As the BiggerPockets president, Scott is a very busy man. Add his own real estate investing to that and he is working like a mad man! Having the advantage of one of, if not the greatest real estate investing education website, Scoot has been able to put together a tremendous investing strategy, mainly house-hacking. Hear why he loves this strategy and how he uses it in his business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Scott Trench Real Estate Background:
- President of BiggerPockets
- Owns properties in Denver where he also house-hacks
- Author of Set For Life
- Helping people achieve financial freedom so they can live on their terms
- Based in Denver, CO
- Say hi to him at biggerpockets.com
- Best Ever Book: The Millionaire Next Door
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless, and this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any of that fluffy stuff. With us today, Scott Trench. How are you doing, Scott?
Scott Trench: I am doing great. How are you doing, Joe?
Joe Fairless: I am doing great, and nice to have you on the show. I've heard a lot of great things about you from mutual friends of ours, and I'm looking forward to our conversation. A little bit about Scott - he is the President of BiggerPockets.com. We don't even need that .com in there - Bigger Pockets. Everyone knows Bigger Pockets. He also owns properties in Denver, where he house-hacks. He is the author of Set For Life, and he is based in Denver, Colorado.
With that being said, Scott, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Scott Trench: My passion, I guess, is financial freedom, and I started out my career very passionate about it, having worked at -- I started my career at what was rated as the worst company to work for in America... You can look that up for 2012 if you wanna figure out what that company was. So I actually was more interested in financial freedom at first than real estate, so I called it Mr. Money Mustache, which is a blog on frugality, and it's popular in the financial independence community...
Joe Fairless: Sure.
Scott Trench: ...and I wanted to be a little bit more aggressive though with my investments than the kind of standard index fund strategy that a lot of financial independence authors and blogs talk about... So that's when I started reading and following Bigger Pockets. Basically, the first major step that I took towards moving towards financial independence was a house hack. I'm sure that that's been talked about many times on your show here.
For me, that concept was I bought a duplex in North-East Denver for $240,000. I put down 5% or $12,000, and moved into one unit. The numbers here - my mortgage was $1,550, and my rent from the other side was $1,150, and then I had $550 from a roommate on my side. There were two 2-bed 1-bath units. That was how I got started on my journey at around 23-24 years old, with this duplex purchase, living with a roommate, and renting out the other side... Basically, living for free, operating the property myself and doing some work on it.
I saved up the money for that down payment over the course of the first year of employment, and put that down... So yeah, a pretty straightforward path there. From there, the Denver market has been pretty hot, and I was able to buy a second duplex, and now I have a quadplex. So I'm going on this kind of slow and steady path towards real estate accumulation, where I purchase kind of once every 12 to 18 months... So I'm not buying aggressively and over-extending, but I'm still able to capitalize on leverage, keep it passive, and go on this journey over the course of the next several years.
Joe Fairless: Do you still have the original duplex?
Scott Trench: I do have that duplex. It has appreciated remarkably over here in Denver since 2014, which is kind of a nice stroke of fortune there. It's going well, it's cash-flowing, and I'm probably gonna raise the rents a little bit more this summer, but otherwise, it's operating as always.
Joe Fairless: What's it worth now?
Scott Trench: I think it's probably worth around 400k-430k.
Joe Fairless: Okay. And with the 400k-430k range - you bought it for 240k, you put 5% down, so $12,000... So it's safe to say you have some equity in it. Are you planning on getting that equity out through some sort of refinance?
Scott Trench: That's a really good question. My plan going into this was basically -- I've made all these fancy models; I'm a spreadsheet guy, so I have a financial modeler... A financial forecaster was my profession prior to Bigger Pockets, and it's still something I do here at Bigger Pockets when I'm running the finances... But basically, my plan called for buy one every few years, because when you're buying leveraged real estate, your return on your equity position diminishes over time. If I buy a $100,000 property with $20,000 down, my best returns on a return on equity standpoint are coming in the first few years... Because a 3% appreciation is a 15% return on that $20,000 down. But as you deleverage through the process of amortizing your loan, and your property is appreciating, your expected return on equity diminishes. So if I expect now, in the future, for Denver to have an average appreciation of 3%, 4%, 5%, then yes, my return on equity is gonna diminish. And I have this problem much sooner than I expected to have it because of the hot appreciation that Denver has seen over the last 4-5 years.
