A lot of people say the same thing “I’d love to flip a house (or have a rental) but I just don’t have the money”. Austin noticed that too and wrote a book called Free Houses to explain how we can acquire properties without having money of our own. With over 16 units bought with very little of his own money, his advice is obviously actionable for most people who will listen. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
[spp-tweet tweet=”“I’m always a fan of local lenders, nothing against big banks” – Austin Miller “]
Austin Miller Real Estate Background:
- Labeled as a creative financing real estate investor
- Built a real estate portfolio of 16 units worth over $1.2 Million with little of his own money
- Author of the book Free Houses
- Say hi to him at http://www.hickoryhomebuyers.com/
- Based in Springfield, MO
- Best Ever Book: Rich Dad Poor Dad
Best Ever Listeners:
We have launched bestevercauses.com
We profile 1 nonprofit or cause every month that is near and dear to our heart. To help get the word out, submit a cause, or donate, visit bestevercauses.com.
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, Austin Miller. How are you doing, Austin?
Austin Miller: Joe, I’m great. How are you?
Joe Fairless: I’m great, nice to have you on the show. A little bit about Austin – he is a creative financing real estate investor. In fact – there’s proof is in the pudding – he has built a real estate portfolio of 16 units, worth over 1.2 million dollars, with little of his own money. He’s written a book and it’s called “Free Houses.” He’s based in Springfield, Missouri.
With that being said, Austin, will you give the Best Ever listeners a little bit more about your background and your current focus?
Austin Miller: Absolutely, Joe. Background – I got started investing in real estate, single-family homes, around 2010. I just kind of have steadily done one or two flips and buy and holds ever since then, and haven’t looked back.
During my day job, I build houses, so I do have a construction company that allows me some time, freedom to still be in the real estate industry, and also have time to have other ways to create income. Currently, our focus is still the bread and butter single-family homes. We buy, rehab, put a tenant in there, and continue to unwind. That’s what we’re still doing today.
Joe Fairless: You wrote a book called Free Houses. I think there’s some people listening who want some free houses – how do we get some free houses?
Austin Miller: Well, I’ll tell you… The premise of the book is that nothing in life is truly free, but a lot of people will label things as free, like “Hey, I wanna buy you a free lunch”, but there’s still costs to you; you have to get in your car, you have to drive there, and most importantly, you have to spend about an hour of your time. Well, time is the most precious commodity that we have, and we can’t get it back… So for a lot of people, they wouldn’t exchange that one hour of time for not having to pay for food. But how I bring that into the analogy of real estate is whenever I tell people I’m a real estate investor, they almost always respond with the same phrase: “Man, I’d love to flip houses, I just don’t have the money.” Almost every person uses money as his/her reason for not investing in real estate.
The premise of the book and what I have shown through my experience and through each chapter, using different strategies, is that real estate is not free, investing isn’t free, but if you’re willing to spend some time and effort, you don’t have to spend any of your own money. So in today’s world, if we’re gonna label something as free, if it’s achieved without exchanging your own money – if that’s the case, then I’ve acquired a whole portfolio of free houses.
Joe Fairless: Alright, let’s talk about one of them. How do we acquire a free single-family home, knowing that monetarily it’s free, but we’re gonna need to put some time towards it?
Austin Miller: Sure. The first year that I got started in this I was thinking “Man, I’m gonna do this. I don’t know how, I don’t have money, I certainly can’t go put 20% down (because that’s what all the banks were asking of me)…” Joe, if you had a house that you’re like “Man, this is a good investment. It’s $100,000”, and you went to your banker and said “Hey, I wanna buy this house. Will you lend me some money?”, typically they’re gonna want what from you?
Joe Fairless: They’re gonna want some sort of collateral?
