JF1297: Learning From A Bad First Investment with Drew Eldridge

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Drew bought his first deal at almost retail, put too much money in the rehab, and wasn’t getting great returns. He learned from the experience and now owns 20 units and one commercial property. Hear what he learned and applied to his business after having a not-so-good first deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Drew Eldridge Real Estate Background:

  • Real estate investor and has been investing since 2006
  • He has 20 doors and one commercial property
  • Builds his rental portfolio not for cashflow but for retirement
  • Recently helped his son purchase his first rental property at 12 years old
  • Based in Oklahoma City, Oklahoma
  • Say hi to him at 405.213.4041 or www.sellyourmemphishomefast.com
  • Best Ever Book: Never Split the Difference by Chris Voss

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Drew Eldridge. How are you doing, Drew?

Drew Eldridge: Great, Joe. Thanks for having me on today.

Joe Fairless: Well, my pleasure, nice to have you on the show. A little bit about Drew – he has 20 doors and one commercial property. He has been investing since 2006. He built his rental portfolio not for cashflow, but for retirement, and we’re gonna talk about that, to learn a little bit more about what that means. Based in Oklahoma City, Oklahoma. With that being said, Drew, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Drew Eldridge: Absolutely. I am an emergency medicine doctor, Joe, and I graduated from residency in 2005. Around 2006 I was trying to figure out what I wanted to as I started to actually have a little bit of real income. I started doing a little research and looked to see what all the wealthy people seem to do to make and retain that wealth, and it seemed like the commonality was real estate. So I started buying and reading every book I could find, and kind of looked at the variations, and decided that buy and hold was kind of what I thought I needed to get into.

That was 2006 – I bought one property after a few months of doing some research. I knew from reading that I didn’t wanna have the analysis paralysis, so I jumped in there and bought one, which of course was my worst deal to date… But it got the ball rolling.

I bought a few over the next seven years or so. After that I decided I need to look at this more as a business, “How can I increase my efficiency on this?” and kind of went from what I refer to, Joe, as like a hobby real estate investor to actually trying to be serious about it.

Joe Fairless: And what transpired after having that mindset shift?

Drew Eldridge: Well, I basically bought 13 more doors in about 18 months time period. What I did was I just started networking. I said I’ve gotta learn more, and for me to think that I can kind of get this figured out on my own is just silly, so what I started doing was I started reaching out to people that I knew were kind of where I wanted to be, and just trying to figure out what would be the best play.

Through that, I just found more and more deals, and it seems like — I think the phrase is the harder you work, the better your luck is, or something like that… Basically, the more that I was involved in this, it seemed like the more deals came across my desk, and I was just able to start growing. But I also kind of had a mindset shift –  in the beginning I bought these houses more for the equity, like you mentioned in the beginning, more as kind of a retirement play. I’m buddies with Tim Shiner, who’s on your episode 1175.

Tim buys essentially for appreciation, and I kind of had some of that mindset; more than anything, I was buying more for the equity and the long play for retirement, because I didn’t really need the cashflow this minute. But also, some of that paradigm shift that happened about 18 months ago is I moved everything, from 10-year notes to 30-year notes, and actually did start going for kind of a cashflow play… Not because I needed the cashflow, but it just made more sense, because if I wanna pay those notes down quicker, I can absolutely do it. But then it frees up some of my money and I can just use that to build. I’m not tapping into my other income to build my portfolio. So I did have a bit of a mindset shift around that time period.

Joe Fairless: So before it was more for equity, now it’s more for cashflow, and as a result it’s longer-term leverage.

Drew Eldridge: That’s correct.

Joe Fairless: Okay. The first one, you said that was the worst deal to date. What are the numbers on it?

Drew Eldridge: Basically, I had no idea what I was doing. I kind of thought maybe I knew a little bit. I essentially bought at retail. It was probably retail about a 75k house, and I think I got it for 71k. Not much of a discount. Also, in the beginning I thought “You know what, I’m gonna do the repairs myself.” I grew up kind of learning how to do that stuff, and I’m in there fixing holes in the floor, and some other things…

I started with a property manager from that very first house, and I’ll tell you about that mindset in just a second, but she came in and said “Drew, what are you doing? You’re putting up crown molding, you’re fixing this house like it’s a flip or like you’re gonna move into it”, and I’d already spent quite a bit of money on the repairs…

Joe Fairless: How much?

Drew Eldridge: I think I ended up spending about 15k. And the house rented in the beginning for $650. The numbers are horrible, they don’t work out… But it was in an area that I knew was going to continue to grow, and I thought “Okay, I’ll bank off a little bit of the appreciation.” But anyway, looking back on that, it was a horrible deal, but I learned a whole lot from it, and I tried not to make those mistakes going forward.

Joe Fairless: What did it rent for afterwards?

Drew Eldridge: I think now it’s up to $800, but it’s worth probably 115k-120k now. I probably could better use that money elsewhere, but for now I’ve just hung on to it. Also in the beginning I had the mindset that I wanted to be an investor, not a landlord… So I think, unlike a lot of people that I talked to, I started off with that very first property thinking that I wanted a property manager, and that’s worked out pretty well. I now self-manage a couple of the properties, just because this far into it I kind of wanted to learn a little bit more about it… But I think that’s an interesting thing – I talked to a lot of people, and everybody wants to do it all in the beginning, and I think that’s great. My situation, coming out of residency, and not having as much time, having a manager was definitely the right play at that time.

