self-directed solo 401(k)s?

Dmitriy Fomichenko: Oh, sure. Well, I’m going to try to compress, there is a lot there. But as you can hear from my accent, I’m not from here. I immigrated in this beautiful country – by the way, the best country on Earth. I know there is a lot of people complaining, but I’ve lived elsewhere, and there is no better place than United States; it’s still the best place, and let’s keep it that way.

But my background is in electromechanical engineering, and that’s what I got my degree in. I worked in the field, got laid off, I got introduced to the real estate investing concept, started doing that, almost 20 years ago, in 2001, I purchased my first property. And then, the circumstances kind of pushed me into working full-time for a real estate investment firm. And prior to that, I had experience in financial services. And then the combination of that, basically, kind of forced me or I was asked to start a department working for that company. And about a year later, in 2010, I started Sense Financial, and that’s what we do – we help people gain control over their retirement accounts; essentially, take their IRAs and 401(k)’s from a prison that they are, because if you have a normal IRA or 401(k), you’re essentially kind of like locked up, you have very limited investment options… So we want to give you the control and the choices and the options to invest in virtually anything you would like.

Joe Fairless: So now let’s talk about the self-directed solo 401(k) specifically. When did the business pick up on that, and why did it appear on your radar, versus—has it always been around?

Dmitriy Fomichenko: Sure. Well, again, we started doing self-directed checkBook IRAs. That’s how I started at Sense Financial. Again, it started naturally, there was a need—by the way, just a quick tip for your listeners is that, if you want to be successful, and if you’re looking to start the business, figure out a need and come up with the solution, and be the best you can at that, and then the rest will fall into place.

So for me, there was a need, I came up with the solution; it was that I just created that solution for our investors, for our clients in doing that. And then, because it was kind of in the same field, I learned about self-directed solo 401(k), we brought that on board, and our business shifted dramatically. Right now, we’re doing more than 90% of our clients, setting them up with the solo 401(k), because it’s just so much better. There is still a place for checkBook IRA, because not everyone is eligible for solo 401(k), but if you compare them side by side, it’s obvious; it’s a no-brainer.

Joe Fairless: Well, what’s the best way to start – for you to compare the two side by side, or to talk about why 90% of your clients are going this direction?

Dmitriy Fomichenko: Well, first of all, let me just explain what that is. So something like that, a solo 401(k) – just like the name implies, solo means kind of solo entrepreneur, or a business owner that doesn’t have full-time employees in the business. So it’s for small business owners, okay? And you must have that business in place, or legitimate self-employment activity. So it doesn’t have to be like a  “corporation”, but if you’re a real estate agent or a consultant or a nurse who works independently, or you have your own side business, doing gardening for your neighbors even, or anything… If you have a Schedule C and no full-time employees, you qualify. So those are really the two criterias – having legitimate self-employment activity or a business, with earned income. That’s another key, it has to be earned income. I know, many of your listeners are real estate investors, and that comes up often. They say, “Well, I do own a rental property or two. That’s my, quote unquote, “business.”

Well, from the IRS perspective, rental income is considered passive. So you have to have earned income. So if you’re flipping property, even if it’s just one or two a year, that’s a business; that’s legitimate self-employment activity. You report that on your Schedule C, you pay self-employment taxes, and you’re eligible.

Joe Fairless: Is there an amount you have to make or loss?

Dmitriy Fomichenko: Well, not really; there is really a no minimum, but it needs to be legitimate. So on IRS actually, there is a good description there of a hobby versus business. It cannot be a hobby, it needs to be a business. So you need to be in it for profit; maybe not necessarily to begin with your first year, but your intention needs to be to make a profit, and it needs to be more than $200 a year, right? So if you’re in business and you’re making $200 a year—to give you an example, I know some people who do photography, and it’s kind of like a hobby for them; they maybe do a photoshoot or two a year, and it’s only a couple $100 or a few hundred dollars a year. It’s really a hobby, that. And so it needs to be for-profit, or with the intention of making a profit. There is really no minimum, and you can do it part-time, you can have a side gig. Many of my clients, they’re employed full-time, they want to keep their jobs, but they do something on the side. Like I said, flipping a house or two on the side is a great, or doing anything else. Again, as long as you report that on the Schedule C and you show profit, that’s it.

Break: [07:30] to [09:32]

Joe Fairless: This is probably venturing into your area of non-expertise; this is more of a tax thing, but if you know the answer, please let me know. You don’t have to put in a certain amount of hours each year?

Dmitriy Fomichenko: No, no. There is no hours requirement. Again, you can work an hour and you can generate five grand doing something. So, again, you’re not an employee, you’re doing something, it’s a business and IRS doesn’t require you to track the hours if you’re self-employed. You don’t report hours anyway, you’ve just got to show income. And again, you can start the business and you can be eligible right away. Again, if it’s a legitimate business and if you have intention of generating profits, you can still do it.

Joe Fairless: Got it. Okay. So that’s who qualifies.

Dmitriy Fomichenko: Correct. Yes.

Joe Fairless: Okay. So now, what do you do? Will you just describe the solo 401(k)?

Dmitriy Fomichenko: Yeah, so the solo 401(k), essentially, it’s—most of you probably know what the 401(k) is, right? If you work for a company or worked in the past for a company, many companies offer 401(k) plans. So it is a 401(k), just like that, but it’s in a way simplified, because it’s designed for owners only and their spouses; so it cannot accommodate employees, that’s why there can’t be any full-time employees. Because if there are full-time employees, by law, you must offer them the same retirement benefits, and a solo 401(k) cannot accommodate those. You won’t be eligible then. But if you own a business or you’re self-employed, and you don’t have non-owner employees working for you—by the way, if you’re in a business with your friend or a brother, you can still set up a 401(k). So there can be multiple business owners.

I have an example where I have business with four owners, that are unrelated, but four partners, and that’s what they do – they don’t have any employees, and we set up a solo 401(k). Again, I guess can be a little bit deceiving in this case, because in this case, it’s not just a single owner, there are four partners. But typically, it’s just an owner, and sometimes there is a spouse; if your spouse is also involved in the business and generates or receives compensation, then you can double the benefits. And I’m pretty excited going into benefits, because it’s going to blow your mind.

So it is a 401(k) simplified version – because there is no employees, it’s a lot more easier to administer and to keep track of, because again, if there is a 401(k), with employees, that’s going to be a very complex situation; you need a lot more. But with the solo 401(k), those are very simple.

Joe Fairless: Okay, let’s talk about the benefits.

Dmitriy Fomichenko: So one of the main benefits – again, if you’re a business owner, or if you’re self-employed, you guys probably are somewhat educated on the whole concept of being financially independent, and you probably rread the book Cashflow Quadrant by Robert Kiyosaki. And remember the right side – being a self-employed, being a business owner and investor. So if you’re self-employed or a business owner, you have ability to generate a lot more income. So the more income you generate, the more taxes you pay. That’s a common concern I hear from just talking to people.

Well, if you generate good income and pay more taxes, it’s a great tax shelter, because a solo 401(k) allows you to shelter up to $58,000 a year from your taxes into your solo 401(k). That’s a contribution limit; compare that with $6,000 of an IRA. So you can only put six grand into an IRA and almost 10 times more into a solo 401(k).

Now, if your spouse is also involved in the business, you can double that; think about 60,000 times two – you can put over 100k into a retirement account, shelter that from taxes.

So just think about this – if you drop your taxable income by 100k in a year – well, that for sure will bring you into a lower tax bracket. So you’re going to be paying a significantly lower amount at a lower tax bracket. The savings can be $20,000 or $30,000 or $40,000, potentially.

Joe Fairless: So just so I’m tracking – and I apologize, it’s a dumb question or scenario… But I have a friend, he’s a doctor, he makes – we’ll call it $450,000 a year. And he gets destroyed on taxes every year, because he doesn’t do real estate or anything else. He just does the stock market. If he were to create a business, not a hobby, of being a photographer, and it’s actually a business, not a hobby, and he earns, say $1,000 or, let’s call it $10,000 doing it during the year, so it’s an actual business… The income from his W-2 job as a hospitalist – can he take that and put it towards the $58,000 a year that he can show there?

Dmitriy Fomichenko: Unfortunately not. Again, to give you an example, if he works for a hospital as an employee and he makes $50,000 there, as an example, and he has a side business that he generates $200,000 a year, he can take his self-employment income and put that in his company 401(k). Those are two different companies, unrelated.

Joe Fairless: Got it.

Dmitriy Fomichenko: So in your question, it’s kind of a vice versa. But let’s use that example… If he was a doctor and he was working for himself, if he as a self-employed he earns $450,000, what he can do is he can hire his wife, set up a corporation—this is not tax advice, by the way. I’m just sharing with you some strategies.

Joe Fairless: Yeah, yeah, yeah.

Dmitriy Fomichenko: He can set up a corporation, hire his wife, pay her enough to contribute the maximum, and then they could potentially shelter almost $120,000. So bringing that income down to 300k, and saving just to a lot in taxes.

Joe Fairless: MM-hmm. Got it. Okay. So I hijacked the conversation a little bit when you were talking about the benefits. So you said up to 58k a year versus 6k in the IRA, and if your spouse is in the business, you can double that. What are some other benefits?

Dmitriy Fomichenko: Yeah – so again, it’s one of the first benefits as a high contribution limit tax shelter. Another one is that, like an IRA, you don’t need to have a custodian with a 401(k). With an IRA, you must have a custodian, and a custodian is like a middleman between you and your IRA and your money. And so you have to go — you can self-direct that, but you have to go to the custodian each time.

With a solo 401(k), a custodian is not required. So we set that up, we set up the plan, and we created the trust for the 401(k), and you become the trustee as a client; you become the trustee, and as a trustee, you control it. So there is no middleman; you eliminate all of the custodian, all of the transaction, and asset-based fees, and you can make investment as simple as just writing a check. You can write the check, and they can invest in one of your syndication deals, Joe. It is just that simple.

So checkbook control, high contribution limits. And this plan allows you to have true diversification, because you don’t have limits on the investments. You can invest pretty much into anything. There is a few limitations. We don’t have time to get into that, but your listeners can reach out to me and we can talk about those specifics; but you have virtually unlimited investment options.

Break: [16:52] to [19:33]

Joe Fairless: The other one only had, to the best of my memory, two; one was in collectibles, and the other is something else that [unintelligible [19:40].

Dmitriy Fomichenko: Yeah, collectibles and life insurance contracts, and also the investments that you cannot invest in. And on top of that, you’ve got to remember [unintelligible [00:19:48].14] person and conflict of interest transaction. So the client or the investor or the account holder cannot invest into any transaction or any deal where him and his immediate family members are involved. So those are the only limitations. Other than that, you’ve got total freedom.

Joe Fairless: Why do they have such a high shelter cap at $58,000, versus an IRA being $6,000?

Dmitriy Fomichenko: Again, it’s a 401(k). Many of your listeners might not know, but if you have a 401(k) with your employer, you can put there 58k total. As an employee, you can put $19,500, but there is a way to actually increase that. So with the solo 401(k), it’s a combination of a 401(k) plus profit sharing. So as an employee, you can put $19,500, plus catch-up if you’re over 50. By the way, I didn’t mention that before, but if you are over 50, there is a catch-up of $6,500. So if you’re over 50, you can put in $64,500 as an individual. So that’s what the limit is.

Joe Fairless: Okay, so true diversification, you’ve got the higher limit, and there’s no custodian involved.

Dmitriy Fomichenko: No custodian, yeah. Yeah, let me mention a couple of more. With the solo 401(k), it has a Roth component or Roth provision, allowing you to actually make after-tax contributions. So you can pay the taxes — just like in a Roth IRA, you can pay the taxes upfront, and then you can make a contribution. And the contribution for a Roth 401(k) is $19,500, your employer limit, plus catch-up. So potentially 26k you can put into Roth. Now, it’s going to be after taxes, but it grows tax-free. So you have that.

I spoke with a client just recently, who actually started with me about six years ago, using his Roth 401(k). He started with 100k and he has over a million dollars in his Roth 401(k) right now; that gain is going to be tax-free.

Joe Fairless: What was he investing in?

Dmitriy Fomichenko: He was investing in crypto.

Joe Fairless: Crypto?

Dmitriy Fomichenko: Yeah. I’m not advocating for that. I think it’s a speculation. That’s my personal opinion. That’s a speculation. But people made money there, people lost money. And again, the point is that you can have it. You can slowly invest in syndication deals, Joe, what you’re doing, and you can certainly get to a million dollars over time. It’s a very real possibility.

Joe Fairless: You mentioned a couple other benefits. You just talked about the Roth component.

Dmitriy Fomichenko: Yeah. So the Roth, and also, there is a loan provision. So if you need money for some need, and you want to pull it out from an IRA, there is no way to do that unless you take a distribution. Well, distribution is a taxable event, plus you have to pay penalties. Well, with the solo 401(k) there is the ability to take a participant loan up to 50k for any reason. So think of it, you’re just creating your own bank, and you can access that at any time up to 50k. So it’s a nice feature to have.

Another benefit is that when you invest in leveraged real estate, for example, in a syndication like you guys do, most of them are leveraged, okay? So if you invest in a leveraged real estate deal in an IRA, that will result in unrelated business income tax, because there is an unrelated debt-financed income. So the leveraged real estate in an IRA is taxed, or income, I should say, from a leveraged real estate. Well guess what? A 401(k) is exempt from taxes on leveraged real estate. So that’s a significant benefits as well.

Joe Fairless: When one of your clients has a Schedule C income and you tell them about this, and they say, “Yeah, Dmitriy, it’s still not for me…” If that happens, why does that happen?