Austin Miller: They’re gonna want some collateral, right; they’re gonna want some skin in the game, and a lot of times it’s 20%. Many times it is. So what I quickly found out was “How do I come up with that 20%?” One of the things that I started realizing was people selling houses at a discounted price. So I called my banker and said, “Hey, what if I can get a house that’s worth $100,000 and I can get it for $50,000?” The conversation was completely different. It was like, “Man, he’s willing to work through some things, he’s willing to take that equity that I had ($50,000 in equity)…”, and equity, for those who don’t know, is defined as the difference between the value of an asset and the amount owed against it… But the conversation was completely different. They would allow me to take some of that equity as essentially a down payment.
So what I got to learning was that if I can prove or if I can show that I have 20% equity, a lot of the times that could negate some or all of my down payment. So what I started on the quest for was to try to find funding, so that I could purchase these deals and rehab these deals, and each chapter in the book is about how to do that, and different methods that I did that. Would you like me to go through maybe even just one of those?
Joe Fairless: Yeah, sure. So just so we’re on the same page, basically in order to buy the free house, we need to find a property that has equity built into it that you can then use as collateral with the lender, and then they take that equity as collateral, and then boom, you have no money into the deal.
Austin Miller: Absolutely.
Joe Fairless: Okay.
Austin Miller: And that collateral being 20%. Really, a lot of it falls under that 80/20 rule. 80% loan to value. So if it’s a $100,000 property, the value of it, I would want to be in it for no more than $80,000, so I have that 20% equity. And really, I think that most lenders, whether it be on the federal guidelines, or for the guidelines from each small bank, just whatever their internal guidelines are, they wanna see that 20%, and that’s kind of the bare minimum of what you need to have.
Joe Fairless: And I imagine it’s gonna be a local lender that’s doing this with you?
Austin Miller: Yeah, I’m always a fan of local lenders. Nothing against big banks, but whenever you’re talking to a local lender, you seem to really be able to talk to the decision-maker… And when they’re smaller banks and they have more control over what they’re gonna allow with their investors, as an investor you’re gonna have more negotiation power and you can kind of talk to them about what they would and would not be willing to do.
People are always like, “Man, how do I know if it’s a smaller local bank?” and I’m like, well, it’s usually called the first local bank of whatever town you’re in, or the community bank of wherever you live. The name a lot of times gives it away. Or “the State Bank of Missouri”, or whatever it may be.
Joe Fairless: Sure.
Austin Miller: Just making a few phone calls and talking to portfolio lenders, you can find out pretty quick what their guidelines are and whether they’re an investor-friendly bank.
Joe Fairless: And a portfolio lender is a lender who keeps the loan in their portfolio, therefore they don’t have to answer to underwriting guidelines that Bank of America, Wells Fargo, U.S. banks like that have to answer to.
Austin Miller: Sure. They’re not selling that loan off to a secondary market or another bank; they’re keeping that loan in-house, in their bank, most of the time.
Joe Fairless: So for your first deal where you did this, was it with a local lender?
Austin Miller: I got my long-term loan with a local lender, yes. My short-term loan I got from a hard-money lender.
Joe Fairless: Okay. Can you tell us the numbers and who did what?
Austin Miller: Yeah, absolutely. My first deal actually has nice, round numbers, which makes it easy for everyone. It was kind of a home run deal, which I always recommend for your first one… You wanna give yourself plenty of room on the first one. So I knew that I needed to find someone that could help me with a short-term loan before I got a long-term loan from the bank, so I started researching on hard money lenders.
The premise on a hard money lender is they’ll give you a short-term loan to purchase a property and fix it up, a real estate investment, and over that time period you’re gonna pay high interest to them, and usually it will have some type of fixed fee for just doing the loan. Then once the purchase and the rehab is completed, at that point in time you can go to an actual lending institution and get a long-term loan, and a lot of times that’s a community bank; that’s who I always deal with. At that point in time, get that loan, cash out on the property and pay off the hard money lender.