Joe Fairless: You’ve got a commercial property… Is that where your office is located?

Drew Eldridge: No, I’m a partner in a Brazilian jiu-jitsu gym. We started a few years ago, and as we grew our membership and increased our numbers, we went from borrowing a mat to a three-year lease on a building that we had a place, and then about a year ago we were able to buy a commercial property, me and my partner on the gym. That’s kind of my first foray into commercial. Now, the benefit is that I know the tenant, and it’s a single tenant (that’s us). It’s actually been a great property so far, and it cashflows, and we’ve built equity in it, and it’s been a good deal.

Joe Fairless: You are a business partner in the Brazilian jiu-jitsu gym, and then you as a company also purchased a commercial property?

Drew Eldridge: That’s correct.

Joe Fairless: Okay.

Drew Eldridge: And then we rented it to ourselves.

Joe Fairless: Is it at market rent?

Drew Eldridge: It is. We’re able to justify that in cashflow, so it works well.

Joe Fairless: Oh yeah, absolutely. Did you consider buying a property that had two spots – one for you all and then one for someone else, so they could help with that?

Drew Eldridge: You know, we had considered that, but really the reason we did not do that, and I think that’s probably the smarter way to do it if you’re able, but with the business model that myself and the other guy that I’m involved with this – we kind of said “This is the amount that we wanna have as an outlay for this”, and to do that, we needed to stick with just a single tenant-sized building. So that’s how it worked out. It was a 5,000 square foot building, and we needed pretty much all of that for our  own gym. And for us to purchase a building that would have the size needed for any other tenant was just not what we wanted to do at the time.

Joe Fairless: You’ve got 20 doors and one commercial property. We talked about the commercial property… With those 20 doors what’s the largest property size in terms of doors?

Drew Eldridge: Just a three-unit. Most of them are single-families, and then I’ve got one three-unit.

Joe Fairless: Okay. How are you financing them now?

Drew Eldridge: What I had done initially was for those first seven properties that we talked about, because I’d put them on short terms, I built up quite a bit of equity by the time I decided to ramp up the second phase… Essentially, what I did is I went to the banker and we discussed it and I cross-collateralized most of those properties going forward, and I think I purchased probably about 500k retail value for about 5k of my own cash money, and then cross-collateralized the remainder off of those original seven properties.

So rather than having to come up with a large percentage down, that’s how I was able to do it and then grow those with reducing my own personal cash outlay, and increasing that return.

Joe Fairless: I’m starting to sweat a little bit, because I got really nervous when you said you cross-collateralized your properties. So if one property goes down, then it’s a domino effect. How do you think about that from a risk mitigation standpoint?

Drew Eldridge: That’s a very good point. So a couple things here. Number one, going forward, on all these properties – I bought them at a low enough cost that I feel that that’s less of a concern. Because when you look across my portfolio, I’m leveraged at about 50%, even with that. So I think with those numbers that doesn’t concern me as much as it should. Now, if I were considerably more leveraged, then yes, I absolutely don’t think that that’s a smart play. But I think as it stands with where my numbers are, that’s not much of a concern for me at this point.

Also, the other thing is I’m in a little bit different situation than some. I have a decent W-2 income that if I ever got in a real bind, I’m fortunate enough that I can cover some eventualities, at least for the short term. But you’re exactly right, there’s certainly risk involved with that strategy.

Joe Fairless: Do you plan on continuing to buy properties around one to three units, or are you changing your approach?

Drew Eldridge: I would absolutely love to move into multi’s, and that’s kind of on the horizon. For 2018 that’s my plan – I would like to educate myself a little bit better about that and try to figure it out. This three-unit, even though it’s kind of a multi — I mean, it technically is, but it’s not the same as buying a 16 or 20-unit property. That’s kind of my next goal, that’s what I would like to look into and learn and move into.

Joe Fairless: What was the tipping point for you that triggered the epiphany of “I wanna move from a hobby to a business?

Drew Eldridge: I think some of it had to do with just kind of my disappointment with medicine. The thought that ultimately in my job I get paid when I show up, and if I want something else to grow a business, there’s no one that’s gonna come to me and say “Hey Drew, this is what you need to do to grow a passive income.” And I knew from my previous properties that had the potential to do it, and short of me going back to school or starting some other business, that was my best opportunity to build that passive income.

And then the other thing, Joe, is that I’m a physician, so if my kids want to inherit something, a business from me, there’s not one. They could go to school, but I don’t truly have a practice they might inherit. At least with real estate there’s a business that I may continue to grow, that they could be a part of.

In fact, my 12-year-old bought a house last year. I’m trying to teach them and give them something that they can grow into as well.

Joe Fairless: I saw that bullet point in your bio and I was gonna ask you about that. Please elaborate on how your 12-year-old bought a house.