Dmitriy Fomichenko: Well, you know what, Joe – I just spoke yesterday with the client, and he actually spoke with, I think, a financial advisor or somebody who told him, “Why are you doing a solo 401(k)? Do a SEP IRA.” So he was a little bit confused. And I said, “Listen, you do your own comparison. You compare them side by side” and I’ve gone over — the contribution limit is the same with the SEP, okay? But I’ve gone over not having a custodian. I’ve gone over not being exempt from leveraged real estate, from EBIT tax on leveraged real estate. I’ve gone over our ability to take a participant loan from the 401(k). You make your own decision. I don’t need to convince you, but you make your own decision. Just look at them side by side and don’t let somebody else make a decision for you. You make your own decision, what’s best for you.

Joe Fairless: What is something that we haven’t talked about, that you think we should, before we wrap up, as it relates to this?

Dmitriy Fomichenko: Well, it’s kind of touching again, maybe emphasizing the point but when I started doing IRAs or self-directed checkbook IRAs, usually people will come up to me, or come to me, they had existing accounts to rollover, either it’s an old 401(k) or an IRA, and they had $50,000, $100,000, $200,000, $300,000 or $400,000 to rollover, because they needed that seed capital to get started.

Well, with the solo 401(k), because of a large contribution limit, I’d say probably 30% to 40% now will start from scratch. They don’t have any retirement accounts, but they do own a business and they make money. So in a year, they can potentially contribute 100k with their spouse combined, and they can really get a good start on their investment endeavors. So that’s one thing.

Another thing is that if you do have existing retirement accounts, you can roll them over into solo 401(k). It does accept rollovers, virtually from any other retirement account, with one exception, and that exception is a Roth IRA. So IRS does not allow you to move Roth IRA into solo 401(k). Other than that, you can move any accounts.

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

Dmitriy Fomichenko: You can always go to our website, which is  sensefinancial.com. And Sense is like common sense. And the story behind the company is because what we talk about here, it just makes sense, okay? Those make sense. Again, make your own decision, but those are financial concepts that do make sense, sensefinancial.com. I’m pretty active on BiggerPockets, so you can find me there. You can also find me on Facebook and LinkedIn.

Joe Fairless: Dmitriy, thank you for being on the show, talking about the solo 401(k), who it’s for, who it’s not for, and what are the benefits for the people it is for. Thanks for being on the show. I hope you have a best ever weekend and talk to you again soon.

Dmitriy Fomichenko: Thank you.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2594: Streamlining Your Tenant Screening Process in 1 Step with Ryan Barone #SituationSaturday

When Ryan Barone started college, he never knew how complicated the process would be to rent an apartment. This led him to create an app for tenants to simplify the process. His college passion project eventually became RentRedi. Ryan is sharing why landlords love using this software, how it streamlines each step of the renting process, and added benefits it provides renters as well.

 

Ryan Barone Real Estate Background:

  • Co-founder, CEO, and CTO of RentRedi — modern, end-to-end landlord software that streamlines self-management of rental properties to make financial freedom attainable for landlords and renting a truly amazing experience for tenants
  • Before launching RentRedi, he worked at Goldman Sachs and PricewaterhouseCoopers (PwC)
  • Based in New York, NY
  • Say hi to him at: https://rentredi.com/

 

 

 

 

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Deal Maker Mentoring

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. 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 the fluffy stuff. With us today, Ryan Barone.

How are you doing, Ryan?

Ryan Barone: I’m doing great. Thanks for having me on, Joe.

Joe Fairless: Well, it’s my pleasure, and I’m glad you’re doing great. And Best Ever listeners, first off, I hope you’re having a best ever weekend. Today is Saturday, so we’re doing a special segment called Situation Saturday. And with us today, Ryan, is going to talk about a challenge that led him to start building RentRedi, which is the company where he is the co-founder, CEO and CTO of. And if you don’t know of RentRedi, well, you should, because they’re a loyal sponsor of the show. And let me tell you a little bit about them — they’re a modern end-to-end landlord software that streamlines self-management of rental properties to help make financial freedom attainable for landlords and renting, a truly amazing experience for tenants. So basically, it helps us, as landlords, make the renting experience and getting our properties profitable 1,000 times easier, and it helps tenants in multiple ways and get them set up, so that they can pay us rent, among other things.

Before launching RentRedi, Ryan worked at Goldman Sachs and PwC, and he is based in the Big Apple. So before we get into it, Ryan, do you want to just tell us a little bit more about your background, and I guess, perhaps that will segue into RentRedi, and then we’ll go from there?

Ryan Barone: Absolutely. So as you mentioned, I had worked at Goldman Sachs and PwC. The start of RentRedi really came almost accidentally, which I think is probably not too dissimilar than how a lot of people start their businesses. At the time, I was actually in college, I was getting my first internship at Goldman; it was trying to get my first apartment, and it just made kind of a lot of sense to move out of dorms, get that apartment, and I went through that rental experience. So it was interesting, because I had a tougher time renting honestly, than I thought I would going through the application process; they needed a W-2, a letter of employment, bank statements, all these different things that I was just not properly prepared for.

And at first, I thought I was just really bad at renting. And I quickly found out that it wasn’t just me; it was a lot of other people, other friends of mine, particularly renters at that point. So at the time, as I mentioned, I was going to school, I was minoring in computer science, but I was in majoring economics and math, so I figured, “Hey, why not build an app for myself and my friends to make this process easier?” And so I started building the iOS and Android apps for tenants initially only, to make the application process easier. And it really wasn’t until I started bringing that to some landlords and starting to try to use that, that they said “Hey, wait, our side is just as bad, if not worse. Help us out in the process, too.” And it’s we’re really expanded way beyond just applications, and certainly well beyond just tenants, and really became this platform that is really dedicated to both the landlord and the tenant side, and focusing on making both of our sides easier and happier. So it’s been a really exciting ride, and certainly a lot of learning along the way. Many things I didn’t know when I started.

Joe Fairless: Yeah, and we will talk about that. How long ago since you started RentRedi?

Ryan Barone: I started it as kind of a passion project on the side, probably as far back as 2014 at first, just working on it in my free time; that was when I was building the initial app. But really, when I dove in full time and started working on it, it was 2016. For a little while there, I was kind of moonlighting, working job during the day, coming home, working on RentRedi from [10:00] to 3:00am, and then starting the next day over again, and eventually said, “Okay, it’s time to make the jump and go forward and build it.”

Joe Fairless: The first iteration of it versus the second iteration of it… What were the updates if you can remember?

Ryan Barone: Yeah, absolutely. So version one was really application-focused, and really what it was was actually similar to — I don’t know if you had done a common app yourself, but when I was applying to colleges, I did this common app, which is basically putting together my information once, applying to a bunch of different colleges, and it made the process really easy to apply. So it made sense to me that why not try to get to something similar, if we could get something that streamlines the process for landlords, so they’re not waiting as long for documents… And making it faster for tenants to be prepared before they even get to viewing the unit. So that was kind of version one.

Beyond version one, it really expanded to the full end-to-end process from the day that the property is listed to the end of the next lease. So it expanded a little bit backwards at first, from applications to pre-qualifications, where someone said, “Hey, I had a couple come view my property and I loved them. But the sad part is, as soon as I did a full screening on them and application, I knew there was no way I could rent to them.” So if I knew upfront that Joe has a dog and I don’t accept pets in my property, it would save both of us some time. So that’s exactly where the pre-qualification came from. It’s quick 10 questions to help you vet people before it. So you’re essentially meeting with the five most qualified people maybe, instead of necessarily the first five that reach out.

And then the listing process to make it easier to actually get those leads in the door, and then once they’re in, once they’re pre-screened, screened, and you’re ready to have them as a tenant, actually processing all that rent, as you mentioned, making the maintenance process easier, which again, came from specific stories of landlords… Each one on our platform has honestly contributed an immense amount to every feature we have… And then signing that lease, communicating with them, and then at the end of that, either resigning and starting that process over again, or listing it out and getting the next one in the door.

Joe Fairless: What are the popular features that landlords say they love?

Ryan Barone: Yeah.

Joe Fairless: And then same with tenants; the top two or three.

Ryan Barone: One of the ones that came out of the landlord side especially was – we had streamlined the autopay side. And I will say that certainly, that autopay, auto late fee, getting that to the point where basically you get set up as a landlord and then you don’t have to think about it again, was one that we had a lot of excitement from landlords on. And that led to what I will say is probably the second there, which is them saying, “Hey, you streamlined the rent collection process for me. I don’t even have to worry about that anymore. Could you do the same thing for maintenance without me feeling like I’m hiring a property manager and paying 10% to 12% of my rent to them?”

Joe Fairless: Yeah.

Ryan Barone: So that was a tough question honestly for us to answer, but we went out and we found a great partnership with a company called Latchel, that typically only serviced managers with 75 units and above. And that was a common theme. And we really target that, as small as one single-family homeowner operator, to hundreds of units. So they didn’t even have access to something like Latchel. And basically, what we were able to do is do a deep integration with that leverage the fact that we had this mobile app that tenants can submit maintenance and video on, and actually automate the maintenance side the way we did for the payment side. So essentially, the landlords turn this on, they set their budgets for what they want it to be, which would be very similar to when they’re signing their contract with the property manager, and then from there on out, the maintenance requests come through, automatically a vendor is found for them, schedule with the tenant, both the tenant and the vendor market complete, you don’t have to worry about like the vendor saying, “It’s done,” and the tenant saying, “No, it’s not.” And then it updates in real-time for the landlord. So basically, you don’t have to do anything, but you still get all the oversight that you would have if you were doing it yourself.

Joe Fairless: That’s incredible.

Ryan Barone: And then on the tenant side, I’ll probably say the credit boosting. So it kind of stemmed from the autopay side as well, where we said “Great, I don’t have to think about paying my rent, but it’s kind of just paid and it goes off into the ether… Could you make it help me in some sort of way?” So we were able to partner directly with TransUnion and make it so that tenants can enroll in credit reporting, so that when they pay the rent, just like they always did, it actually goes towards building their credit. So tenants get to build their credit doing something they were already doing, landlords are happy in the process, because they get their rents on time more often, too… But that’s one that’s been a huge excitement on the tenant side of things.

Break: [08:48] to [10:48]

Joe Fairless: Is that a deterrent for some tenants, because they’re concerned if they do miss a payment or if they’re late that it’s going to hurt their credit, since it’s connected through TransUnion?

Ryan Barone: It doesn’t, for two reasons. One, they can decide if they want to turn it on or not. So it’s only if they want to build that credit. And secondly, we only report on time payments. So if they do enroll in it, it never hurts them. It won’t help them if they’re always late, but it won’t hurt them if they’re always late.

Joe Fairless: Oh.

Ryan Barone: It’s only a benefit for them.

Joe Fairless: Got it. That’s great. What a nice feature for them. What about an aspect of your service that you thought would play really well, or be popular, that wasn’t, both on the landlord and on the tenant side?

Ryan Barone: That’s a tough question. Going back to the very initial version, right? I was putting together something that would make it easier for myself as a tenant, and it was basically bundling everything into a PDF and sending that over email. I thought landlords would love that, because they were already getting it over email. They didn’t love that, because they hated the idea of all of these different documents in email, and not having really an organized system for how that worked.

So that honestly, didn’t go very well at first. And that’s where we really had to build out the ability for them to manage those applications and things like that, by date and by property and by tenant, so that they could sort through these things, they could store them and look back at them if they ever needed to… If it ever came up to a legal case or something, and they wanted to go back and look at an application they accepted or rejected or something like that, they would actually have an easy way of searching and looking into that.

So that was probably one that — I thought they would love getting it over email; they did not, and to their point, they were completely right. It’s definitely better not that way now. But I think that’s where — it’s the beauty of being able to get feedback… And that’s a really important piece to me that it’s awesome, almost no matter what you’re doing. People will give you feedback if you ask for it, and ask them to be honest, and that can really help you do whatever you’re trying to do a lot better than you would have done on your own.

Joe Fairless: On the tenant side, what’s your least used feature?

Ryan Barone: I think it would depend on the tenant. So the ones that are coming through the application process are going to use things like Tenant Screening a lot, and renter’s insurance, for example, a lot… For tenants that landlords are onboarding, because a lot of the time the landlord, when they’re first adopting RentRedi, they already have some tenants, and they don’t need to make those tenants go through that process. So in that case, those tenants would skip things like the tenant screening process. They have the option to get renters insurance, we’ll help them with that, but we also let them upload it, so that the landlord can at least know, “Hey, they have a policy.” So if I’ve been living in your unit for three months already and you’re now adopting RentRedi, I’m not going to go through that screening process, and they hopefully already have renter’s insurance… So I’d probably skip those two.

Joe Fairless: Taking a step back, what’s your business model?

Ryan Barone: That was one that, again, came from the feedback side of things, in talking with landlords. They basically said to us, “We’re on spreadsheet”, and most of the landlords that we worked with, and still work with, were on spreadsheets before they started using RentRedi. And I really wanted to understand why. And a lot of them said, “When I look at these massive enterprise solutions that were built for very large property management companies, they’re charging per unit, and I feel like I’m getting taxed for my growth. I’m just trying to build my own wealth, my own financial freedom, and that is kind of inhibiting that.”