So when people ask me, “Hey, how do I find a hard money lender?” Well, you can go on Google right now and you could type in “hard money lender” in your area, or just “hard money lender”, “real estate hard money loans” and they’re all across the country.
Now, same thing with hard money lenders – it’s probably better to find someone in your area, because the first property I did, the hard money lender was in my town, and I actually met him. Small company, the guy just had a lot of capital, and he liked giving out real estate loans for the short-term and with a high interest on the money, and then a fee. That was just the way that he continued to make a living.
He wanted to see the house, and a lot of times the hard money lenders are more concerned with the property and whether or not it’s a good deal than it is with the person who’s asking for the money. They’re gonna wanna have an application filled out and all that, and maybe even meet you, maybe it’s a phone call, I don’t know, but they’re always very concerned with the property more so than the person. So the terms on my deal – the house was listed for about in the upper fifties; I wanna say it was like 56k-58k, and I ended up offering 44k, and we got it under contract.
Joe Fairless: You got it under contract with the first offer that you made, at 44k?
Austin Miller: Honestly, I can’t remember… I’ve offered 42k and they came back at 44k and I accepted… That sounds right. But our purchase price was 44k, and I knew just from running comps and studying the area and help from a real estate agent that it would probably appraise close to 100k, or 90k-100k.
Joe Fairless: As is?
Austin Miller: No, after repair value.
Joe Fairless: After repair, okay.
Austin Miller: So using the 80/20 rule, I thought, man, I’ve got up to $80,000 all-in that I need to be at to stay at that 80% loan-to-value to have that 20% equity. So I put $20,000 into it over the course of three months, and then my fee on the back-end to do the whole loan with the hard money lender was $2,000. My all-in loan after I had closing costs and things was $66,500. Once we were done with the purchase and the rehab, I then called in an appraisal and it appraised right at $100,000, so I was well below that 80/20 rule.
One of the things that people kind of get hung up on, specifically with hard money lenders, is the high interest, because you’re going to pay for those months that you’re rehabbing the property anywhere from 14% to 18%. Some people see that and they’re like “Oh my goodness, I can’t believe that you would pay a high interest like that.” But if you’re only paying it for three months, you make three payments of high interest, and at the end of it you get a house that cash-flows $250/month, that has all kinds of equity, to me that is worth it.
So many people will say, “Man, I wouldn’t pay that”, but at the end of the day that was the vehicle that allowed me to purchase this house. So the only out of pocket expense that I had were those three monthly payments on the high interest. The first month wasn’t a very high payment because I hadn’t drawn that much out on the construction. I think all in all it was like $1,800 between the three payments that it cost me out of pocket.
Then I had a house that was cash-flowing, I had a long-term loan, and a tenant in there, and cash-flowing about $250/month. So it was a very smooth transaction and it went off fairly well for me on my first one.
Joe Fairless: Once you get the appraisal back at $100,000 and you’re all-in at 67k, then you go to your community bank and then you get the long-term loan, right?
Austin Miller: Yes, that is absolutely correct.
Joe Fairless: What were the terms of that loan?
Austin Miller: A 20-year loan that is a 5-year fixed… So I should back up – at the time it was my first deal, so I just kept it in my own name, and I actually got a 20-year fixed at that point. But as I grew in my business, now everything is in an LLC, and I believe you can have a certain amount of properties in your own name (four or five or something) before you can no longer do that and get a long-term fixed rate loan. But as I got a real estate attorney, he said “Look, man, you should really be protecting yourself and have these in an LLC”, so I moved everything over to an LLC.
My typical loan right now, for the past several years, is a 20-year amortization, and it’s a five-year fixed, but a maximum of two points increase at five years.
Joe Fairless: And what bank do you use?
Austin Miller: For most of my transactions in Missouri I use a bank called the Bank of Missouri.