Drew Eldridge: I’ve got three boys: 10, 12 and 15. It’s been about a year and a half ago now, we were taking a trip and I had told my boys, I said “I will pay you $50 to read a book, but I get to choose it”, and my 12-year-old is a big reader. He’s the one that’s a little more on the intellectual side, always loving to read… So he read Rich Dad, Poor Dad for teens. And part of the $50 was we have to have a good conversation about it where you can explain the points, so I had to read the book of course, too.

He started telling me about depreciating assets, and liabilities, and just truly kind of the understanding of what the point he was trying to get across… And the boys had also been going around with us to all these rental properties for the past several years, and they have some money set up in what’s called a drip account; for your Best Ever listeners that may not be familiar, that’s dividend reinvestment plans… Essentially, where you purchase stocks – and you can usually purchase them direct – and they reinvest the quarterly dividends at a discount, so it’s compounding interest and dollar-cost averaging.

[unintelligible [00:15:16].12] that when they were younger, and told family and friends, “Hey, whenever you give gifts of money and things like that, we’re gonna end up putting that in stocks.” So we had done that over the years, and then also I think a $50 contribution monthly just was sucked out of our accounts to make to make it automatic… So Cooper had about $20,000+ that he knew he couldn’t touch until he was 18. But he said, “Hey dad, reading that book and talking about real estate, what if I use that money to buy a house? Could I use it before?” I said, “Well, maybe so. But you’re gonna have to try to figure out all the numbers.” Essentially, “I’m not gonna do it for you” is what I told him.

So we started going out, we’d grab lunch, we’d go make a list of properties, we’d go walk through, we’d drive for dollars, and I would have him make the calls. He would call the realtors, we’d meet them, I’d make the realtors talk to him… They’d try to talk to me and I’m like, “No, it’s Cooper’s money, you talk to him.”

By the end of it, he’s actually talking about foundation… “There’s a crack here. Do you think that’s a foundation problem?” He was trying to estimate repairs, as much as a 12-year-old can… But it was really good. The naysayers – and there’s only been a few, fortunately, whenever I’ve kind of told people about this… But we did have to title it in our names;  after talking with lawyers and the title companies, they said it’s a huge issue to try to put the minors on the LLC or on the contract, so they just said “Title it to him at 18.” And that’s what we did, but we used his money, none of it was from us. He had to pay for the repairs. We checked him out of school to go to the closing.

Even though he wasn’t signing, they had to explain it to him. We use our property manager, but he goes through the statements and looks and sees what the expenses are. Now, he’s always like “Can I have some of that cashflow to buy a dirt bike?” We give him a little bit to make it worth his while, but most of it goes back to basically resupply that dividend reinvestment plan that we started for him, with the hopes that he can do it again in a year or so.

Joe, I think the thing is even if nothing ever comes about it, he’s got a house that he can take some cashflow through college, or sell at some point for a down payment on his own house… But even better, what if he takes to this and wants to start doing some real estate himself?

Joe Fairless: Oh, something already has come about it. That’s incredible. He’s already learning the core principle of Rich Dad, Poor Dad, where if you want a liability, then you buy an asset and have that asset pay for the liability. So you want a dirt bike? Okay, well  your house can pay for your dirt bike, or in Rich Dad Poor Dad terms, your asset can pay for your liability. He’s already starting to see that first-hand. That’s amazing.

Drew Eldridge: 100%. And it’s funny that you said it, because that’s exactly how he justifies things. The amount of cashflow – he’s like “Okay, how many months of cashflow until I can blah-blah-blah?”
My 15-year-old is more social, he doesn’t really care. He’s like “I can’t sit down and read those books and do that.” At some point he may, but as he watches his brother get a little cash, he’s starting to say “Well, maybe I do need to do that. What book was that that I need to read, dad?” So we’re trying to get him involved, and then of course, the ten-year-old is still not quite there on comprehension of all this, but we’ll get there, we’ll see. It’s been fun.

Joe Fairless: What are the numbers on your 12-year-old’s house?

Drew Eldridge: The house that we found for him was a HUD property. When we first looked at or called about it, it was still in owner occupant status. It was funny, because we had kind of just run the numbers on it — because basically he and I would go through the numbers on most anything we looked at, and we had come up with a number and then the realtor called me right after he had gone to bed and said “Hey, this goes to investor status tomorrow. Do you want me to put an offer in?” So I gave it to her and it got accepted.

Basically, we paid 55k for the house, so we had to figure out his down payment… Then we initially had factored in about 3k in repairs, and I think there was an additional 3k because the HVAC needed to be replaced. So the retail value – of course, for what that’s worth – is about 85k for that house, and he’s renting it for $800/month. I think he’s all-in out of his own cash 17k-18k or so, and he’s renting it for $800/month. But the total acquisition cost I think was 62k or so.

Joe Fairless: When you take a look at the generational wealth component and you see what you’re building and what your family is building, how do you protect that from an asset protection standpoint? What do you have in place, or what will you have in place?

Drew Eldridge: Honestly, Joe, that’s one of the things that I think is very important, and probably something that I’m a little lackadaisical about… This is in an LLC, but I really don’t have a whole lot beyond that. Now, I’ve got some umbrella insurance policies as well, but there’s really not much beyond that. As I’ve started to network and meet people like Tim Shiner and meet local real estate investors here in Oklahoma City, I’m taking little tidbits from each of them, and that’s one of the things that on my list of “I probably need to improve.”