So our perspective was, “Is there a way that we can not make landlords feel like they’re getting taxed for their growth, but still help them grow?” So that’s actually the way that our business model is set up. You don’t pay more as you add more units, which is something that is truly unique, and even from enterprise down to single-family owners. So for most of the landlords that go for our annual plan, they’re paying $9 a month, and that’s not increasing per unit, that’s not per unit, it’s just their $9 a month and they’re in. And the way that we’ve been able to structure it is, essentially when screenings are run, or some of these services like Latchel, that they wouldn’t even have access to in the past, if they wanted to enable those… We’re able to basically generate revenue off of those streams by basically making these partnerships with these larger companies and saying, “Hey, treat all of our landlords as one large portfolio, just count them in the process.” They get their screenings for less than they would even going straight to TransUnion, and we can make some money on the spread there.

Joe Fairless: Hmm. That’s a smart business model. Because it sounds like the majority of the money is made through the partnerships that you’ve created, versus the upfront costs or ongoing costs from your customers.

Ryan Barone: Yeah, absolutely.

Joe Fairless: Huh. This business you created, you’re obviously very talented and—you’re a software engineer, is that what you said earlier?

Ryan Barone: I had minored in it in college, but I actually learned most of it along the way, probably not too dissimilar from a lot of people in the entrepreneurial space; you kind of jump off the cliff and build [unintelligible [00:15:47].02]

Joe Fairless: Well, software engineering is a different beast, I think. I don’t know how many entrepreneurs kind of just dabbled in software engineering, and learned it… That’s impressive, is what I was getting at.

Ryan Barone: Thank you.

Joe Fairless: But my question for that, why I was asking is, did you take on investors for this, or are you just bootstrapping? How did you get to this point?

Ryan Barone: Initially, it was bootstrapping. It was just — getting started, I had obviously the minor, so I knew one language. Actually, what Rentedi is built in were all languages that I learned online. And it is truly incredible how much there is online for you to learn, in the developer community, but also in almost any community, real estate as well. There’s some really awesome communities out there where you can just ask people, “Hey, how do you do this? What’s the best way to do that?” And then people will be honest, they’ll give you answers, which is awesome, in my opinion.

And then from that point, we got to a point where some landlords that were using the platform basically said, “Are you raising any money?” I said, “Sure, yeah. Absolutely.” So they actually became our first investors, which was really cool, because we had our very first investors as people that truly understood the product inside and out, from a user perspective, as well as from being on an investor in RentRedi, but also in a real estate investor, which was great.

And then in 2019, we raised our first venture round, and that’s really where we brought on our core team. And then this year, we raised another venture round and basically doubled our team size. So we would not be at the same place we are today without those two main groups, basically, that came on in 2019 and this year, as well. But yeah, I mean, that’s how we’ve gotten to where we are now.

Break: [17:27] to [20:07]

Joe Fairless: What’s the output of doubling your team size?

Ryan Barone: One of the big benefits for us and the big purpose of bringing on that team, doubling that team now is that in 2019 we felt like, okay, we are able to bring on this team and do this for a lot more landlords; we basically had a smaller amount of landlords that were very, very happy, but that was as many landlords as we could really help at that point. This let us do 30 times that amount of landlords. And then we were essentially at the point where we were able to keep growing the amount of landlords we were able to support… But we kind of had to choose between one of the things you asked earlier, which is building out those new partnerships, which are coming directly from landlords and tenants saying, “I have this problem. This would solve it for me. Can you create a way that that’s real and smooth, and a good experience for me?” So that takes effort and time to build. So we were kind of choosing, at times, between find and help more people, or find and integrate more services to help the existing ones. So doubling the team this year really has helped us not have to choose between those two, where we get to do both simultaneously go find and help more people, and also integrate these new services that help the existing ones on the platform.

Joe Fairless: From an entrepreneurial standpoint, I’m asking the following question – what’s something that went wrong that you can think of, initially, and tell us what happened? Or a big old problem that took place, and what happened?

Ryan Barone: I know you mentioned on the software engineering side it can feel very different from a lot of things, which in some ways it might be, but in a lot of ways, I do think it’s very similar. And it was one of the things I struggled with very early on, was it was really hard, and I didn’t really know everything I needed to know to build what we eventually became today. So I think that is very similar. And at first, I had these thoughts of “Should I plan more? Should I wait longer? Should I not start?” And I think that is very common in any entrepreneurial endeavor that you say, “Should I just wait? Should I analyze more, should I gain more skills before I start?”

Honestly, as much as it was very difficult to learn that along the way, my perspective is start with something, and in a lot of ways — or in the software space, they call that your MVP, which is basically like the most simple, most basic version of whatever solves your problem. And I think this goes for physical products or real estate or anything you’re doing. But just starting with something. And then from that point, addressing each problem as you go along the way; it’s not going to be a perfect plan when you start out, but my perspective is even as much as you do plan, you’re going to miss something. I missed many things along the way, and it wasn’t until I was in the weeds actually trying to execute what I was trying to accomplish that I realized, “Okay, we need to do this as well. We need to do that as well.” So my feeling much more is start now if you know what you want to do and you know what you want to accomplish, and have somewhat of a plan. But don’t worry too, too much about having every step of the way planned out, because you really can’t 1) use those different resources and communities that are out there, and leverage other people that honestly know more than myself ,or if you’re thinking about for yourself, like there are people that are more experienced than us in whatever issue we have… And a lot of the time you can reach out and ask for help, even online; a lot of them will help you, and you can just build a better product as you go along.

Joe Fairless: Anything that we haven’t talked about that you think we should before we wrap up?

Ryan Barone: From the entrepreneurial perspective, one that, at least for me is important and that I think translates to almost anything would just be listening to whoever your customer is. I think this goes for someone managing real estate that has tenants, it goes for us that’s creating software for people that are managing those properties… It seems like sometimes you have to know the answer. I think that that’s the initial gut feeling that I myself or a lot of people have, that you have to just know what you should be doing. But in a lot of ways that customer, that tenant, that landlord, whoever it is for you in your business, has an idea of what the right answer is. And if you’ll ask them, a lot of the time they’ll tell you. And if it makes your job on the creator side of things or the operator side of things to do whatever is the right answer, because you get that feedback from the person that feels it the most.

Joe Fairless: That’s powerful. It’s simple, but powerful. I completely agree. And clearly, you’ve embraced that philosophy and acted on it through the creation of RentRedi, based on this conversation, and also just the bells and whistles that the software program has from my experience, too.

How can the Best Ever listeners learn more about RentRedi?

Ryan Barone: Our website, it’s  rentredi.com, because we’re a startup and we have to spell something wrong… So that’s a good place. But we’re also on Facebook, Instagram, Twitter, YouTube; we have a YouTube channel as well, we try to share some knowledge… So pretty much any social media outlet you want to go to, you can find us on there and say hello. We always reply to things. It’s always kind of nice to hear from people.

Joe Fairless: Ryan, it’s been a pleasure speaking to you, learning more about your journey, learning more about the different iterations of RentRedi, the challenges that you came across, and the popular items, or features, I should say, that RentRedi has for both landlords and tenants, and how those came about. So thank you for being on the show, I hope you have a best ever weekend, and we’ll talk to you again soon.

Ryan Barone: Thanks for having me, Joe. I appreciate it.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2593: Converting Single-Family to Multifamily with Derek Clifford

Former Project Manager Derek Clifford used his multifamily income to retire from his W-2 position just this year. Keeping his life vision in mind, he’s currently working with his wife to acquire deals in Indianapolis. Derek is sharing with us his top three goals as a result of his investments, why he chose to focus on small multifamily in the Midwest, and his most creative approach to reaching investors. 

 

Derek Clifford Real Estate Background:

 

 

 

 

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Deal Maker Mentoring

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Derek Clifford. Derek is joining us from an unknown location, but a safe location, and we’ll get more into that later. Derek has converted single-family homes into apartments, and is now a syndicator, investor and a JV partner on several deals. Derek is currently Airbnb-nomading around the country, which is why we don’t know his location.

Derek, thank you for joining us, and how are you today?

Derek Clifford: Ash, it’s so great to be here. It’s an honor. I’ve listened to this podcast so many times, and to be a guest on it, it’s pretty incredible.

Ash Patel: It’s our pleasure. Derek, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Derek Clifford: Absolutely. So I am a former project manager at a utilities company from the West Coast in the United States, and I’ve retired myself from my W-2 job using multifamily real estate to do it. And today, my wife and I, we work together to take down small multifamily in the Midwest and in Texas, and we raise capital and we also like to partner up with fantastic operating partners down in Texas, and then we’re doing our own stuff up in the Midwest. So in addition to that, we have masterminds, coaching, we have all kinds of other things to help people get out of the corporate rat race.

Ash Patel: Alright. So, Derek, it’s not a secret where you’re at, but where are you right now?

Derek Clifford: Right now, this is our 16th Airbnb, and I just counted it yesterday. So this is legitimate. This is our 16th Airbnb, and we are in Indianapolis, Indiana.

Ash Patel: How long ago did this Airbnb venture start, the traveling?

Derek Clifford: We started back in May, and we were mostly in California, which is the place that I was working, and just traveling around because of the pandemic; we kind of took advantage of that and started traveling within the state. And then when we made the decision to leave the job, that kind of opened up everything. So from that point forward, we were making our way east from California to Nevada, then Utah, Colorado, and Kansas City, Missouri. And now we’re here in Indianapolis, and we have a few more stops to go.

Ash Patel: I’m dying to hear the story. So you were working full-time, and you’ve found multifamily as a way to retire yourself and your wife. Can you take us through that journey? What got you started, and how you ended up being able to retire?

Derek Clifford: Yeah,. So when I first started, I started out like a lot of multifamily investors first do, which is in single families. So I did that back in 2017. I got started out of state here in Indiana, and then what happened was, Ash, we ran out of single-family loans; we could only do a certain amount of them before banks start turning you away. So after we maxed out those number of loans, we started looking, “Okay, what is the next step?”

So the next step for us was naturally, multifamily. So we started out by doing a JV in the market that I had built up my single-family portfolio, which was out in the Midwest. And then we realized another thing – we were running out of capital; we only had enough money to be able to put into these properties before we started to run out.

In the meantime, you know, I had a lot of colleagues at work, who were asking me how to do all this. So I wrote a book that basically described my entire process of, my whole blueprint, on how to get from working a full-time job and doing part-time real estate investing, and doing that on the side. So I documented that all in a book and then just gave it to everyone I knew. And then that started attracting more and more interest.

And then I got a mentor, his name is Vinney Chopra—I’m sure that he’s been on the show once or twice—and he showed me the world of syndication, and that’s how we kind of got started. So basically, building this entire business on the side. But one thing I do want to mention, Ash, is that the key to all this was my wife. Without having my wife on board with me to help facilitate the mental space, the physical space and the time space for me to be able to do all this… And she was also a visionary behind all this, and she was kind of asking questions as to what would happen if we were able to do what we wanted to do with multifamily real estate.

So it’s really funny how your life is determined by the questions that you ask and how you answer them. And once you have quality questions, you get a quality result. And with those good questions came out a lot of work, but out came these fantastic results, and so that’s kind of where we are today.

Ash Patel: What did your employer think of you handing out books, basically a guide on how to quit the rat race?

Derek Clifford: Very good question. They actually didn’t say anything, because they did not know. A lot of it was under the radar type of thing. It was the relationships that I had built, talking with people that I had close relationships with as a project manager. So I just kind of gave that to them or told them where to go to get the info.

Ash Patel: It reminds me the movie Old School. You started a secret fraternity. And you can’t talk about it at work.

Derek Clifford: Yes, sir.  Absolutely.

Ash Patel: So 2017, it wasn’t that long ago. And that’s when you got started.

Derek Clifford: Yeah, so 2017 was when we actually got a lot of our single-family started. Just this year, it’s been absolutely insane. This year, we started off by converting all of my single-families to multifamily, and doing three syndications as well, as a capital partner. But definitely, we ramped up a lot this year in multifamily, because we started to get a lot of the interest from the previous years built up.

And then also, I have a pretty cool trick for the listeners, too; if you have a bunch of single families, and you want to buy a multifamily, and you have a whole bunch of equity in them, and let’s say that these single families are inside of your personal name, you can do a 1031 out of your personal name and into an LLC. But the catch is, is that you have to keep the EIN number for that single-member LLC that you create as your social security number. So you can actually do that – you can create an LLC, that’s not its own entity from a tax perspective, but is an LLC, so that you still get some of the legal protections that an LLC offers.

So as soon as I heard that from a few people that I have been networking within the multifamily space, my mind kind of opened, and then I was able to convert all of my single-family homes that you mentioned the intro, into multifamily property. And then of course, that gave me the broker credibility, that gave me the track record, and it gave me something to really give a lot of credibility to my path going forward. So then, along with that came a lot more capital, a lot more interest, and when you have capital and you have a deal pipeline, things just magically start to happen.

Ash Patel: Money attracts money, right?

Derek Clifford: Absolutely, sir.

Ash Patel: Derek, explain that to me a little bit more in-depth… You have an LLC with no holdings in it. Is that right?

Derek Clifford: Actually, what we did was – as long as you talk with your 1031 company, they should give you the same advice, at least today; and we did this back in February and March, so I can’t say — whoever’s listening to this podcast now, at least at the time of this recording, this still exists, in September of 2021. But if you create an entity, as long as you do that before you close on the property and you give it to your 1031 folks, and you show that the tax ID is the same at the purchase as it is at the sale, they’re fine with that. So you can create that entity, you just have to flag a 1031 when you do the sale. And then once the sale completes, you have 45 days to get the replacement property. So there’s already a lot of work there, but you can create the entity as soon as you find the thing to 1031 into.

Ash Patel: Okay, so you’re still bound by the 45-day identification period.