Joe Fairless: So that was your first property, and now to recap – you found a deal that had a lot of equity in it, you have a construction background, which was helpful in renovating it, getting it up to the appraisal value of $100,000, you’re all-in at $67,000, you then cash-out the hard money lender with a long-term loan that you have with a community bank, and now you’ve put some sweat equity into the deal, but you have not put any of your own money into the deal, and you have a property that has a long-term loan, and you move on to the next one. Is that right?
Austin Miller: That is absolutely right.
Joe Fairless: Cool. So right now you have 16 units…
Austin Miller: Just bought the 17th last week.
Joe Fairless: Congratulations on the 17th! So you have 17 units, and in your bio it says they’re worth over 1.2 million. How much of your money do you have in those properties, tied up, that came out of your pocket?
Austin Miller: Out of my pocket? Oh man, over the years, if any given year I put over $2,000 into the company, then that would just shock me.
One time we did end up making a down payment on a house that was — I think we bought it for like $15,000, so that was the big down payment, 20%; it was $3,000. [laughs] That was the biggest time I’ve ever put any of my own money into it.
Joe Fairless: So at most you have $20,000 out of pocket, tied up in this 1.2 million dollar portfolio that you’ve built. Is that accurate?
Austin Miller: That’s on the high end, I can tell you that.
Joe Fairless: Okay, at most. 20k is on the high end. So you have a portfolio of 1.2, although I’m sure it’s a little bit more now that you got the 17th property… How much was the 17th property? What was the purchase?
Austin Miller: 15k.
Joe Fairless: Okay, 15k. So that’s incredible… And the examples you’ve mentioned so far – the last one was 15k, the first one was 44k, but then worth 100k… So I imagine there’s one that’s a little bit more than the others, especially like the last one that you bought for 15k… So what property is valued the highest?
Austin Miller: We’ve got a fourplex. Out of the 17 units, one of them is a fourplex. That one I think is somewhere around 180k-200k appraisal value.
Joe Fairless: Tell us about that one, will you?
Austin Miller: So that one was one that we found through some direct mail, and it was a seller that kind of just needed out. The property had been cash-flowing, and rented fully-occupied, kind of close to campus, nice two-story brick columns out front, really cool property…
Joe Fairless: Which campus?
Austin Miller: If you’re familiar with Springfield, Missouri, we’ve got [00:16:07.04] Missouri State is the biggest one, and it was pretty close to that one. It’s probably six blocks or so… But that was one that I was able to get at a deep enough discount from him to where we went in and just through purchasing in cash and then doing some minor things around the property I think we spent about $5,000, and that was all money that we’d built up from cashflow, so not out of pocket… But I partnered on this one because the acquisition cost was substantially — it’s one thing to come up with $10,000 or $20,000 for a purchase price, but whenever you’re talking about a six-figure purchase price, then it was a little out of my comfort zone then… So I brought on a partner and said “Hey, if you bring the cash, I’ve got the deal, and we’ll partner 50/50 on this and start an LLC.”
Agan, $5,000 into it just to really do some things like tree trimming, painting, a little bit of landscaping, cleaning it up… We just gave it a lot of curb appeal and made it look like a different place, that we then bought in cash, went back and had that appraised at almost $200,000 and we were able to pull all of our money back out and we cash-flow right at $200/unit.
Joe Fairless: What was the purchase price?
Austin Miller: The purchase price on that one was 140k, and we put $5,000 into it, and then it appraised for almost 200k.
Joe Fairless: That’s great.
Austin Miller: Yeah, that was a good one.
Joe Fairless: The 140k that your partner brought – you said the 5k on top of that was from cashflow from the operations… Why not bring 145k to the deal and then just have it all done up front, and then move on?
Austin Miller: That was a negotiation on his side, like “I’ll bring the cash, but I want you, since you’ve done a lot of rehabs and stuff, I want you to put a little skin in the game, too. You can’t come up with 140k, but what can you come up with?” So I said, “Well, I’m giving it a facelift.”
Joe Fairless: Okay, so once you closed on it, he received 50% of his money, and then your 50% was invested back into the deal?