Just like I always tell people that I talk to about real estate, I’m like “Network, network, network”, I went and had lunch with a guy as I kind of started to try to ramp this up, and he looked at me and said “Well, show me your numbers.” I did, and he said “Why is your insurance number so high?” Essentially, he told me I need to switch to a commercial policy and save me about 7k/year.

By the same token, when networking this is one of the things that commonly comes up – “How are you protecting your assets?” I hate to admit it, but that’s something that I probably need to be a little bit more on the [unintelligible [00:21:11].02]

Joe Fairless: Based on your experience as an investor, what is your best real estate investing advice ever?

Drew Eldridge: My best real estate investing advice ever is essentially to network and to do something. I always say, do something and do it now. That doesn’t mean necessarily to buy a house right now, but do something to move you towards that goal. I’m not sure if that’s going out and buying a book, buying a journal to start taking notes in, but do something and do it now. Because I see too many people that say “Hey, I wanna invest in real estate”, but they don’t network, they don’t bother to take it beyond just talk.

Joe Fairless: Absolutely. It reminds me of the phrase that Tony Robbins says, “When would now be a good time?” It scrambles your brain a little bit, it’s like “Wait, what? When would NOW be a good time?” Okay, I get it. Thank you. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Drew Eldridge: Let’s do it.

Joe Fairless: First though, a quick word from our Best Ever partners.

Break: [[00:22:11].03] to [[00:22:39].23]

Joe Fairless: Okay, best ever book you’ve read?

Drew Eldridge: Never Split the Difference, by Chris Voss. It’s a book about negotiation, it’s something that I have to constantly go back and look at. Just this past week it saved me $16,000 on an RV purchase. I highly recommend that book.

Joe Fairless: I interviewed Chris about 10-15 episodes ago, I think… That’s when it released, but if you just google “Chris Voss Joe Fairless”, that interview will come up. Best ever deal you’ve done that wasn’t your first and wasn’t your last?

Drew Eldridge: It was, again, by virtue of starting to take this serious and tell people that I’m a real estate investor… At the hospital, there was a nurse that came to me and said “I want to rent my house that I have left over from my divorce.” I said “Here’s how you do it”, and she came back to me about six months later and said “Will you just buy this house?” I said, “Okay, tell me the numbers.” It values at about 70k, and she said “I owe 38k on it. Will you go ahead and just pay off the mortgage and you can have it?” I know those numbers aren’t super sweet for probably a lot of your best ever listeners…

Joe Fairless: Yeah, they are. That’s incredible.

Drew Eldridge: Well, for me it was a great deal… And here’s the other thing too, and this just goes to show you the power of that networking. So that was a year and a half ago… About two weeks ago her mom (of all people) contacted me and said “Hey, are you still buying houses?” “Sure.” She said “I have a friend whose mom died; she’s got this house, she just can’t bear to deal with it.” I said to her, “Okay, tell me the numbers.” She wants 85k for it, can I go and talk to her?

I got it for 82k, and I probably should have paid 85k (I hope she doesn’t listen to this), but because of Chris Voss’ book, you’ve gotta make them feel like you didn’t just accept their offer, because of the psychology of them thinking they could have done something different. But the house is probably worth 150k, and I will probably have to put 5k or less into it. And I did tell her “Your house is worth more”, but she was crying and thanking me at the end of it for helping her get this quickly done. Then that deal led to a second deal, and those two have been some of the best deals so far.

Joe Fairless: How did Chris’ book help you save $16,000 on that RV purchase?

Drew Eldridge: I really didn’t intend to buy an RV, and I was having the one that I currently have worked on… And by the way, I love to travel in the RV with a family; it’s a motorhome, it’s a great way — it’s 100% a depreciating asset, but it has emotional importance and I think it’s one of the few depreciating assets I’m cool with. But anyway, I went in and on Monday I sat down with them and said “Here’s the one I’m interested in on your lot”, and the price that they gave me – we kind of negotiated a little bit back and forth, and I kind of just was like “Nope, thanks” and walked out. Because they told me “This is our bottom dollar, we’re not gonna budge” (we came down a couple thousand).

So the guy calls me back two days later – of course you knew that was gonna happen… And I said “Okay, well let’s talk”, but what I did is I pulled out Chris’ book (it had been a few months since I read it) and I took some notes, and I said “You know what, I’m gonna just try.” So we went back and forth, and I used a lot — I used his “Now, how am I possibly gonna be able to do that?”

Joe Fairless: Yup.

Drew Eldridge: And a lot of his other little techniques, and it was great. Ultimately, I walked out 16k or 17k cheaper than what they told me was their absolute best number on Monday, take it or leave it. I owe Chris some money, apparently.

Joe Fairless: I have his e-mail, so I will e-mail him and copy you and I will tell him that you’re paying him $8,000 at least. Don’t worry, I’m on that.

Drew Eldridge: Absolutely. Or at least buy him a beer or a lunch.

Joe Fairless: I think he’ll probably take the $8,000 over the beer or lunch.