So the answer is I've gotta start looking at an idea of how to releverage, or a 1031 exchange and put it into another property. That's a good problem, right? We all wanna have this problem, of having the investment work out sooner than you expect. But what my problem is, which is interesting, and you've just pointed it out - I've bought a great investment property, that produced a great return for me, and now it may not be a good return; it may not be something I would buy today, from an investment perspective.
Joe Fairless: With you being a spreadsheet guy, how will you assess whether you should releverage through a refinance, or sell into a 1031 exchange?
Scott Trench: So the problem I have right now - things have been pretty hectic here at Bigger Pockets over the last six months, so I haven't given as much thought to my real estate portfolio, I haven't done this assessment. So you're reminding me right now of my laziness, and I'm gonna have to [unintelligible 00:06:20.25] for this show.
The way I figure it out, philosophically, is if you assume that the stock market is gonna return about 10% a year, an index fund investment, on average, over its history. Obviously, there's gonna be volatility in that, but if you project out 30 years, my belief is that I'm gonna get pretty close to that 10% average compound annual growth rate. All cash real estate is gonna perform worse than that, on average. Some properties will perform better than that over a long period of time, but on average, all cash real estate is gonna perform worse than that... So you have to maintain a certain leverage, and my belief is if you're gonna be investing in real estate with leverage, then you might as well be getting at least 5%, 6%, 7% return beyond that of an index fund for it to make the effort worthwhile.
So the answer is if I project going forward that in a kind of average scenario over a period of time, in the next several years, that I'm likely to get 10%, 11%, 12%, 13% on my property, it's time to sell, refinance, releverage, or whatever... Somehow redeploy my money in something that's gonna produce better, or get out of it and just take the historical long-term average of stock market and index funds. That's my philosophy there. Does that answer your question?
Joe Fairless: It's helpful. I haven't heard of that thought process put that way. Yeah, absolutely. Thanks for sharing that.
So you've got the original duplex, and then another duplex, and now a quadplex. Will you tell us the numbers on the second duplex, and then the numbers on the quadplex?
Scott Trench: Sure. The second duplex was $360,000. The worst financial return. This one's an up-down; the first one was a side-by-side. The unit upstairs rents for about $1,500, and the downstairs rents for about $1,100-$1,200; we're not sure yet.
Then the quadplex I bought for $355,000, and this is my best - probably from a strict financials perspective - investment, from a cashflow perspective at least. The quadplex though, I bought it for 355k, I bought it in July 2017, and the property rents for about $3,200/month for all four units combined. My mortgage payment was about $1,700, and after the tax assessments, it's gone up to about $1,800.
My rents I believe I can raise immediately over the course of this year, this summer, when our leases expire, up to about $925 a piece, and I've already validated that by remodeling a unit and getting that up to $925.
So I expect to generate $3,700/month in rent over the course of the next year, while I remodel these units and redo the leases. About $3,700, and an $1,800 principal interest, taxes, insurance.
Joe Fairless: How long have you had the second duplex?
Scott Trench: That one was bought in 2016.
Joe Fairless: And you said it's an up-down... One of them is $1,500, and the other you said is $1,100 or $1,200, "I'm not sure." Why are you not sure?
Scott Trench: I live in that one, so we're figuring out what the rent will be when I move out.
Joe Fairless: Oh, okay. There we go, it makes sense. When you move out, are you doing the same thing that you've been doing?