Austin Miller: No, he received all his money back, and he received 50% equity in it.
Joe Fairless: Right, but then you said the 5k came from cashflow after it closed, so…
Austin Miller: Yes, I get what you’re saying, yes.
Joe Fairless: So he got all of his money back from the transaction, but then once it closed, afterwards, he got his 50% cashflow, and then your 50% was invested back into the property, until the cap-ex stuff was done.
Austin Miller: Correct.
Joe Fairless: Cool. Alright. The structure – is that just a joint venture structure?
Austin Miller: Yeah, it’s just a partnership, LLC, very basic, that was drafted up by a real estate attorney.
Joe Fairless: So the key here, in all of your deals, it sounds like — well, there’s multiple keys… One is having an eye for properties that are under market value, but then the second is being able to deliver on the execution of bringing that value back up through sweat equity and also through overseeing the project. Would you say those are the two things that are critical to this? And if so, is there anything else that is critical to be able to buy these properties for little or no money out of pocket?
Austin Miller: Well, I would say the oversight… A lot of people — I get the connotation of “Yeah, it’s easy for you to say, because you’re in construction. I have no idea how much that stuff costs, and I wouldn’t know how to do a rehab…”, but my background was commercial construction, and when I got into flipping houses I didn’t know costs; it was kind of like a different world for me, so the first couple I hired out completely. I just got some good contractors that were referrals from other investors, and they were able to give me bids within X amount of days during my contingency period, my due diligence period, and that way I knew that my numbers were correct before going forward.
So I would say that that is definitely something that comes with time – learning about rehab costs in the construction industry, but it’s definitely not something that will hold you back. And I think that the biggest thing is just being able to be in the industry and the asset of bringing a deal forward, or finding a deal. If they were everywhere, then I would have the ability to go to someone and say “Hey, partner with me on this. This is a great deal.”
I found that the value is just me being able to produce those deals, and that can be done by anyone that is willing to get into finding real estate properties that are distressed, foreclosed, tax sales, auctions, direct marketing, other wholesalers… The list is endless on where to find deals. Right now, because the market is up, you have to work a little harder, but again, they’re still out there.
Joe Fairless: You’ve got 17 units and the value is over 1.2 million… How much do they cash-flow a month, in total?
Austin Miller: Our bare minimum per property is $200/door. Some do a little bit better than that, but usually — obviously, it depends on move-outs and whatnot, but around $3,500.
Joe Fairless: Got it. So $3,500 is for all of them, and then on the 4-unit you’ve got 50% ownership… Do you have any partners in any of the other deals, equity partners?
Austin Miller: Yeah, so on most of them I’m with one person. Usually, when you get into finding funding sources and private money… A lot of people say “You can find private money lenders all over the place”, but what I’ve found is most investors will do one or two deals with private money lenders, and then eventually they’ll kind of follow in step with somebody and partner with that person continuously. That’s kind of what happened to me.
Joe Fairless: Okay. So you’re personally cash-flowing around $1,700-$1,800 and you only have (at most) 20k in these deals. That’s a really good return.
Austin Miller: Yeah, I think so. A lot of people will be tempted to spend that on using this income to live or whatnot, but for me, I’m putting it back in the business… Because you never know when you’re gonna have a tough move-out or when you need to purchase a property.
Right now, one of the strategies I’m considering is just paying down existing loans at an aggressive rate, instead of just paying them on the 20-year notes.
Joe Fairless: This is really interesting, and I’m glad that you talked about your approach from start to finish. I was just doing the math… Your $1,700/month, times that by 12, that’s $20,400, so basically the all-in, at most, that you mentioned, is 20k, and you’re making approximately 20k/year on these investments, so that’s a really good return.
Austin Miller: Yeah. Real estate has been good to me in the fact that there’s a million excuses for not getting into it, but if you just really put your head down and get into it, the sky is the limit.