Drew Eldridge: I bet.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Drew Eldridge: I kind of alluded to it before… I think number one was paying retail or too close to retail on that first deal. And some of that was also just because I was anxious to get something done, and get the first one under contract. I think that’s probably the biggest mistake. Then also included in that deal was the fact of trying to overdo it and not make it a rental, whenever that’s really what the market I was going for.

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

Drew Eldridge: I’m a reserve deputy with the County Sheriff’s office here, and been doing that for ten years; I’m assigned to the SWAT team, and I do it for free. In a way, it’s my version of community service… So I guess that’s one way that I give back.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on or get in touch with you and say hi?

Drew Eldridge: I’ll give you my phone number, they’re more than welcome to text me. It’s 405-213-4041. I love to talk real estate, and I always seem to learn something from everybody I interact with. Also, we’re gonna try — I’ve got a cousin… I grew up kind of just outside of Memphis, Tennessee, and we’re gonna start doing some wholesaling in Memphis, so SellYourMemphisHomeFast.com is our little basic investor website, if anybody wants to reach out to me there as well, or is interested in the Memphis market, hit me up for that. We’re gonna give that a go in 2018.

Joe Fairless: I am surprised that URL was still available, SellYourMemphisHomeFast.com.

Drew Eldridge: No one was more surprised than I was.

Joe Fairless: I’ll put that in the show notes link. Thank you so much, Drew, for being on the show, for talking about how you are — boy, you’re involved in a lot of stuff. Volunteer reserve deputy, Brazilian jiu-jitsu gym partner, commercial owner (although you’ve got a really good tenant, since it’s you and your business partner) and then a doctor, too. I probably ended with the most time-consuming thing… Emergency medicine doctor.
Thank you for being on the show and talking about how your 12-year-old bought the house and the approach that you too with him… Certainly a lot of lessons for all the parents or people who want to be parents, an option for how to approach with your kids. So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Drew Eldridge: Thanks for having me on, I appreciate it.

Kathleen Shannon and Joe Fairless

JF1268: Being Boss Through Residential Real Estate Investing with Kathleen Shannon

Listen to the Episode Below (27:44)
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Kathleen is an entrepreneur, podcaster, and real estate investor. We get to hear entrepreneurial tips from her as well as hear an investor story of buying residential real estate. She prefers to buy houses that are move in ready, and rent them out to decent tenants in decent areas. Her strategy is that she only buys homes that she would want to live in. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Kathleen Shannon Real Estate Background:

-Co-owner of the branding agency Braid Creative

-Co-host and author of Being Boss a podcast (and now book!) giving advice for creative entrepreneurs

-Invests in residential properties with her husband as a way to slowly build their wealth and retirement

-10+ years Agency & Entrepreneurial experience

-Say hi to her at www.braidcreative.com

-Based in Oklahoma City, Oklahoma

-Best Ever Book: Daring Greatly

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Kathleen Shannon. How are you doing, Kathleen?

Kathleen Shannon: Good. How are you, Joe?

Joe Fairless: I am doing good as well, nice to have you on the show. A little bit about Kathleen – she is the co-owner of the branding agency Braid Creative. She is also a real estate investor, she invests in residential properties and she is the co-host of the podcast Being Boss, which is a podcast for creative entrepreneurs, as well as the author of the book Being Boss, which is a book, I imagine, for creative entrepreneurs. She is based in Oklahoma City, Oklahoma, but soon to be a resident of Detroit, Michigan. With that being said, Kathleen, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Kathleen Shannon: Yeah, sure. So I own my own branding agency, Braid Creative, and I went to school as an artist, thinking I would be a painter, and never imagined that I would be investing in real estate. Before I came on the show I was thinking about the fact that I think so much identity is wrapped up in our homes and the homes that we buy, and it keeps a lot of people from buying homes, and I feel like I was able to kind of like make that leap, and make it happen.
So other than Braid Creative, my branding agency, I also co-host the Being Boss podcast where I’m talking about advice for creative entrepreneurs, and there is a huge overlap between entrepreneurship and investing in real estate and how you manage it and your different approach; everyone has a different approach, right? So it’s all very personal, but it also comes down to numbers. That’s kind of where I’m at…

Joe Fairless: I’d love for you to elaborate on the first part that you mentioned where you said “So much of your identity is wrapped up in the homes, and maybe the result of that might be people don’t buy as many–” will you help me understand that a little bit more?

Kathleen Shannon: Yeah, sure. Buying your first house is a huge milestone. I think that it is wrapped up in the same vein as getting married or having a baby, and it’s not a decision that most people go into lightly; it’s incredibly personal and emotional, and whenever you’re buying your first home, you want it to be just right. If you’ve ever watched any HGTV, people just get so wrapped up in the emotions of it, and I think that you have to really take that out of the equation whenever you start investing in real estate… Because it really is a numbers game and it really is about building your wealth and building your retirement, and I just think that a lot of especially creative entrepreneurs, which is my audience – I think a lot of them don’t think of themselves as someone who could be investing in real estate. I think that a lot of them may have the impression that you have to be a millionaire to invest in properties, and that’s certainly not the case, especially if you know your area and have a unique situation, kind of like Oklahoma City has.

Joe Fairless: If I were a guest on your podcast, and we were talking about investing in real estate, knowing your audience, how would you position that conversation so that it resonates with them and they’re empowered to then go buy real estate?