Derek Clifford: You are.

Ash Patel: Ah, I thought you had a secret way around that.

Derek Clifford: No, I don’t think so. I wish there was, but there’s no way around that.

Ash Patel: So what year did you retire?

Derek Clifford: Well, I retired here in 2021, about one month ago, almost to the day.

Ash Patel: Well, congratulations. And your wife did as well?

Derek Clifford: Yes, she’s actually a naturopathic doctor, so she has her own practice. So she’s been doing her own work for a while now, but with the pandemic, I’m really proud of her and what she’s done because she has been able to stop her practice going into the office, and now she’s doing everything online and she’s completely shifted her business model.

Break: [08:48] to [10:49]

Ash Patel: When your wife asked you, “What do you want to happen?”, what was your answer?

Derek Clifford: What we want to happen in terms of…?

Ash Patel: So if this thing pans out, what do you envision happening? This is a question that I wrote down – your wife was the visionary, and she said, “What do you want to happen as a result of this real estate investing?”

Derek Clifford: That’s a really great question, Ash. We’ve been on the same page for a very long time, when it comes to that type of thing, and our vision. Our life was going to be, back at the time, we wanted to have the ability to be able to help 1,000 couples get retired from their W-2 situation, so that they’re not working a corporate job, and they’re able to do what they want to do. At the same time, we’re traveling, and we have complete locational freedom, which we do now have today. And in addition to that, what was really important to us was to be able to live off of 10% of what we make, and give 90 away to the causes that we believe in.

Ash Patel: That’s incredible. So all of the masterminds that you’re doing and all of the coaching, all the investing, is that 100% remote?

Derek Clifford: All of them. 100% remote.

Ash Patel: Is that difficult, or do you just have to continue to find systems to put in place, so that you could stay remote?

Derek Clifford: No–

Ash Patel: Because it’s easier—a part of you has got to be like, “Man, I could just go back to Indianapolis and take care of this myself.”

Derek Clifford: Oh, of course. I think that when your network grows large enough, like it is right now for me, every city that I go to, there’s an opportunity for me to network with someone. So after this, we’re heading to Memphis, and we already have two people that we’re going to be meeting up with, and there’s probably many more that we can do. So I don’t miss the in-person aspect, because we still are getting that. I know that COVID is kind of this new thing that’s kind of throwing a wrench in that, but I’ve gotten quite used to doing virtual networking, and then taking the opportunity to really solidify the relationship when we are actually in that area. So we haven’t really missed a beat at all, Ash. I think it’s been actually great to be able to get exposure to even more people… Because I have to admit, if you don’t have these in-person meetups, these people are getting their networking fix online, and that’s how we were able to get exposure to a lot more people.

Ash Patel: Derek, you mentioned you’re looking for small multifamily. What does that mean?

Derek Clifford: Yeah, small means anywhere between 75 and 40 units. But right now, the price point that we’re looking at is anywhere between $3 million to $6 million in purchase price. So depending on the market that you’re at, that’s kind of the unit counts that we’re looking for. But we’re recently starting to think bigger, and we want to go up into the higher spaces; it’s just that right now we’re seeing that there’s a lot of competition and a lot of institutional money out there that’s willing to go after things in the 100-plus unit space. And quite frankly, they have access to cash, and their motivation is a lot different. They’re looking for safety, when we’re looking for yield, as private investors.

So we’re still looking in that space, and we can bring on several partners that we’ve met to be able to help get that acquired. But we’ve been finding that a lot of the great deals are actually in some of the smaller unit spaces. And what our plan, Ash, is for us to acquire a whole bunch of property in [unintelligible [00:13:50].27] metro area, and then eventually, we’ll be able to sell those as a portfolio and have a little bit of cap compression, because if you keep them as a portfolio, you can install one property manager there, you can get economies of scale, even though there are different buildings; they’re just right across the street from each other or right down the block… So that’s kind of what we’re looking to do at this point. That’s our one hack around trying to do those 100 unit buildings by getting 244 units or something, and then taking the fence down between them, that type of thing.

Ash Patel: What area are you focused on?

Derek Clifford: Well, right now our clear strength is in Indianapolis; that’s where we have a lot of our deal flow. And we love this area, because the inventory is so tight. So it means that if we pick up some properties right now, there isn’t that much new construction coming in, although I think that’s going to start changing soon. But the dynamics here in Indianapolis is incredible. I think in 2020 there’s over a 7% rent growth through the pandemic, and that trend looks to be continuing. And then of course, we love the dynamics down in Texas, too. We love Austin, San Antonio, Dallas, so we definitely are working with great people down there. But for us actively, we’re going to be probably mostly based out of Indianapolis, because as we pick up our portfolio of small rental properties, we’re going to start to vertically integrate here and start to establish a home base in this area.

Ash Patel: Derek, 40-70 units – is that typically an unsophisticated seller? Meaning they don’t have all of their due diligence package ready to go.

Derek Clifford: That is 100% correct. So we’ve been in an occasion many times already where we asked for seller financials, and they’re not willing to provide bank statements. It makes for a very interesting conversation with the lender, who is trying to get this to make sure that whatever rents are coming in place does make sense. So there’s a little bit of a trust factor there that I’ve also been able to establish with a lot of my banking contacts here, where they know that we see the upside potential, and they trust in us and our business plan to be able to execute. But you’re right, the unsophisticated sellers – there’s pluses and minuses to that, and that’s one of the downsides. But we’ve been finding that the pluses have been far outweighing that, because it gives us the opportunity to do some value-adds that are relatively easy. Honestly, as long as you have a great property manager and your interests are aligned, by either looping them in, or giving them some equity for their work, or just paying them well and treating them well, and treating them like a member of the team, that’s how you’re able to start scaling up really quickly in the small multifamily space.

Ash Patel: Derek, what creative ways have you found deals?

Derek Clifford: Oh, that’s really funny. So back, when I was working in the Bay Area in California – I have a really good friend out here, and he would drive for dollars every week. So he would literally drive around and look for properties in the neighborhoods here in Indianapolis for me. At the time, I only had single-family homes. But was, as I said, we were out of loans, so we were looking for things to get ourself into a non-recourse realm, or at least in someplace where we don’t have to worry about Fannie Mae saying “No, you have too many loans.”

So as he was driving around and looking at stuff, he found one building that looked to be a good fit. And every week, I would sit down, he would send me pictures, I would look at the GPS coordinates of the pictures that would come in, I’d try to find the tax records, who the owner was, do a little bit of skip tracing, try to do some Google stalking and stuff to try to find who the owner was behind the LLC… And we found one that — it was interesting enough, we were two weeks behind, and they had just given the listing to the broker. But we had opened up the conversation, right? And when the seller hears from us and saying, “How did you guys know that this was being listed? How did you guys find this out?” And I explained the whole story to him, “We’re just trying to hustle.” And the seller forwarded our email to the broker and connected us with the broker, and that was enough for him to be motivated to want to sell to us, because he knew how dedicated we were.

So I think doing those little things that add up, and just trying to hustle wherever you can – that might be your one way in. And as soon as you can show to a broker that you can close, then the pipeline just starts opening up. At least that’s what we’ve been finding.

Ash Patel: Yeah, hustle wins. And you’re right… I’ve had a lot of brokers send me deals, and when I don’t buy them, I never hear from them again. But you’re right, the ones that you do buy from, you start getting that reputation. So – great advice.

What made you connect with Vinney Chopra?

Derek Clifford: I wish I could say that it was a scientific method that I came down and said, “I looked at price and I looked at features”, and all that. But at the time, Vinney was just getting started and he lived within a stone’s throw of where I was, in the Bay Area. So that was a big thing, because he had local events back then before the pandemic started, so it was easy for me to get to an event and see him in person.

Another thing was is that we’re both GoBundance members. So him and I both had the GoBundance connection before the whole thing even started. And thirdly, if you’ve met Vinney Chopra, before—have you met Vinney Chopra before?

Ash Patel: I have not.

Derek Clifford: Okay; if you’ve met him, you’ll understand why… Because his positivity and his personality is something that I want to achieve, too. There’s so many mentors out there and people that are doing really good stuff, but there’s just not a character fit. I want to eventually follow my mentor, and not only the way that he is doing deals, but also who he is as a person. Because that kind of percolates through to everything you’re doing – your messaging, your marketing.

So we really liked Vinney’s personality; we thought that where he was in life was where we wanted to be in life eventually. So we want to learn from him not only in the multifamily space, but from a mindset perspective, and what he’s doing outside of multifamily. Because you know, Ash, we’re so busy in the multifamily space chasing dollars, trying to get where we are to where we’re financially independent, right? Financially independent, retire early. But no one has ever given thought to “What does it look like after that? What are you doing after that?”

So if you set all this up, and you’re in a position where you’re financially retired, and you’ve gotten yourself to a point where you’ve achieved everything you’ve achieved, but now you don’t have positivity, or you don’t have any friends or family, because you’ve just been working your whole life, and there’s no balance, and there’s no systems in place… Basically, you’re following a different mentor’s path – then what’s the point of that?

So we saw what Vinney has become because of the advice that he’s giving and what he’s doing for his own business, and we definitely wanted a piece of that; we wanted not only the success he’s achieved in multifamily, but also the success that he’s achieved personally.

Ash Patel: And a lot of your syndication knowledge and experience comes from your interactions with him?

Derek Clifford: Yeah, I would say a lot of it comes from him. There was also some other individuals that were involved; like, we went through three or four coaching programs, and we’re always getting coaches and we’re always in masterminds, just because that’s the best way to keep your network up and stay sharp. But he gave me the fundamentals and the confidence to be able to go out there and do syndications.

Ash Patel: When was your first syndication?

Derek Clifford: It depends on how you define that… But there was one thing where I raised some money for an LP stake on a property back in 2018. And this is right when I first got interested in multifamily, and was introduced to GoBundance space. So that one I raised for an LP position, just because I wanted to learn how they ran a syndication and see what it’s like to be an actual LP. But I didn’t have the $50,000 myself, so I kind of got some people together in the office to pool our money together, and then we together went in as a single entity. But I would say that the one that I got first active in was April this year, so not too far long ago.

Break: [21:16] to [23:56]

Ash Patel: How did you find investors for that?

Derek Clifford: A lot of the investors there were from people that I’ve known over a long period of time. And a lot of them were also people that are interested in my book, too. So people that read my book and saw my “business card,” which is the book, they were interested in learning more. And then when I presented an opportunity with someone that I trusted in the Texas area, they felt like the time was right. And I would say that I didn’t get very many organic leads from a lot of my marketing, because I was just getting started back then. I say back then isn’t five months ago, but that’s kind of what it feels like; it feels like a long time ago. But things have picked up a little bit now. But mostly, it was one, leads people that I’ve worked with before, or invested with before, or they were friends.

Ash Patel: So a lot of friends and family; typical for the first investment. And what types of marketing avenues do you have to attract more investors?

Derek Clifford: Yeah, great question. So I have a very talented virtual professional based out of the Philippines, and he does phenomenal work. So what we did was we took a lot of things that we learned from Vinney, and then, of course, branded it. And as far as marketing goes, it really wasn’t too much. We have our own podcast, which is something; we have our book, that was another thing. And then we have blog posts, and we’re very active on social media. So it takes a lot to figure out what channel is going to work for you. And I keep getting the advice that “you should go narrow and deep”, which is what we’re doing with the podcast. That’s where we get a lot of the people who start plugging into our stuff.

So really, I think it was branding, taking the offering memorandum from the lead syndicator or the lead sponsor, and then putting our own twist in it, adding material, taking some away, and then rebranding it so that it looks like our own material is usually the best way to go.

And then of course, we did a webinar and we did a presentation as well to go over the investment, and to show people that we knew what was happening there, and what the returns were, and why we were excited about it.

Ash Patel: A lot of traditional marketing avenues. What’s your most creative approach to reaching investors?

Derek Clifford: That’s a good one. We’re starting up a mastermind soon, so that’s going to be one way to just get people involved in an open community where there’s people that have the same questions as you. But I would say the most creative way would be just using LinkedIn. Whenever you get someone that responds to one of your social media posts, even if it’s a like or something, doing the hard work of going out there and saying, “Hey, I noticed that you liked some of my content. Thank you for that. Do you have any real estate goals? I’d like to learn a little bit more about you.” Because when someone does that, you want to see who is willing to invest the next step, which would be to respond to your message. So you want to be the initiator always. So I think that that’s one of the main ways, is to be really, really intentional about the people that reach out to you on these platforms that you pick, especially when you’re first starting out, to learn a little bit more about the audience that actually liked your material.

Ash Patel: Again, what a great philosophy. Derek, you mentioned GoBundance a few times. For the Best Ever listeners that don’t know what that is, do you mind giving the audience a little definition of that?

Derek Clifford: Yeah, just real quick… So GoBundance – I’ve known these guys for a really long time, and I just recently was able to join earlier this year. But I really love this group because they are truly whole-life millionaires, that are in this group. There’s definitely a financial focus, but we believe in GoBbundance, that you have to be a whole-life millionaire to really grab life big and to really make it what you want to be.

So the epitome of someone who is not a success, but thinks they are is someone that has a lot of money, but nothing else. So what we like to focus in GoBundance is spirituality, giving back, relationships, career, personal growth, family, friends, the tribe, and health as well. We focus on all of these things, because if you’re weak in one part of this wheel of life, then you’re not going to roll very far, because a square wheel doesn’t move very well. So if you’re well rounded — it’s really funny how, when you’re healthy and you have great relationships, that money just flows to you. It’s an interesting concept. And then the vice versa is the same, too.