Scott Trench: That's the plan, to keep doing this. It seems to me that the house-hacking strategy is very effective, because I need to put down $50,000 with a partner to buy that quadplex, right? That's a lot of money. But that's not a lot of money to save in two years. It's a lot of money to save in one year, it's not that much money to save in two years, for your typical maybe median or slightly above median income earner in a specific area. It's tough to save that much money, but it's not impossible. But when you can do that, and then also the next year buy a place with $15,000-$20,000 down, now you can actually consistently maintain a system of buying properties regularly... And this is different -- maybe a lot of your listeners are full-time real estate investors, and it's really the deal flow that's the problem in order for them to build their portfolios... But for a lot of our listeners, and for probably a lot of your audience as well, there are folks that are working full-time jobs, buying on the side, and so the risk that I perceive in there is investing a life-changing amount of capital - an amount of capital you can't accumulate in one, two, three years of hard work and saving - into a deal and having the market tank on you. So I like this system of kind of consistently buying and dollar-cost averaging over time to kind of spread my risk and ensure that I will hit closer to that kind of long-term average return that I can model out. That's why I really like the house-hacking and buying properties traditionally, with the 25% down payment, because it allows me to spread my investments over more evenly, I guess. I don't have to come up with a huge chunk of cash every single year to buy these properties.
Joe Fairless: I don't think a ground-up developer would find a favorable audience with you if he/she were to present you an opportunity to do ground-up development. Am I correct in that?
Scott Trench: Yeah, not right now... I'm getting closer. I think the problem with ground-up development, at least in Denver, is that you're talking about a 100k-200k capital commitment from you, the owner of the property... And then you're talking about a lot of leverage and a business initiative, what I consider to be more of a business initiative. My portfolio I think is more of an investment. I spend some time managing it, but really not more than a few hours a month, versus a development, where I have that much on the line... At least at first I would want to spend nearly a full-time effort trying to get myself as high as possible odds of success of that kind of moving forward.
However, I plan - like many real estate investors - to grow my portfolio over time, and for that type of ground-up development to not have the ability to bankrupt me or to give me a life-changing financial problem. At that point, then yeah, absolutely, I'll start assessing those opportunities as they come, like I would anything else.
Joe Fairless: Your investment approach is to do the house-hacking... If you weren't able to do house-hacking, what would you be investing in?
Scott Trench: The goal for me is not real estate. I love real estate; I used to joke I don't like real estate, like the income and cashflow that it provides, but that's not true... I love real estate. It's just fun to talk about [unintelligible 00:12:23.22] portfolio. But the goal really that I don't wanna forget is financial freedom, so I'd invest in a way that could help me move toward financial freedom.
One of the things I may seriously consider nowadays, now that I've had some success with my career and have a little bit more cash than I kind of expected to have at this point in my career, is investing out of state. I think that there's opportunities to hit solid singles in these more Midwestern markets, where you can kind of buy a property for 50k-60k, put 30k into it, and then maybe get an ARV of 120k. So you put 80k-90k in, you get an ARV of 120k, and now you can refinance out of that and repeat your strategy... Not rapid-fire. Some people think you can do this really quickly, and I guess you can if you're really good, but a lot of times it takes six months to a year to get that money out of that deal. But you can then accelerate your progress to do one, two, three a year after a few years, and then be kind of making some substantial progress. So I think that's what I'd probably be doing if I wasn't house-hacking and didn't have the ability to put down 25% on a meaningful investment property in Denver.
Joe Fairless: How are you managing your properties?
Scott Trench: I self-manage. It's pretty straightforward for me. There's a bunch of schools of thought on management. For me, in a higher priced market like Denver, I have higher rents per unit than somebody who might be investing in Memphis, Tennessee, and I also have a different type of tenant because of that higher income threshold. And I'm not buying A properties; I'm buying B and C properties here in Denver... But those types of tenants don't' give me that much work to do from a management perspective.
My management is, for me, pretty manageable, I guess, if I use the word manageable ten times in one sentence. So I don't have a problem with that, so I self-manage.
Joe Fairless: What are some disadvantages that you've seen about self-managing?