Kathleen Shannon: You know, I would probably start with the first smallest step. So what is the first thing that you can do to start stepping into a future of owning real estate and investing in real estate? The first thing you would wanna do is get qualified for a loan, right? And I know it sounds really simple, but that’s the kind of thing that people — I would say lean into it by researching the market, getting a loan, figuring out what you can afford, really crunching some numbers… And I would say start with your own first home. So whenever you are buying your first home, don’t think about buying your forever home. I think that a lot of people really overextend themselves with their mortgage by buying the kind of house that they think is gonna be one and done, and that’s it.

Instead, I would buy something that is a good starter home that would make a really great investment property in a few years. So that’s what I would tell people – start with your first home, the one that you actually live in for a couple of years, because then you’re gonna get better finance rates, you’re going to get the feel for what it’s like to even manage a property… So just the little things, like all the repairs that come up; you start to understand the expenses associated with owning a home, and then from there I think that a lot of people think about renting out their home to someone who wants to destroy it.

I feel like the biggest fear whenever it comes to residential property is, “Well, what if someone just trashes my home?” And that is a relevant fear and it does happen, but just like entrepreneurship, you have to trust that you can handle things that are thrown your way. You can get a clean-up crew and for $500 your house is looking good again. Or someone skipping out on rent, or not paying rent and having to evict someone… I think that people go to all these worst-case scenarios, and it overwhelms them and they don’t wanna do it, when in reality, yes, you’re going to have hiccups, but it’s just one at a time, and trusting that you’re going to be able to handle it along the way goes a really long way.

Joe Fairless: Is that how you got started with your investing, that thought process?

Kathleen Shannon: Definitely. I got started with investing though actually by living in a house that my parents owned. Whenever I was going to college, they had bought me and my siblings a place to live in, and whenever I moved out of that place, I managed the property for them. I figured out how to get people in the place, which is just asking your friends, “Hey, do you want a cool place to live in?” Or your friend’s saying, “Hey, I like your place. If you’re ever renting it out, let me know.” So it really is this organic and easy.

So just like creative entrepreneurship, it’s about getting that first client.  Whenever it comes to investing in real estate, it’s about getting that first house, and it’s about getting that first tenant. If you can get a really good one, it will get you started on a really good foot.

So that’s how I started – I was just managing my own friends who were living in my parents’ property, and from there seeing “Okay, there isn’t some nebulous, faceless enemy wanting to destroy the place…”, and from there, I’m trying to remember… Because I married my husband and he was impressed that I was able to manage my parents’ property, and he owned a house, so whenever we moved in together, we were like “Well, hey, how about — let’s just rent out your house.” So that’s the way that we started there together with investing in real estate.

Joe Fairless: Okay, you rented out his house that he owned.

Kathleen Shannon: Correct.

Joe Fairless: Were you also managing your parents’ property?

Kathleen Shannon: By that point I was no longer managing my parents’ property. I think that they were managing that themselves.

Joe Fairless: They wanted to get in on the fun.

Kathleen Shannon: Right… [laughter]

Joe Fairless: Okay, so you have turned over the reins to your first management job — and by the way, this isn’t your full-time job, it’s something you’re just doing on the side… And now you and your husband have decided to rent out the house that he had… And then what?

Kathleen Shannon: Then that was a crash course in having that disaster tenant. So we had a couple of tenants, and I swear I think the house was cursed. I actually recently sold it. I don’t usually sell properties; I’m like a long game kind of person whenever it comes to my properties, because my own goals for having investment properties is for retirement. Being a creative entrepreneur, I don’t have a fat pension or a 401k — I do have a 401k, but I think that investment properties is a really great way to have a long-term retirement vision… So I recently sold the place because every single tenant was just a little bit of a nightmare as far as kind of trashing the place, or not paying rent and having to evict someone, and learning how to do that for the first time, learning how to garnish a checking account, which is never fun… There’s nothing about that that I like doing.

So I managed that property, and then I bought my second property. This was a super cute house — this is also my policy, I always buy houses that I would be willing to live in myself. I’m not willing to slumlord it… And obviously, as I get older, my taste is a little bit more elevated… I probably wouldn’t live in the places that I have now; I would, it just wouldn’t be my first choice I guess is what I’m trying to say.

But I bought a really cute house, and was super stoked to do that, and managed that property. So now with two properties, with one of them kind of attracting bad eggs, I decided to hand over the management. I think it was after that first eviction I was like “This is just too hard to do on top of having my own business that I’m trying to grow.” So my husband’s mother ended up retiring and it was a really great job for her to do part-time, so now she’s managing the properties.

Joe Fairless: Okay. The numbers on the second house – do you remember what you bought it for and what it rents for?

Kathleen Shannon: Let’s see… I bought it for 65k, and I’m always putting down 20% on all of my places, and I think now I have enough that I have to put down 25%, which is also great for — you don’t wanna pay PMI on an investment property… And I think legally we have to have 20% down on an investment.

Anyway, so that house I bought for — I have the numbers right here… I bought that one for $63,800, and the mortgage is $432, and my rent is $830. So typically I like to make about $400 profit; that’s not pure profit, because there’s some expenses involved, of course…

Joe Fairless: Paying mom-in-law, things like that.