So the idea is to grow out from the center together and not just in one direction, which will be financial. That is important. But the idea is that your mindset, as it grows, your external world will eventually catch up with it. So if your mindset is just on money, that’s all you’re going to get. But if you’re aware of all of these different aspects of life, then everything’s going to expand together. So that’s kind of the second piece.

Ash Patel: Thank you for that. Derek, what is your best real estate investing advice ever?

Derek Clifford: I think the biggest thing for me was analysis paralysis when I first started. And for those people who are at a plateau in their business right now, they’re at single families and they want to go to multifamily, or they’re already doing JVs and multifamily and they want to go into syndication, I think that the first thing to do is reframe your expectations. If you’re able to take your expectations and take them from a point of hitting a home run right from the beginning, and change it to more of, “Well, I really want to learn something here. I want to cover my risk, obviously, I want to use the 80/20 rule. But I want to make sure that whatever I invest in, I’m going to learn a lot from.”

So as soon as you make that perspective change, it just knocks the barrier down to action… And I’m all about action, finding out what works, and being hands-on. So that is my best ever advice to the audience is, reframe your expectations on what it is you’re looking to do, and just try to learn something. Know it’s going to be a long-term investment and commitment, and understand this is a long-term game, and the more you can focus on learning at the beginning, the more successful you’re going to be later on.

Ash Patel: Derek, earlier you mentioned you’re starting a mastermind. What is your definition of a mastermind? What exactly are you guys doing?

Derek Clifford: Yes, the team and I were just talking about this today. We want to build a community where people are engineering their exit from their W-2. They talk about concerns, they talk about why it’s hard, they talk about the methods to get there, and they’re looking for inspiration in the community.

So what we do is we’re planning on doing a mastermind where it’s open to everyone, and soon the details will be out there. So probably by the time this comes out for the listeners, we should have something available on our website. And what we’ll do in there is we’ll have 15 minutes or so to talk about a topic, and then we’ll break out into breakout rooms, and then have everyone discuss what the topic is, any concerns or issues, and we’ll just lead the discussion around the topics of investing together with your spouse, leaving your full-time job, how to get started in real estate investing or other business, and just really a lot of mindset, relationship and real estate-centric focuses for those who are looking to leave the corporate world.

Ash Patel: I love that. Derek, are you ready for the Best Ever lightning round?

Derek Clifford: Let’s do it, man.

Ash Patel: Let’s do it. Derek, what’s the best ever book you’ve recently read?

Derek Clifford: Ah, there’s so many. But I have to give Raising Capital for Real Estate by Hunter Thompson. I have to give him a shout out there. That’s a really, really good one. And the other one, if I can, is David Goggins, Can’t Hurt Me. Fantastic book about how we really have more mind capacity than we think we do.

Ash Patel: Derek, what’s the best ever way you like to give back?

Derek Clifford: Generally, we like to give advice and sit down with people and help them with their real estate. So we do a lot of the coaching, one-off, as pro bono. But I think that the thing that we like to do is give to an organization called 1Life Fully Lived, and they’re focused on financial education and helping people when they’re very young learn about finances and how important it is and how it compounds, in a lot of these low-income areas. My good friend in GoBundance, Tim Rhode, is the co-founder or is the founder of this organization… So we’re really passionate about giving back there.

Ash Patel: Derek, how can the Best Ever listeners reach out to you?

Derek Clifford: The easiest way to do that is to email me at derek@elevateequity.org, or if you want to learn more about us and even schedule some time if you like what you see on our website, just go to elevateequity.org. It’s very simple. We have all of our stuff there – our portfolio, our podcasts, blogs, everything about coaching, and how to get a hold of me if you have any questions.

Ash Patel: Well, Derek, I can’t thank you enough. Thank you for sharing your story today, and being an inspiration to the Best Ever listeners that might be in a 9-5, they might want to break out into multifamily. You started in 2017 with single-families, and less than four years later, you’re retired, and now you’re teaching others how to do the same thing. So thank you for inspiring our Best Ever listeners.

Derek Clifford: Ash, it’s been a pleasure being on. Thank you so much for having me.

Ash Patel: Thank you. Best Ever listeners, thank you for joining us and have a best ever day.

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JF2592_ Renter Nation _ Actively Passive Investing Show 62

JF2592: Renter Nation | Actively Passive Investing Show 62

In today’s episode of the Actively Passive Investing Show, Travis discusses the current housing and affordable rent shortage we’re currently experiencing in the U.S. We dive into the imbalance we’ve been seeing in the market and how the pandemic had an impact on that, the future of renting, and Travis’ best advice for property owners based on these trends.

 

 

 

 

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Deal Maker Mentoring

TRANSCRIPTION

Travis Watts: Hello, everybody and welcome to the Actively passive Show. I’m your host, Travis Watts. Thank you so much for tuning in to yet another great episode. This episode is called Renter Nation. I titled it Renter Nation, because what we’re talking about is homeownership is becoming less affordable, I think we all know that, and many would-be homebuyers are right now on the sidelines waiting for either prices to adjust and/or come down.

Unfortunately, with commodity prices rising and with wages increasing and with inflation at the highest points we’ve seen in several decades, many renters are becoming long-term renters, and that may potentially be for life. America has become a nation of renters. In fact, the number of households that are renters is up from 31.2% in 2006 to 36.6% in 2016 according to the Pew Research Center, who basically did an analysis of the US Census Bureau Estimates of Housing Inventory. And these numbers continue to grow and expand here through 2021.

Meanwhile, the average home price continues to rise, and has been for many years now. And with so many people unable to buy, especially over 2020 and 2021, rental demand has increased. And what we’re starting to see now his rents are catching up and they’re rising rapidly.

I’ll share with you guys a real-life example. I’m invested in an apartment deal – it’s a real estate syndication in Boise, Idaho, and for years, there’s been a lot of people moving to Boise, Idaho. But since the pandemic, and more specifically over the last 12 months, Boise, Idaho is now leading the nation in the fastest rent growth, up nearly 33% over the past 12 months.

Another example of an extreme market would be Spokane, Washington, just behind Boise, Idaho. Spokane has had a 29% rise in rents over the past 12 months. And just to kind of zoom out and put all that in perspective, the nationwide average for rent increases right now is hovering around 10% over the past 12 months. As we’ve discussed in previous episodes, there’s a very large demand right now from institutional buyers in the single-family space, companies like Blackstone and iBuyers. In case you didn’t catch the last couple of episodes, Blackstone acquired a company called Home Partners of America; they own about 17,000 single-family homes nationwide. That acquisition was valued around $6 billion.

And here’s why I like to share a few facts about Blackstone – they’re known for setting trends in the industry, especially in the institutional space. So unfortunately – or fortunately, depending on what side of the coin you’re on – this may be just the beginning of institutions and institutional buyers entering heavily into the single-family market, thus making single-family homes more expensive.

And to quickly define iBuyers, I would recommend doing your own research and just run a quick Google search, but basically, iBuyers are companies that are willing to make you or I a full cash offer with no contingencies as far as repairs or warranties or upgrades for your home. And then what they do is they go in and they do a light renovation and put it back on the market. And they’re eliminating the middleman, so to speak, of realtors and realtor commissions, and lowering closing costs and things like that. There’s a lot of companies right now in the sector that are trying to gain rapid market share. Just like we’ve experienced in the past with companies like Amazon, they may do certain things where they’re operating at a loss in the beginning, in order to get market share, like what Amazon did with their Kindle devices. They were actually selling them below the cost of manufacturing them in order to get more customers hooked on their software, their programs, their audiobooks, so that they would gain market dominance long-term, and they could slowly but surely rise the prices to the market level.

So all this to suggest that the single-family market in the United States has a very low inventory, a very high demand, both from Main Street and Wall Street investors and buyers, and right now is experiencing all-time record highs. And a good portion of Americans that would be otherwise homeowners are unfortunately being priced out of the market.

Break: [05:28] to [07:29]

Travis Watts: So let’s talk a little bit about this housing shortage. How did we get here, and why do we have this supply and demand imbalance in the first place?

Well, first and foremost, I’ll start with the pandemic, still on everyone’s minds. The pandemic was a very interesting thing that happened; a lot of people started working from home, some people decided this might be a good time to retire anyhow, and we saw a lot of shifts happening. We saw New York, New Jersey, California, these high tax states coming down to lower-tax states, whether that would be to the Carolinas, or in Georgia, or in Florida. We see a lot of inward migration into Texas, especially out of California. And just even regionally speaking, we saw a lot of shifts in the market.

So what happened is, there was affordable housing, so to speak, in these areas, but everyone’s sort of chasing at about the same time all at once and bought up what inventory there was. And real estate, at the end of the day, is really just supply and demand, so now we have a lack of inventory on the market, a lot of people still wanting to move to these places, so prices are being bid higher and higher in the process.

But here’s something pretty interesting that you may not know – we were never, as a country, building enough housing to begin with. And I’ll give you an example. There was a study done by the National Association of Realtors, and what they said is that “The US built an average of 276,000 fewer homes per year from the years 2001 to the year 2020, compared to 1968 up to the year 2000.”

In other words, if the building had kept up with the demand this whole time, we would have approximately 5.4 million additional homes, thus evening out this crazy supply and demand issue that we’re seeing. Not to forget that between the years 2001 and 2020 we had the great recession, which was really a housing crisis, and there wasn’t a lot of development happening through those years.

So I went and I did a little bit of research here recently on homeownership percentages, and to my surprise, homeownership in the US, for decades and decades now, I’m talking since at least the 1980s, has hovered around 65%. Now, there’s a lot of reasons why homeownership goes up and down, to include construction costs and labor costs, material costs, interest rates, political policy, the Federal Reserve, the administration’s that come in… For example, when I bought my first home, there was a government stimulus for first-time homebuyers where they would give you basically a tax credit to purchase a home, things like this.

So what we’re seeing here in 2020 and 2021, and looking forward to the future here is building costs have rapidly been increasing. Now, not all of this is due to the pandemic; we were seeing building cost and cost of copper and lumber, etc, up in 2018 and 2019. But it’s more rapidly gone up here in the last 12-24 months.

As I’ve mentioned many times on the show, we saw earlier this year lumber at 300% price increase compared to where it was before. But again, it was already up 94%, I think it was in 2018 or 2019, pre-pandemic. The pandemic also caused a lot of supply chain issues, so a lot of materials couldn’t get here, which is part of why we’re seeing such rapid inflation in certain supplies. There’s also a labor shortage, as I’m sure you’re aware, nationwide. For whatever reason, it’s tough to get labor right now. So again, companies have to charge more if you really want to get that product or that service right now. And also, home construction – I know at least from April, it had dropped 13% compared to the month prior in March.

And according to the National Association of Homebuyers, they’re saying basically over the last six to 12 months that “$36,000 has been added to the price of buying a single-family home.” That doesn’t just carry over to new construction of course, that is also in benefit of anybody who owns pre-existing real estate as well.

So what happens next? And where do we go from here? It’s an interesting question, and it may come as a bit of a culture shock, but what we might be seeing here in our near future is co-living again, where multiple generations and a family are living together, for example. I’m seeing this happen right now in my inner circle, with some of my friends, elderly parents that are finding it difficult to rent or keep up with inflation, so they are coming to live with their kids, potentially grandparents coming to live with parents, because assisted living is quite expensive, if you’ve never looked into that before.

And as my wife and I have traveled over the years – I’m just thinking right now on a global level – this is not abnormal. There’s a lot of countries in fact, I don’t know if I could say the majority, but when we were going through Asia, when I was working in the Middle East years ago, it’s quite normal to have grandparents, parents and kids within the same household for affordability reasons.

In my perception, there was a period of time in America where it was, “Hey, everyone should be a homeowner”, and homes were getting bigger and bigger and bigger. And it was at a time where inflation wasn’t very high either, and we didn’t have the supply and demand issues quite to this extent. This is where you may have heard the term McMansion. This is where everyone’s buying these single-family homes that are four-bedroom, five-bedroom and six-bedroom and 6,000 square foot and all this kind of stuff. But again, these were being built at a time where it was a bit more affordable.

In fact, my wife and I actually met by being roommates in one of these homes. What had happened is, the owners went through the Great Recession with their McMansion, their kids had gone away to college, they had all these spare bedrooms, they couldn’t really sell because they would take such a hefty loss… So they started renting the bedrooms out. And my wife and I, temporarily – it must have only been about six months or so as we were transitioning in our careers, didn’t know each other – she was renting a room and I was renting a room in that household, and that’s actually how we met.

So I think everybody at the end of the day is looking for affordability, especially now with inflation being so high. That’s exactly what these homeowners were doing. They were saying, “Well, we have this, what we thought was an asset, which kind of turns out to be a liability, because we’re underwater and we owe property tax and insurance and all the rest. Why don’t we rent out the bedrooms?” They didn’t have kids that were coming to live with them, and they didn’t have an elderly parent living with them, but they had us paying their mortgage for them, basically.”

Break: [14:29] to [17:10]

Travis Watts: The bottom line, as I said, people are always going to search for affordability, they’re going to find a solution, whether that means living and co-living with family or whether that means renting out spare bedrooms or Airbnb’s or things like that with their owner-occupied home.

I also want to take a minute here in this episode to further explain something. I get this feeling that there’s still a bit of a negative stigma around being a renter versus being a homeowner. And I just want to bring a new idea out there to the table and put some numbers to it. So this is a true story – my wife and I, we owned a single-family home in Florida. This was many years ago… And we decided to sell the home and to become renters by lifestyle design, I like to call it. And let me explain why.