Scott Trench: The disadvantage is really just that the problems come -- you have no control over when you actually get those calls. I'll go six months and not have any calls, and then it'll just seem like "Oh, this is a terrible time, and I've got so many other things going on... And I'm out of town, and now I'm getting calls", so I've gotta kind of coordinate that kind of stuff. But really, that's the biggest problem. I don't really have too much of an issue. So far, knock on wood, it's been pretty straightforward for me from a management perspective. I like to think I'm pretty fair and reasonable landlord, and I have pretty fair and reasonable tenants... So we get along, they get a great place to live, and I have solid, cash-flowing investment properties.
Joe Fairless: How has your role as president of Bigger Pockets helped you with your own portfolio and your own investment approach?
Scott Trench: I would say that my role at Bigger Pockets was not impactful for my first two deals. Then, with my third deal, I think I did have a little bit of a reputation, and that helped me meet more people... But really, I just met with 30-40 different people over the course of a few months; maybe not quite that many... Maybe like 25 people. I met them for coffee and told them, "Hey, here's what I'm doing... How can I help you?" and "If you find a property that's of this type, built in this year, in these areas, then I'd love to buy it, because I'm looking at buying my next property", and a deal came through that. So I wonder if my ability to get that deal was slightly impacted by my work here, at Bigger Pockets.
I guess one advantage to it has just been I've been able to absorb so much knowledge through my professional capacity and working here at Bigger Pockets that perhaps that has given me slightly better odds of success... But I don't think it's been necessarily like "Oh, I only did this because I work at Bigger Pockets."
Nowadays, because of the success of the business, and I have a book that's done fairly well, I've been able to amass a little bit more cash than I think I would have expected to this point in my career... So my next purchases will be from a position of more comfort. That's where I think Bigger Pockets will really play a role in my success going forward - now that I have a little bit more cash than I expected, and I just have more access to opportunity than I ever have. Does that answer your question there?
Joe Fairless: Yeah... Just to ask a couple follow-up question on that - with the person who showed you the fourplex... Is that person a real estate agent, or is that person the owner? What was the connection they had to the property, and then they shared it with you?
Scott Trench: Yeah, so I actually am an agent, and I got my license so that I could view the MLS, and potentially represent on my own deals... But ironically, I've actually not represented myself in any deals because this person that brought me this deal was an agent, and had a connection with the seller's agent of this property, and I was able to get that deal before it hit the market...
So it was kind of marketed to investors through this kind of word of mouth type situation for a few weeks before it was actually gonna go onto the MLS. So that was my advantage there - he brought me a great deal before it hit the market, so I was able to get it under contract with, I presume, less competition than I would have.
Joe Fairless: Pocket listings, they're great. You said the next purchase will be in a position of more comfort. Can you elaborate on what you meant by that?
Scott Trench: Well, when you buy your first place -- when I bought my first place, my total net worth was probably basically zero; maybe like 15k-20. The amount of savings I had, less my car loan payment, plus the value of my car. That's my position I was starting from. So buying a $240,000 asset, which was five times my salary at the time, was a very scary proposition. That seemed like a lot of money at the time. It is a lot of money.
The second property was a little easier, the third property was a little easier than that, and now those properties on their own -- the portfolio could go poorly, but those properties on their own really don't have the ability, even if I lose both tenants and have to replace the roof and go through a $20,000 rehab, they really don't have the ability to set me back in a way that would be irrecoverable in my position right now. So that's what I'm talking about from a position of comfort.
At the beginning, those were fears that I had - what if I have all these problems right away, where I don't have the cashflow and I'm gonna have to borrow more, and it's gonna be really hard...? Now I have those reserves, I have this cushion, I have a big stock portfolio, I have the big position that I'm saving for my next purchase that really kind of allows me that luxury of comfort and time, and not having to be afraid that the market is gonna tank on me and I'm gonna lose everything, or be in a position of weakness.
Joe Fairless: Based on your experience as a real estate investor, what is your best real estate investing advice ever?
Scott Trench: I think that the best real estate investing advice ever is to remember that real estate is one part of a well-constructed personal financial position, and that really, most of us are building real estate not for the sake of owning a large real estate portfolio, but for the balance and opportunity and flexibility in life that a real estate portfolio gives us.