Kathleen Shannon: Exactly. So I like to make about $400 on the property to cover expenses, and that’s actually worked out pretty well. We haven’t ever been at a loss, we’ve always been able to really fill all the properties. We’ve had just enough money in the bank account to mess with my taxes at the end of the year…

Joe Fairless: Yeah, that’s good, and that means you’re lowering your taxable income because of depreciation, is that right?

Kathleen Shannon: That no, but I’m being taxed — I have enough income on the property… Yeah, there’s enough profit that I’m paying taxes.

Joe Fairless: Oh, the opposite.

Kathleen Shannon: Yeah, opposite.

Joe Fairless: Oh, okay. Got it.

Kathleen Shannon: Yeah, and I feel like — this is a whole other ball of wax, but I feel like it comes out of my paycheck, because my income is the most variable, being an entrepreneur…

Joe Fairless: Yeah. All this hard work…

Kathleen Shannon: I know, I promised myself I would never complain about taxes again, at the beginning of 2017. I was like, “You know what, I’m fine.”

Joe Fairless: Okay, so 65k… Did you have to put any money into it in order to get it move-in ready?

Kathleen Shannon: I didn’t. So most of the properties that I get are practically move-in ready. Sometimes I’ll throw up a coat of paint on it, or… You know, just even in the inspection process if there’s a few things that need to be repaired, but maybe a couple thousand dollars at most to get them ready.

Joe Fairless: Okay… And you bought the second house — is that in the same area as the first one, or a similar area?

Kathleen Shannon: No… You know what’s funny – that first one was in Norman, Oklahoma, which is where the University of Oklahoma is, and that was a 3-bedroom place, the one that was never doing well for us… So my strategy with all my other properties moving forward is that they’re in Oklahoma City, they’re on the edges of historical neighborhoods, so they’re not actually in the historical neighborhood, but right next door… And they’re usually somewhat near either a highway or a university, so like good locations.

Joe Fairless: Okay. How many homes do you have.

Kathleen Shannon: I have six rentals, after selling that seventh, that was the bad karma house…

Joe Fairless: Yeah, after selling the ugly, [unintelligible [00:14:36].00] bad karma…

Kathleen Shannon: Yeah. [laughs] So I have six rentals and one primary.

Joe Fairless: Six rentals, one primary. For each of the rentals, did you put down 20% and used the same type of loan program, or did you change it up?

Kathleen Shannon: Yes, I think. My husband and I also have a strategy where we each buy the houses in our own names, so we kind of alternate every other one so that up until five each, we only have to put down 20%. Then after five, we have to start putting down 25%, and the loan structure was the same on all of them.

Joe Fairless: Okay, 20% down, 30 years…

Kathleen Shannon: Yes, 30 years, fixed rate, and I have actually refinanced a couple of them whenever the rates have gone down low enough to make it worth it.

Joe Fairless: Okay. And are you using a local lender, or someone national?

Kathleen Shannon: I’m using a national bank, but I’ve got a local guy.

Joe Fairless: Got it, cool. Alright, which of your homes is the least profitable and which one is your most profitable, not including the bad karma house?

Kathleen Shannon: Right… The most profitable house is the house that I lived in. So I bought a house in Oklahoma City and I blogged about it. It’s a house that I was married in, that was featured on Glamour Magazine’s blog, and it’s the house that my son was born in… So this house is kind of internet-famous, and that’s the one that makes the most profit. That one makes around $550 in profit.

Joe Fairless: And that is before expenses and paying mom-in-law?

Kathleen Shannon: Yes, correct.

Joe Fairless: Okay, that’s basically — income minus mortgage is that $500.

Kathleen Shannon: Exactly.

Joe Fairless: Okay. And then what about the least?

Kathleen Shannon: The least profitable house — I make about $375.

Joe Fairless: Any lesson for us as listeners that we can take away from the most profitable versus the least profitable that you’ve identified?

Kathleen Shannon: Hm, interesting… I would say even my least profitable house feels profitable enough. I like the amount of profit that I’m making on it and I don’t think that it’s because of the house necessarily. The house that’s internet-famous – yeah, if you went to build up a blog around your house and live life into it… I think that breathing life into your homes – and that’s why I like to buy homes that I would personally live in –  I think that that’s really helpful. So having a personal brand is also really helpful for filling your homes with good people that you like. But other than that, I really don’t see a huge difference between then other than my house that’s the most profitable – it is a 3-bedroom, even though my strategy for the rest of my homes, which all of them make between $350 and $450 a month in profit before all the expenses of property management and repairs… So I think that all of those homes – the strategy that I’ve taken is that these are long-term investments; I wanna hang on to them for as long as possible, especially while Oklahoma City has seen so much growth, and really just maintaining them, keeping them nice. So I don’t know that there is any lessons between the two.

Joe Fairless: You mentioned having a personal brand that’s helpful for filling your houses, and that’s just right up your alley – you’ve got a branding agency… How does that help you fill up your homes?