So this home that we owned, I had to put $175,000 down for the downpayment. And even after doing that — so now my money’s locked up in the house, right? I can’t get it back, unless I do a refinance or something years down the road, assuming the home went up in value at that point. And our payments per month were about $2,300. So when we sold, I took the $175,000 back—I really didn’t make much money on the home at all—and I put that into multifamily investments. I was investing in private placement syndications.

We rented a place in the same neighborhood for $1,700 per month. It was a little bit smaller of a place, but it was literally about a mile from our house. So that $175,000 that was invested brought in about $1,450 a month in cash flow from the multifamily investments. And our rent was $1,700. That means we were effectively living for $250 per month… Or, said another way, we were saving about $2,000 per month. So instead of locking up my $175,000 in a home and paying $2,300 a month, I took my $175,000 and put it in investments, and I paid $1,700 rent, and I had $1,450 coming in in cash flow. So the difference there is $2,300 minus $250, so about $2000 per month.

Additionally, because we did this intentionally, we were able to have flexibility—so many words here—we were able to travel, we were able to not have the worry of, “Hey, our roof needs replacement” or “Our A/C unit just went out when we least expected it.” None of these was out of pocket expenses, because we were renters, and that fell on the landlord. So all that to suggest that maybe renting could make sense for you or someone else. So I don’t want to do this episode in terms of, “If you’re a renter, you’ll never get out of the rat race” or “If you’re a homeowner, that’s where everyone wants to be.” There’s pros and cons to both and understanding the difference is what will make you an intelligent investor.

So a few takeaways here from the episode – we are currently seeing and we will likely continue to see a lot of demand for housing, both from Main Street buyers like myself or like yourself, and institutional buyers as well. Home prices are definitely on the rise in many markets in a double-digit form, forcing more people to rent versus own. We are experiencing very high inflation compared to the last several decades. There is a shortage of inventory, both in single-family homes and in affordable apartment rent.

If you are a landlord, perhaps you might consider holding on to your properties. If you are currently buying real estate, please make sure that it cash flows and that the numbers make sense. And if you do currently rent where you live, you might consider investing, like my wife and I have done for several years, where we can potentially offset our rent with cash flow from other investments.

Thank you guys, as always, so much for tuning in. I’m your host, Travis Watts. This has been another episode of The Actively Passive Show. Don’t forget to like and subscribe. We’ll see you next time.

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JF2591: 80 Units in 1.5 Years with Blake Selby

When Blake Selby started his real estate journey as an investor, he tried a little bit of everything before eventually morphing into a private lender. But not before scaling to 80 units within 1.5 years, then turning that into 100 units free and clear. Blake is sharing with us how he scaled without always going through the bank, what he found was the most efficient way to grow his money, and his top three steps for qualifying investors. 

 

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Deal Maker Mentoring

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Blake Selby. Blake is joining us from Davenport, Iowa. He’s a full-time investor and a private lender. Blake currently owns 100 units free and clear, and owns over a million dollars’ worth of notes.

Blake, thank you for joining us, and how are you today?

Blake Selby: I’m fantastic. Thanks for having me on your show.

Ash Patel: It’s our pleasure. Blake, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Blake Selby: Absolutely. So when I started, I started as an investor in real estate, as most people do who get into real estate – they’re just looking for some passive income. And over time, I’ve morphed into a private lender, which has been a great transition for my staff and myself, much better for what I want to do now that I’ve kind of made it in investing; helping others to get into investing is actually a big passion of mine.

Ash Patel: So how did you go from being an investor to a private lender?

Blake Selby: It wasn’t an even linear trajectory. I was doing everything I could, kind of taking a shotgun approach in investing. So I was doing wholesaling, flipping, personally becoming a landlord of a large portfolio… And through that process, the whole time I was always buying low and selling higher, thankfully. But that was what allowed me to scale up; I just did everything. And I’m glad I did, because I learned — nowadays I know that to be great, you really need to hone in and find your focus. But at the time, I didn’t know what I was going to be good at. So I kind of just did everything, and learned along the way lots of bumps and bruises. But all in all, it led me to obtain what I think is a good net worth, and the ability to lend out and to help other investors.

Ash Patel: Alright. Blake, so you currently own over 100 units free and clear.

Blake Selby: Free and clear.

Ash Patel: Can you give the Best Ever listeners your journey on accomplishing that?

Blake Selby: Yeah. So I got to 80 units within about a year, a year and a half of investing. And I did that because previously I’d owned a gym; I was fortunate enough to have one of my gym members be a Vice President of a local bank who decided to loan me a million dollars in a portfolio loan, so that I could buy assets, which was a huge leg up. I’d say some of my journey with skill, some of my journey was luck. I’ll admit that.

I took that million-dollar loan, parlayed it into 80-plus units quickly. Over the ensuing years, that went from 80 units to 320 units. And at that point, after I had amassed this portfolio, I said, “Do I really need to have millions of dollars in loans, or could I just capitalize on the fact that I was buying into an increasing market, and sell off maybe 200 of those units, and just keep the remaining 100 and something as paid off assets?”

Well, not only was able to accomplish that, but through that process of selling them, I got a lot more money for them than I thought I was going to. So I also ended up with a seven-figure lump sum amount that I now loan out.

Ash Patel: Blake, the $1 million portfolio loan – was that on existing assets that you owned?

Blake Selby: No. That was starting fresh. So he had been a member of my gym for a few years, saw what I was capable of. I didn’t really have the right financials and things like that, but he saw what we were doing. We had all these gym members, and I was 25 at the time, and had this bustling gym. And I was able to sell the gym, used that to raise a little bit of money, and then in the process, he said, “I can get you loans for these properties that you want to buy; just let me know.” He was very aggressive with me on giving me a loan, so I’m very thankful for that as well.

Ash Patel: Okay, so the loans were collateralized on real estate.

Blake Selby: They were. They were.

Ash Patel: Okay. Got it. Okay. And how did you scale up to 80 units in 1.5 years?

Blake Selby: That was actually through a mix of, of course that million dollar loan, but then also discovering seller financing. I had never really looked into that, I didn’t know what that was. It was only until a guy offered to sell me one of his houses on payments that I said, “Oh, wait a second, I don’t maybe need the bank for all of these.” Whereas at the bank, I might have been capped at 30 or 40 units, I could go to these sellers and to say, “Hey, will you sell this to me on payments if I put a small amount down?” and most of them were willing to do it at the time.

Ash Patel: And what’s a small amount, percentage-wise?

Blake Selby: 10%, something that I would just have in my cash reserve, just from rental properties or something like that. So that’s what I was doing. Sometimes, in rare occasions, I was putting nothing down, which was pretty [Inaudible [05:12].

Ash Patel: And at what stage did you go from being a one-person shop to taking on partners or employees?

Blake Selby: I never took on partners, but I did take on employees. I think we’re at four full-timers right now, and we’ve got a ton of subcontractors, 1099 workers that work for us. My W-2 employees that work 40 hours a week, we’ve got four of those. And basically, it was just kind of a natural progression. Over time, I just picked up one, then two, then three, and I imagine over the next few years we’ll probably be at about 10.

Ash Patel: Blake, what was your first hire? What position was that for?

Blake Selby: General admin. And I recommend, if you’re just getting started as an investor, if you intend to scale, be thinking about people that you know that might make a good, trustworthy, reliable, teachable, trainable person that might be a good addition to your staff… Because sometimes my staff actually help me keep me so organized that I actually get so much more done in a day than I would have on my own. So just because they’re keeping me on track and eliminating some of that tedious stuff…

For example, I had somebody that did all the legwork to get this podcast put together for me. That way, I didn’t essentially do any of the communication or anything like that. So I have a staff that shares an email with me. But that’s a very small example.

Another bigger example is dealing with some of the properties that we help other landlords with as far as from a management standpoint; we have about 400 or 500 doors that we help other landlords with. And with that, if I was taking telephone calls all day long, I would get nothing done. So having a good, quality staff there to receive phone calls, deal with paperwork, deal with anything that might arise from a tenant issue is really helpful in keeping me focused and honed in on private lending and some of the more core business activities that are higher dollar amounts.

Blake Selby: I did not see property management in your bio. Do you manage properties for other holders?

Blake Selby: We do. We don’t even advertise it; we get so many referrals… I almost don’t want to advertise it because we’re very picky with the clients that we manage for. We want to manage for clients that have a lot of units. One of the guys that we manage for has 150 houses. To give you an example, now my staff is only dealing with 10 guys every week, versus 100 landlords that have two units or three units.

Ash Patel: And that makes a lot of sense. I still want to know, how did you get into private lending?

Blake Selby: I did my first private loan in 2017. So this was while I was still adding units. I said, “Why don’t I try this?” And again, I was trying everything else. So I said, “Well, I guess I’ll try private lending out.” And I didn’t really realize it until the culmination of the first deal, but it was just so easy for me. I could just kind of set it and forget it, as long as I did the right types of deals… And it didn’t scare me as much as maybe putting all my eggs into an asset. I could maybe be halfway into an asset’s value on a private loan, and then kind of, rain or shine, I’m getting paid, because the asset’s worth $100,000. If I’m only into it for 50, there’s no way that I’m not getting paid. And if I don’t get paid, I’m probably going to make a significant amount of money, which rarely happens, and I’m not in the foreclosure business. But we do have them in like all kinds of different states. I just bought one in Arkansas the other day, did a private loan on one in Arkansas, which I don’t know anything about Arkansas, but I can read assessed values and I can check comps… And when I’m seeing that I’m into a house for $100,000 and the other party put $175,000 of their own cash into the deal and I’m first lien position, that makes a whole world of sense for me.

Ash Patel: Blake, will you lend on multifamily or other commercial buildings?

Blake Selby: Yes. Absolutely. Houses are my sweet spot, but I will absolutely lend on multifamily and on commercial; the deal just has to be right. I’m looking at one right now, it’s a bank property. I think it’s in Virginia. Anyways, I’m looking at a bank property out there, and the gentleman that has it – it’s a $200,000 loan amount that he needs from me, but it’s currently assessed at the county level for taxes at $480,000. So it’s really a no-brainer; he has the rest of the money to come up with. So for me, absolutely. That deal makes so much sense to me, because I don’t think there’s a world in which that could ever be worth less than even $300,000.

Break: [09:10] to [11:11]

Ash Patel: What steps do you take to qualify the investor that’s asking you for money?

Blake Selby: As far as the investor, I’m looking for “Does this person rub me the wrong way personally, when I’m talking to them?” I know that’s a very unscientific way to look at it. But when I’m speaking with somebody, I want to know, are they trustworthy? Do they seem like someone I can do business with, that isn’t going to be snaky? I can usually read that pretty early on in a conversation.

Second of all, I look at how they present the deal to me; are they very aggressive and pushy? Because if they are, that’s usually a big red flag. Are they sincere? Because if they are, then I’m more willing to work with them and try to come up with a solution. So if they say, “Oh, I’ve been in the business for 50 years, and I know everything there is to know.” Well, then why are you coming to me for money, right?

Ash Patel: That’s a lot of gut feeling versus background checks, and financials and all that.

Blake Selby: Yes. We’re very gut feel-based on everything that we do; very old school, very handshake. Another thing – obviously, I’m going to vet the deal and look, but there are some metrics that I can look at. Instead of appraisals, we generally have the client do a video walkthrough tour of the property just on FaceTime or Facebook video. So I want to save the borrower as much money as possible. So if I can appraise the thing by just looking at it myself, why not?

Ash Patel: I want to go back. You said that, while you were scaling up, you started private lending.

Blake Selby: Yep.

Ash Patel: It seems like you had an abundance of cash. Where did all of that come from?

Blake Selby: I did, because while I was doing everything else and scaling, I kept flipping, kept wholesaling and kept doing all these cash-generating activities, because I realized that I was going to get limited by the bank. Eventually, I had millions of bank loans; I think I had $2 million or $3 million of bank loans by the height of it. But it’s not easy to continue relying on the banks for money, because a) they’re a little slow sometimes; b) the percentages are good, but at the end of the day, they’re going to limit you on how quickly — they’re going to see you expanding like a wrecking ball, like they did with me, and they’re like, “Oh, dude, you need to slow down a little bit. We’re seeing all these new loans being generated every six months.” So for me, I said, I need to rely on the banks as a component of my business, but I can’t rely on them for all the cash. So I need to do some cash-generating activities like flips, wholesales. At the time, I was turning to take on some management clients. Other things that are just cashflow-positive things that are not 100% reliant on my rental income. Okay? So that’s how I got to the most of the cash that I got to early on.

Ash Patel: Blake, you started scaling up, you hired a staff—

Blake Selby: Yep.

Ash Patel: —and at some point, you sold off the majority of your units,—

Blake Selby: Yep.

Ash Patel: —focused on about 100.

Blake Selby: Yep.

Ash Patel: And then you got into private lending as well. Then, where do the notes come in?

Blake Selby: So with the notes, what we did is we were selling some of those properties off. Now, the 200 that I sold off – there’s little over 200 – those ones that I sold off, half of them I sold off cash. The other half, I sold off and I formed notes on them. So I allowed people to put down payments down on the notes, and then I actually sold off some of the notes, which was kind of a cool 3D chess move; I think it’s cool anyways. And that allowed me to really cash up, because those notes were probably higher than I would have gotten for the properties had I not sold them in that manner; if I had looked for a straight of cash buyer. So I was able to sell some of the notes to a note buyer, generate even more cash, and then plow that back into high-yield private loans. And so that’s the business end of the enterprises that we have today, is most of it is now private lending, and of course, a smaller portion is that $400 or $500 doors depending on the given month in management units.