So my advice would be save up, consistently build that savings rate, and steadily build out that portfolio if you're working a full-time job and looking to build a portfolio over the next couple of years. Do it consistently, not aggressively, and enjoy the rewards that slowly, and then quickly begin piling up.
Joe Fairless: What percent is real estate of your financial position, and what percent would you recommend?
Scott Trench: My position is probably about 65% of my financial position right now, and I think it depends... As a young person starting out, real estate was close to 100% of my financial position, because I invested everything in my first house-hack. That's not diversified, but I think that's sensible, because that gave me great odds of success, lowered my cost of living, gave me an opportunity to own a cashflowing investment; same with the second property.
Over time, it begun to build out more of a diversified portfolio. So I think it depends on where you're at and how your strategy is going. Yeah, it's risky to have all your eggs in one basket, but if that's your first year of getting going and that's what you think has the best odds of success, maybe that's not so big of a deal. Once you get past several hundred thousand dollars - or maybe several million dollars - in net worth and you're not attempting to aggressively build out your one core business, then it might be time to diversify a little bit.
Joe Fairless: We're gonna do a lighting round. Are you ready for the Best Ever Lightning Round?
Scott Trench: Let's do it!
Joe Fairless: Alright, let's do it. First, a quick word from our Best Ever partners.
Break: [00:20:30.13] to [00:21:17.21]
Joe Fairless: Alright, Scott, best ever book you've read?
Scott Trench: Best ever book I've read is probably The Millionaire Next Door.
Joe Fairless: Best ever deal you've done?
Scott Trench: The first duplex.
Joe Fairless: What's a mistake you've made on a transaction?
Scott Trench: A mistake I've made on a transaction... I knew I was gonna have a set of problem tenants with a property purchase, and I did not take steps immediately to figure out how to remove those tenants from the property.
Joe Fairless: How would you go about removing the tenants if presented a similar situation in the future?
Scott Trench: Cash for keys probably would have been what I would have done... Just offer them cash to leave.
Joe Fairless: And how do you know the amount of cash to offer in order for it to financially make sense?
Scott Trench: That's where I'd probably call up a couple of friends in the neighborhood, or maybe start a forum topic on Bigger Pockets to kind of see what the community thought on that... Because it'd probably be around one or two months' rent, but that specific amount - I could probably get some advice from some smart people in the community to figure it out.
Joe Fairless: Best ever way you like to give back?
Scott Trench: There's two types of people I like to give back to. One is the middle income to upper middle-class income earner that is kind of the core person who's gonna be buying real estate. This is your kind of ordinary American who can buy real estate. I think that it's really powerful to help them move toward financial freedom, because they go out and impact the world in very unique ways once they achieve financial freedom, and that's a huge opportunity.
The second way I like to give back is people who are not at the starting point in the economic race, who are not able to command a median income, and I like to help them out through an organization here in Denver called Upstream Impact or Cross-Purpose. We basically help them work towards that job, or a career that has a potential to give them a median income, become self-sufficient, that kind of thing.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Scott Trench: BiggerPockets.com. I'm right there, easy to find. You can type my name in the search bar, or you can e-mail me.
Joe Fairless: I really enjoyed our conversation, Scott. Thanks for being on the show. I love that we went through really a range of topics, but all focused on what you're doing right now as it relates to the house-hacking. A question that comes up frequently is "what's the thought process I should use when I have equity in a house/property? Should I do a cash-out refinance, or should I sell and do a 1031 exchange?" and I love the explanation that you gave with the stock market historicals and what we can expect/project in the future, and then thinking about that, plus need a little bit more to compensate us for our time if we're gonna be doing real estate versus passively investing in the stock market. Great stuff... Plus, I loved the case studies, I loved to get into the numbers of your properties.
Thanks again for being on the show. I hope you have a best ever day, and we'll talk to you soon.
Scott Trench: Awesome. Thank you, Joe.