Joe Fairless: And I imagine the windfall of cash will be when these properties appreciate – let’s hope they do; fingers crossed. I know you’re clearly not banking on it, because you said you have a minimum cashflow requirement, so you’re not banking on appreciation… But if and when it happens, then you can start getting chunks of change through cash-out refinances, or if you’re paying them off some other creative methods, to then really scale faster once they start seasoning a bit.
Austin Miller: Absolutely. I started buying properties before I had kids, so hopefully by the time they’re in college, if I really need to, I can just sell one and pay for their tuition.
Joe Fairless: Hold old are they?
Austin Miller: We’ve got a 4 year old boy and a one year old girl.
Joe Fairless: You might need to sell a couple of them by the time they get to college… [laughter] Who knows what college tuition will be by then?
Austin Miller: Yeah…
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Austin Miller: The best real estate investing advice ever would easily be just to get out there and do one, and be a doer. That’s one of the things I talk about in the book; there’s not a lot of fluff in the book, but we live in this age where being an entrepreneur is so attractive and so sexy that people just get caught up with — you don’t have to be a Robert Kiyosaki right out of the gates.
If you’ve got something that you wanna do, if it’s real estate investing, get out there and just do one. How much money can you lose on one small rental house?
I don’t consider myself an entrepreneur, I consider myself a hard-working small business owner and a real estate investor. So get out there and just do one.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Austin Miller: Oh, I love the lightning rounds.
Joe Fairless: Alright, then you’re gonna love it, because you’re gonna participate in it. First though, a quick word from our Best Ever partners.
Break: [00:24:54.16] to [00:25:56.23]
Joe Fairless: Okay, best ever book you’ve read?
Austin Miller: Real estate investing – Rich Dad, Poor Dad. Personal – easily the Bible.
Joe Fairless: What’s a mistake you’ve made on a deal?
Austin Miller: Letting my emotion get involved and trying to force the numbers to make the deal work.
Joe Fairless: What’s the best ever deal you’ve done?
Austin Miller: The best deal I’ve ever done – I sold a property twice… Because I bought a house on seven acres, and once I bought it, I fixed the house up, and then I also split the acreage in half… So I sold the acreage and then I sold the house and I made money twice.
Joe Fairless: Best ever way you like to give back?
Austin Miller: Teaching and volunteering in local ministries and local community advisory boards.
Joe Fairless: Lastly, what’s some advice you have for finding under market deals?
Austin Miller: Right now one of the best I have found them recently is auctions. It seems like, for whatever reason, in our market people are not going to auctions right now. I’ve never had really bought them before an auction, but what I’m seeing – I’ve gone to two and I bought one last week – is that for whatever reason, it’s a really good place to pick up deals right now.
Joe Fairless: And with you not putting the cash up, how do you structure that with your investor? Because cash is needed to do that.
Austin Miller: Well, it’s 10% down, and on this one I paid 10% down out of pocket, out of the real estate investing cashflow funds, and then whenever we cash back out on the long-term, we settle up then.
Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about what you’re doing?
Austin Miller: You can e-mail me at Austin@hickoryhomebuyers.com.
Joe Fairless: This has been a wonderful episode, especially for Best Ever listeners who are looking to get started, or they’re just looking to identify a model to help them scale with little money out of pocket. You’ve got properties where you’ve partnered with individuals, you’ve got your own properties – in total 17 units, worth over a million bucks…
You’ve put in, at most, $20,000 and you’re making approximately $20,000 a year from the rentals. You do that by finding properties that have equity built into them, they need some lovin’, you put in that lovin’, and then you find a long-term lender (you have a community bank that you use) and then you cash-flow and hold on to it.
Thanks for being on the show, I really appreciate you sharing your business model and how you do this. I hope you have a best ever day, and we’ll talk to you soon.
Austin Miller: Joe, thanks a lot, man. I really appreciate it.