So that’s most of my business, and then of course I’ve got my 100 that are still paid off. I don’t really think about those, I just have my staff manage those, just like we would any other doors for any other landlords. But those are all fixed up, paid off. Nothing needs done with them. No work needs done. So I just hang on to those. I’m really not acquiring any more units. I think those are just kind of my ones that I already know everything about. They’re already set up and ready to go. So for me, I just leave them alone.

Ash Patel: Can you take me through the numbers on—

Blake Selby: Yeah.

Ash Patel: —let’s say, $100,000 house that you sold, converted into a note.

Blake Selby: Yep.

Ash Patel: Can you walk me through that entire process?

Blake Selby: Let me tell you about a specific group of properties that I sold. So there was a 74 unit house package that I sold for $2.1 million. I know it sounds like a really low number for 74 houses. These houses were in the hood, these houses were in Illinois — not in Chicago, but they were in Illinois in an area that resembles the South Side of Chicago. So very rough. The houses themselves were in pretty good condition, but again, they were in the wrong neighborhood; which is okay, because I got them super cheap. So I sold them at $2.1 million, I was into them for about $800,000. So you can tell I did pretty good on that little package right there.

And then of course, what I did is I sold the note at a slight haircut, because it was a long-term note, it was like a 20-year note, and I wanted the cash now, so I could plug it into some of my shorter-term loans. So what I did is I took that $2.1 million note, took a small six-figure haircut on it, and was able to get all the cash now. And that was great for me, because I didn’t have to wait the 20 year spread to get it, and I could then parlay that into some shorter-term higher yield private loans. But again, even though I sold it for a small haircut, the note, I still ended up with more cash probably than I would have had I sold those properties to a cash buyer.

Ash Patel: So the $2.1 million that you sold – was it to one purchaser?

Blake Selby: One guy. One guy.

Ash Patel: Okay. What was the rate on that term?

Blake Selby: So I gave him a sweetheart deal on the note – just 4%, which is insane. And that was a 20-year amortization with no balloon. I’ll never do that again. But the reason I did that is just to get it sold, get the juicy downpayment, and then I went ahead and sold the note off. So it was as if I sold it cash. But because the note was so much higher than what I would have gotten from a cash buyer, it actually worked out to where I still made more money than I would have had I sold the property’s cash.

Ash Patel: And what percentage did that buyer put down on the $2.1 million?

Blake Selby: I’m trying to remember what the exact dollar figure was; maybe half a million, somewhere in there.

Ash Patel: Okay.

Blake Selby: Yeah, so he put a pretty chunky amount down.

Ash Patel: So that’s a great deal. Somebody put down half a million dollars—

Blake Selby: Yep.

Ash Patel: —on a $2.1 million portfolio, at 4%.

Blake Selby: Yep.

Ash Patel: Yeah, I could see why you wanted to get out of that.

Blake Selby: And it was a win for him too, because we actually now manage those properties for him, which is fantastic. So we’re still getting residual income off those properties in the form of management. But with that being said, he’s tracking somewhere around $40,000 to $50,000 a month in rent off of that portfolio. So his payback for him putting down half a million – his revenue is more than that per year, right now. So he’s doing well on those. So to have a situation be good, one person does not necessarily have to lose for the other to gain; both can win in their own ways.

Ash Patel: Great philosophy. Blake, are you still buying and selling notes today?

Blake Selby: I do. So if somebody’s got a reason why I need to buy this note – let’s say it’s a note that’s kind of a troubled asset, as far as the note is worth way less than what the asset is, and I’m going to stand to gain on day one quite a bit, because I’m buying the note of the huge haircut, then absolutely, I will buy it. I will say that in this particular time in our economy, those are more rare. So I’m not seeing those as much. But I’m still occasionally, if I [unintelligible [00:18:07].28] I’ll sell one off. Absolutely.

Ash Patel: And if you buy the note on a troubled asset, let’s say it’s a million-dollar property—

Blake Selby: Yes.

Ash Patel: —and you buy the remaining note of $200,000… What’s the play on that?

Blake Selby: Let’s say I bought a remaining note of $200,000, and it’s worth a million, right? So I’m going to pay a discount rate for that note, so that on day one, I’m getting a really solid return. So what might happen is on that particular asset that you mentioned, maybe I’m going to pay 150 for that note, so that on day one, I’m getting a 25% haircut, in addition to the interest. And then what I might do is I might just package that note back up and sell it for a 12% haircut, so I’m clearing 12.5% for doing nothing, essentially. So that’s one way to get it done.

That’s a little less common, but something that’s more common is if somebody has, let’s say, a land contract or a contract for deed that they did, and they just need out from under it, some of these people will sell their notes off for like half. So in that case, that’s just so much money for me on day one, that I can’t turn it down.

Ash Patel: And then, is it hard to sit there and hold it and make your money over time?

Blake Selby: Yes.

Ash Patel: Or are you just itching to sell it? Right.

Blake Selby: I’m always itching. I’m always itching. I’m a long-term thinker, but I like short-term deals. So I want to do long-term plays using short-term deals to do them. I like everything that I do to be under 12 months, ideally. It doesn’t always work out that way. If that feels too good, then I might have to bend around my rules a little bit. But as a general rule, 90-plus percent of everything I have is one year or less. So at any given time, half of my money is going to be boomeranging back to me within six months.

Ash Patel: Yeah, so you don’t want to sit there and painfully watch this money come in slowly.

Blake Selby: Especially—

Ash Patel: So will you end up selling those notes?

Blake Selby: If they’re more than a year, I probably will.

Ash Patel: Okay.

Blake Selby: If they’re less than a year, I’ll just wait to get paid back and then recycle, but sometimes I’ll still sell them. If they’re bigger ones, sometimes I’ll have investors that say, “Hey, man, I want to get into real estate, but I don’t really want to be a landlord.” I say, “Well, you should buy notes. Here’s some notes you can borrow. I’ll give you a 10% haircut on this note”, because I got a 25% haircut on it. So who cares? It’s quick, easy money. I could just redeploy that money into something else. So that’s kind of nice.

I guess the issue with holding long-term notes and why I don’t like to do that as much is because if you’ve looked at what inflation’s done since COVID, with home prices and with material pricing, and different things like that, if you were to hold something for 20 years, I don’t know if that those dollars would be worth what they are now, in 20 years. That’s the only scary part. If you’ve got, especially a low-interest note that you’re holding for a 20-year period – man, what’s that money going to be worth when they finally pay you back?

Ash Patel: That’s a great point. You mentioned investors. Have you ever taken on investors?

Blake Selby: I’ve taken on investors in different roles, but not necessarily in my company as a whole. So sometimes I’ll take out an investor who wants to maybe buy one of the notes, and/or an investor who wants me to front some of the money to help them purchase a package and they kind of pay me back later. I’ll take on an investor if they need me to manage their units or portfolios, or come in and basically as a consultant unscrew up a really troubled large portfolio. I’ve done that a couple of times.

So those are the roles in which I’ll take on an investor. As far as an investor investing in my company – I love the freedom that I have to kind of jump in and out of assets without having to ask anyone. It allows me a lot of freedom and speed and quickness, and that’s why I’m able to do some of the deals. Now, if I had somebody I had to make a phone call to and say, “Hey, do you want to do this?” and then we’ve sat there deliberating, obviously, investors and partners can be good, as you’ve seen with Warren Buffett and Charlie Munger over the years, and other people like that. What I find is that, until that right person comes around that can really add a bunch of value to my company, I don’t know that I would take them on as an investor necessarily.

Ash Patel: Got it. So you started out with flipping, wholesaling, and over your investing career, you’ve found more efficient ways to grow money with your private lending and notes. What’s next? Where will you be in two years, in terms of what will you be working on?

Blake Selby: Good question. So flipping and wholesaling are faster than private lending as far as growing money, I will say that. But there’s more pitfalls in those. With private lending, the way I do it – there’s almost no situation where I’m going to lose money. The risk for me is so much less, because I’m loaning so little on each asset relative to their worth… Whereas when you’re flipping and wholesaling, these people can probably generate money quicker than I can if everything goes right; but when it goes wrong, they can also go negative. So I’m at the point in my career where I don’t need to go negative, or I don’t need to risk going negative. I’d rather have a moderate return and just have it be very predictable.

So in two years, I could see myself maybe another 20% or 30% over where we’re at now in terms of just general holdings. And that might be $1 million, $2 million more. And then another thing that I could think in five years – I see myself having a larger staff, maybe 10 employees, having a little bit more states that we cover, maybe we’re in almost all the states at that point. My goal is to be a national company now.

Break: [23:05] to [25:45]

Ash Patel: Would you focus just on private lending and notes?

Blake Selby: Private lending, potentially, still increasing some of the regional management. I don’t want to manage more than a two-hour radius away from our headquarters here in Davenport. But possibly more of a regional focus on the management; we’re at 400 or 500 doors now, and we would get up to maybe 2,500 doors, that’s kind of a max. If I had 10 employees, I could handle that. But again, we really don’t advertise. So we’re all referral-based. So I just want to really slowly grow the management, because I’m a big believer in quality over quantity. So I don’t want our reputation to ever get smeared. So we just really slowly grow it with landlords and people that we know are going to be solid clients, that will always pay their bills, and will always pay us, take good care of their tenants.

Ash Patel: We’ve talked about a lot of your wins.

Blake Selby: Yeah.

Ash Patel: Give me an example of a hard loss and the lesson learned from it.

Blake Selby: Most of my losses came from contractors over the years. Contractors can be wonderful, and we have tons of subtractors that we use, 1099 contractors we use on a regular basis, not just for our own stuff, but also for our investor clients that do management through us. But with that being said, on some of my flips, I’ve gotten hosed by contractors, to the point where I’ve gotten taken [unintelligible [00:26:50].19] really unforgivable amounts.

The only other really big loss I had was loss of potential. There was this 10-unit apartment building right in the heart of Davenport, right in the downtown. And I bought that in 2016 when I didn’t really know what I was doing, I got it cheap for 15 grand, believe it or not. And I just had the self-belief I can solve this problem; it had a crumbling foundation and all kinds of other issues with it. And what I’ve found for the first time in my career is how much of a hindrance and a hurdle city governments can be when you’re trying to improve a neighborhood. They don’t care that you’re trying to improve their neighborhood. All they’re really interested in is making sure that their butts are covered and that it benefits them official in some way. And I didn’t realize that. I was figuring, “Oh, this decrepit building”, I come in and have all these grand designs and plans. Well, they wanted me to spend the most money.

For example, this is a building where previously, there have not been any sprinklers. Well, they decided they wanted there to be fire sprinklers, and this building just needs a hug right now. And instead of allowing me to do that over time, they wanted me to put in like a $100,000 sprinkler system into this 10-unit building. Now that’s 10 grand a unit, that’s quite a bit if you average it all out. And at the end of the day, the city would not let me spend less than a million dollars after I looked at all of their bucket list items they wanted me to do, using union labor and this and that, and all these different things. They wanted me to spend about a million dollars on the building and that building would have comped out at about $700,000 when I was finished.

Ash Patel: And this is in the city limits of Davenport?

Blake Selby: Davenport’s not unique. Every city government that I’ve really worked with has been this way. I just didn’t realize this going in but I was younger. I was 26 when I attempted this. And for me to try to get those tax credits and those abatements and all the things that were needed to make this a viable project, I just found that it was such a monstrous time suck. And I was sad, because I ended up selling the building off and basically just breaking even or making 1000 bucks; it was a very little what I made.

Ash Patel: So you sold it for $16,000?

Blake Selby: Yeah, which was really sad because I saw this as a huge opportunity. And the guy I sold it to – he’s got a little more experience in the tax credits and things, so he’s going to be using — obviously the project isn’t viable on its own. So he’s going to be using some government money to do this. But you have to hire consultants for that, and spend potentially six figures just getting all your paperwork in line and all of your engineer stamps and everything. And at the time, in 2016, I didn’t have $100,000 to just put on a dream, hoping that it could work. So I was hoping for something a little more clear-cut. I was ready to get my elbows into the game and get my guys in there working and start repairing things. The way that the city wanted me to do things was just so difficult. So that was a big letdown, I would say. It wasn’t a loss, but it was a letdown. I was really bummed I couldn’t bring that to its original — it was actually the first apartment building in Davenport, which was kind of cool.

Ash Patel: Alright. Was it a historic building?

Blake Selby: It was. It was.

Ash Patel: Yeah, so they had some emotional ties.

Blake Selby: Yeah. It was called the Hiller building, way up on the national registry; it’s such a cool building. But again, that was probably one of my early things where I sat back and went, “Wow, there’s a lot I don’t know here still.” And I’m still learning to this day.

Ash Patel: Yeah, that’s some great advice for our Best Ever listeners. Anytime I buy a building, if it’s in a big city, I don’t bother approaching the city council or anybody. But if it’s in a smaller suburb, a smaller city, I will go to the city hall and talk to zoning, talk to the building department, and find out what they would like to see done with the building, see if there’s any tax credits abatements, any of that, but really get them to be a partner with you, right? Introduce yourself, let them know what your vision is, and really try to get them on your side, and usually that helps… But yeah – man, that’s a tough blow.

Blake Selby: I agree with you that the smaller municipalities are easier to work with, because they don’t have as much going on. I just bought out—what did I do yesterday? I drove out to Indiana, I picked up a house — it was just one that was going to get lost if I didn’t get it that day. I picked it up in this little town called — I think it was Winchester, Indiana. And you go down to the local government, all the ladies down there real happy to see you, “Oh we don’t get visitors that often,” and you know… It’s much easier to work with those type of people.

Ash Patel: With everything that you have going on, why are you driving to Indiana and why are you buying a house?

Blake Selby: So what I’ll still do is – all the way from the big 50 house packages that we do, all the way down to the very small nitty-gritty, I am still intimately involved in the business in every way. It just so happened—I normally don’t do that, but it just so happened this particular guy was ready to lose his house that day if I didn’t get it, and I wanted to be there in person to make sure everything didn’t get screwed up. So I just went ahead and did it. It wasn’t that far of a drive, it was like five hours. So I just got the car, went, did it, got it done, came back. It was something I felt like doing. I don’t do that very often, but occasionally I will. Sometimes I like to meet the people that I’m doing loans with too, or the people that occasionally, when I do buy, the people that I’m buying from.

Ash Patel: Okay, so were you buying the house or were you supplying the loans?

Blake Selby: On that one, I actually bought the house straight up.

Ash Patel: Okay. And what was the story with that?

Blake Selby: So he was basically going to lose, he hadn’t paid it. He only owed four grand on it. So I just gave him five grand so he can make 1000 bucks. So I wound up getting a fully working on and functional house for five grand. Brand new roof.

Ash Patel: How did you find that?

Blake Selby: Basically, we do like 10,000 direct mailers, we’re just hitting anybody who’s got their houses paid off, saying, “Hey, do you need a loan? Do you need somebody to [unintelligible [00:32:05].19] your house? What do you need?” So we go state by state. Every month, we do a new state. So that happened to be in Indiana. So we go and buy lists on some of the list sites and just go and do massive direct mail campaigns.

Ash Patel: What a win.

Blake Selby: Thank you.

Ash Patel: Blake, what’s your best real estate investing advice ever?

Blake Selby: The best advice ever – I think it depends on where you’re at, on your money. So if you’re just starting out, the best thing you can do is watch podcasts like this one, gain knowledge, learn from other people’s mistakes, and then also selectively choose who you listen to. So just make sure that people you’re listening to actually have done what they’re saying and aren’t making the majority of their money on education. Make sure they’re making the majority of their money on deals, if you’re listening to them.

The other best advice I could say is make sure you keep a small emergency fund in cash, just in case anything happens. Worst thing you want to do is wind up cashless when you need a furnace put in, in the middle of winter.

Ash Patel: Great advice. Blake, are you ready for the Best Ever lightning round?

Blake Selby: I’m ready.

Ash Patel: Let’s do it. Blake, what’s the best ever book you recently read?

Blake Selby: Shoe Dog by Phil Knight.

Ash Patel: What was your big takeaway from that?

Blake Selby: The ingenuity of somebody who was the Nike founder just flying over to Japan and just sourcing the Japanese shoes from the shoemakers there, figuring out a way to make it competitive with the American shoe market, going in and just building an entire dynasty out of it. I just thought that was phenomenal, some of the stories that were told in that book.

Ash Patel: Blake, what’s the best ever way you like to give back?

Blake Selby: Occasionally, I’ll do a charity case. So maybe elderly homeowner that’ll be losing their home, and I’ll go ahead and just buy the house, and just let them stay there for rent that’s like half of what it should be, for like a really long time.

Ash Patel: That’s great. And Blake, how can the Best Ever listeners reach out to you?

Blake Selby: The best way they can is my website, selbyrentals.com. It’s my last name followed by rentals and then .com. All my stuff’s on there – phone number, everything that I have.

Ash Patel: Blake, thanks for your time today.

Blake Selby: Thank you.

Ash Patel: Thank you for sharing the story about your quick rise to where you are today; 80 units in 1.5 years to having 100 units that are paid off, private lending, note investing… I appreciate your time and sharing your story with us.

Blake Selby: Thank you so much for having me on, too.

Ash Patel: Yeah. Best Ever listeners, thank you for joining us, and have a best ever day.

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JF2590: The Key to Adding Partners to your Real Estate Team with Stephanie Betters

With a background in medicine, Stephanie Betters struggled to decide between being a nurse practitioner or a full-time investor. So she decided: Why not both? Her goal of owning three rentals per child turned into a booming real estate career that she never anticipated. Today, she’s sharing her tips for growing a team with an aligned vision, private vs. traditional financing, and her very detailed due diligence process for choosing which syndications to be involved in.

 

Stephanie Betters Real Estate Background:

  • Full-time real estate investor and part-time nurse practitioner
  • First flip in 2007, and formed her investment company in 2015
  • Passively involved as an LP and GP in several large multifamily assets
  • Flipped hundreds of homes, built nearly 100 new construction spec homes, and wholesales 200 homes/year
  • Based in Charlotte, NC
  • Say hi to her at: www.leftmainrei.co
  • Best Ever Book: Good to Great: Why Some Companies Make the Leap and Others Don’t

 

 

 

 

Click here to know more about our sponsors:

 

thinkmultifamily.com/coaching 

 

Rentify

 

Deal Maker Mentoring

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Stephanie Betters. Stephanie is joining us from Charlotte, North Carolina. She is a full-time real estate investor and a part-time nurse practitioner. Stephanie’s first flip was in 2007, and she has since flipped hundreds of homes and built nearly 100 spec homes. If that wasn’t enough, Stephanie also wholesales 200 homes per year.

Stephanie, thank you for joining us, and how are you today?

Stephanie Betters: Hi, I’m so good. Thank you so much for having me.

Ash Patel: Well, we’re excited. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Stephanie Betters: Oh, sure. My background truly is in medicine. I’m a nurse practitioner in cardiac surgery. About two years ago I went part-time. So up until kind of recently I was working full-time in medicine and in real estate. My husband and I started our real estate company back in 2007 with a live-in flip, and have really progressed since then.

Really, what I’ve been up to lately is we’ve been doing wholesaling and new builds on the real estate investment side, and that company has done really well and created other opportunities for us, too. So there’s actually two spin-off companies that came from, say, our mother’s real estate company. One is a marketing company that just does social media marketing for real estate investors looking for motivated sellers, primarily on Facebook. And then the other company is called Left Main REI, that is a CRM that was built on Salesforce.

Ash Patel: Incredible. How big is your team? Is it just your husband and yourself?

Stephanie Betters: No, we have, on our investment side, about 15 employees.

Ash Patel: Okay. So take me through the evolution of how this started. Your first flip was in 2007, and now you have a massive Empire.

Stephanie Betters: Okay, so 2007, we had just graduated my undergrad, my husband and I met in college, and no money, and tons of student debt. At that point, I think we had $150,000 in student debt. We were trying to figure out what we were going to do. The plan was to go to grad school. But we both wanted to work for a couple years before going back to grad school. So we were living in upstate New York, in Binghamton, New York, and we bought our very first house there. It was a foreclosed house with mold, and it was the only thing we could afford. And my husband’s like, “Well, let’s live in it. We’ll flip it. That’s what everyone does on TV, and they make good money.” And I was like, “Oh my God, this is not what I envisioned my newlywed self to be doing.” But we did it, and we lived in it for a year and a half, and we sold it Q1 of 2009, which locally was literally two weeks before the market crashed completely. We were super lucky. Literally, two weeks after we sold it. IBM, which was the local major employer laid a ton of people off. So we got lucky. We sold it, made good money.

And then we went off to grad school on Long Island. We decided not to flip houses on Long Island, because we were really busy in grad school. And like the crash was happening, and it was kind of uncertain. So we’re like, “Perfect timing. We’ll just go to school and get more debt. That sounds great.” So we did that for two years. And then our family was all over the US, tried to figure out where to go next. We picked Charlotte because of the real estate market and because of the opportunities for our medical careers. Now, my husband and I—I’m a nurse practitioner and he’s a physician assistant, and we moved to Charlotte because it had an International Airport. The market was great. Really, we did a lot of analytics and found that it was really just slightly behind the Jacksonville, Florida market and the Raleigh-Durham tri-city area market. So we kind of felt like we had a little bit of a head start on understanding what would happen with this market and make some predictions.

So we moved down here, had a bunch of babies, we have three kids, and we were kind of just trying to figure out when the good point would be to jump back in. So that was about four years after we moved. We moved there, and four years later, we started our business. We bought our first rental, that wasn’t so scary. I felt like then I was really ready to jump back in. To be honest, I was kind of the thick of the mud about it, I was nervous.

At this point in our lives, we had just graduated grad school, we had two young children, I had another one on the way, and we had $200,000 in debt now, and brand new careers. So I was really nervous to go all-in again. When we went all-in the first time, it was just us, and we’re like, “Whatever, we’ll live in a mess, I don’t care.” But now we had kids and debt and all this stuff. So I was a little bit slow to come on board, because I wanted to feel like we were at least a little bit settled before we went crazy again.

So we bought this house in an area that we thought would appreciate. We took a bet on ourselves and we said, “Okay, if we know what’s happening in this market, if what we think is right, then this house will appreciate. And in two years, we’ll be able to take out a home equity line of credit and that will be the money that we use.” Because we didn’t have any other cash, we literally didn’t. So that’s exactly what happened. We had our third baby. About a year after that is when we refinanced the house, took out a home equity line of credit, we were right, we bet on ourselves, “Yay, we’re very excited. We had $20,000. Now what do we do?”

So we went off and we listened to a ton of podcasts, yours included, which was really, really helpful when we were first starting off… And why it’s kind of an honor to be on it now; it’s kind of a full-circle moment for me. We self-educated, made a ton of offers on properties, and got two offers accepted at the same time, because we were making literally 100 offers, and we just got so used to being said no, that we just started putting in a ton of offers, and all of a sudden two got accepted. So one of them was going to be a rental and one of them was going to be a flip. The problem is we only had money for one. So that’s how we learned about private money.

Ash Patel: I have to ask you – at this point, did you anticipate this was just going to be a side hustle, some extra income?

Stephanie Betters: Yeah.

Ash Patel: You never anticipated it was going to grow?

Stephanie Betters: Never. The original plan was we wanted to have three rentals per kid, because we figured, “Okay, that’ll pay for college, for wedding and retirement, essentially for us.”

Ash Patel: Got it.

Stephanie Betters: So when we set out to do this, what really changed our course was when we got those two offers accepted, because that $20,000 – we were using our W-2 income to get a conventional loan for this rental. But guess what? They ate all of our savings. So we’re like, “That’s great, we’re only going to be able to do one house every five years at this rate.” And we needed to acquire nine properties before they graduated high school. So we were like, “Well, this is never going to happen, we’re not going to hit that goal. We’re going to get three, we’re not going to get enough.” So we were like, “Okay, we need to flip again. And we’re going to take all that cash from flipping and just use that to acquire rentals, and then the world will go round.”

So here we are like, “Okay, now we have a rental that ate the $20,000 when you include the downpayment and the little renovations that we needed to do to it, and we have this other house under contract, which will be a flip, but now we don’t have enough money. So what do we do?”

So my husband was at the clinic, he was working in urgent care at that time, and was just pitching up somebody’s head, talking about real estate, and the person he was pitching was like, “Oh, yeah, actually, I love real estate. I’m a private money lender.” And he’s like, “Oh really? You are? Well, we actually have a deal that needs funding, if you are interested.” He’s like, “Yeah, let’s talk about it more later, when you’re stitching up my head.”

So they had a meeting and this guy ends up lending us some money, and he’s still a private money lender to us to this day, which is so amazing… And we did that flip. And then this whole process started. We took all that money we made for the flip and we bought another one, and then we bought another one. And then we learned that in order to keep up this momentum, we needed to advertise, right? So we started sending out mail and things like that. And now we got deals that we weren’t ready to start renovating on, because all of our crews are busy. So then we kind of learned about wholesaling. And that was fun, because we didn’t have to hold the property or deal with the contractor drama, right?

Ash Patel: You both had full-time jobs.

Stephanie Betters: Full-time jobs still. We still had full-time jobs, both of us at this point. So we were kind of running around with our hair on fire. But yeah, we learned how to wholesale, and that seemed to grease the wheels. While our properties were being renovated, if we got new deals that came in or new leads that came in, we could wholesale them and kind of keep some of the cash flow coming in, while we were waiting for the big paycheck with the flip.

But to your question, we were working full-time. So now that you’re marketing and the phone is ringing, how do you answer it? I’m in the hospital, dealing with like real emergencies, where I can’t just interrupt my patient. “I’m so sorry, just stop bleeding for a second. I’ve got to go answer this phone.” I couldn’t do that. So we had to hire people. We hired a lead manager first to answer the incoming calls, and they would set appointments for us. And generally, that was after work or on the weekends. And we just kind of fumbled our way through until we were able to have enough volume with appointments that we could continue to hire out. It’s been quite the evolution.

Ash Patel: Alright, so now we’re wholesaling and we’re flipping.

Stephanie Betters: Yep.

Ash Patel: What’s the next part of the evolution?

Stephanie Betters: The next part of the evolution was flipping margins really decreasing. We had to hire a project manager and we had to hire a second project manager to keep up with it. It required so much oversight to do it well and to deal with contractors. So we actually decided to merge with another local investor, Jeff Johnson. He’s phenomenal. His MO was new builds, and he was really interested in wholesaling. So we both had something interesting for the other party. Zach and I, my husband, we had a little bit more of a team built out, and he had more of a process with new builds and new builds spec home construction. So we felt that we had a lot of synergy. So we merged in 2018, and now we were doing three things; we were flipping, we were wholesaling, we were doing new builds.

Ash Patel: Again, while you have a full-time job.

Stephanie Betters: While we have a full-time job. I haven’t quit yet. My husband ended up leaving in 20