Kathleen Shannon: I don’t really know how to say it other than if  you have 10,000 Instagram followers and a lot of them live in the city that you live in, and then you have a house available for rent, you can throw the house up on Instagram and say “Hey, I’ve got a space.” And then people start knowing you for having these really cute, cool houses.

I have people year-round asking me “Hey, do you have anything available?”, and usually not; usually my places are filled, but then whenever I do, I just throw it up on Instagram, like in an Instagram story (I’m not even posting it) and people are really excited, and usually I get a good lead that way.

Joe Fairless: Wow. So you have a social media following and you post about it, and then people who live in that city are interested and then they end up renting from you.

Kathleen Shannon: Correct.

Joe Fairless: Wow, cool.

Kathleen Shannon: I see people do this with Airbnb’s in kind of more destination places, and this isn’t something I would do if it were my full-time job. If it were my full-time job to manage properties, and even now as I’m looking for a place to rent in Detroit, I’m seeing how far really good photos and just a little bit of aesthetic — like, don’t go for the five-gallon bucket of the cheapest Band-Aid color paint that you can find… Whitewash your house; make it beautiful and clean and airy and bright, take your photos during the day, hire a photographer… It is worth thinking of your house as a brand, and treating it as such in order to get good tenants, and maybe a couple hundred extra bucks a month in rent.

Joe Fairless: Oh, yeah, that’s great advice, and I sincerely appreciate you giving that. We’re gonna dig even more into this, because I’ve got the question that I ask all my guests, and that is “What is your best real estate investing advice ever?”

Kathleen Shannon: I would say buy properties that you’d be willing to live in. I think that there’s so much integrity in that, especially for my audience. I know a bunch of real estate dudes that are making good money on these huge properties that are kind of gross, and I don’t know… To me – no offense if this is you or any of your listeners, but I started to think “Okay, maybe I need to do what the millionaires are doing”, right? But to me it just doesn’t feel quite aligned, at least right now, with my goals and really what I’m wanting out of this. So for me, whenever it comes to the brand that I have and the brand I’m trying to carry out through everything I do is just a reputation of a cool place to live in, or a cool branding agency to work with, and that’s really what I’m trying to carry through.

So be willing to live in the place that you would purchase, and manage it with integrity. If the A/C breaks, fix it the next day… Which is also why I like to manage my own properties, or have my mother-in-law do it, because I like to treat my people good. So that would be my biggest piece of advice, truly – be a good person, buy good properties.

Joe Fairless: I don’t think anyone would argue with that or want to publicly argue with being a good person is not the right approach, so I wholeheartedly embrace that. Are you ready for the Best Ever Lightning Round?

Kathleen Shannon: Yes, let’s do it.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [[00:21:26].10] to [[00:22:18].05]

Joe Fairless: Alright, Kathleen, best ever book you’ve read?

Kathleen Shannon: Daring Greatly, by Brené Brown.

Joe Fairless: Oh yeah, she’s got a good TED talk. She’s got a couple TED talks, doesn’t she?

Kathleen Shannon: Yeah, one of the most watched.

Joe Fairless: Yeah, I think she’s a professor somewhere in Houston; I think she’s Houston-based.

Kathleen Shannon: Yeah, she’s an author and researcher in Houston, and funny enough, I blogged about that book and she ended up hiring me to do her personal branding before she went on Oprah.

Joe Fairless: Holy cow! That’s pretty cool.

Kathleen Shannon: Yeah, yeah. But it is an incredible book just as far as showing up and being seen… It’s a must-read for everybody.

Joe Fairless: Best ever deal you’ve done that you and I have not talked about yet.

Kathleen Shannon: Like business deal?

Joe Fairless: Anything. It could be one of your homes, or it could be a business deal, however you wanna interpret that.

Kathleen Shannon: Well, I just wrote a book, and it is being traditionally published, and going through that deal feels huge. That was such an honor, to be able to write a book and to be picked up by Running Press.

Joe Fairless: Wow.

Kathleen Shannon: That’s a pretty cool deal.

Joe Fairless: Outstanding. Congrats on that. What are some takeaways, or what would be the reason why we read it?

Kathleen Shannon: A lot of people ask me “How do you get it all done? How are you doing it all?”, like running Being Boss, which has become a chart-topping podcast, how am I running a branding agency, I have a toddler, I have investment properties… So I get asked all the time, “How do you do it all?”, and all of my tips and tricks and mindsets and habits and routines are all in that book.

Joe Fairless: What’s a mistake you’ve made on a real estate transaction?

Kathleen Shannon: Renting to people whenever my gut said no. I don’t even know if that’s legal to say.

Joe Fairless: No, there’s always legal ways you can turn people down if —

Kathleen Shannon: I had a gut-check — I think I was so desperate to fill my first space that I rented to the first person who came along, and now I know better. And there were some red flags that I can mention, like essentially saying “Can you not call my current landlord?” and “Here’s the deal, I need to give you $40 today, and then I can give you the other $80 on Friday.” Just stuff like that.

Now I know better, so trust those red flags and trust that you’re gonna find someone else to rent your place.

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

Kathleen Shannon: I love generously sharing my gifts of knowledge on things like this podcast and my own podcast. I love mentoring college students who are freaked out about being artists for a living… So I love giving back in that way, but of course, picking some of my favorite charities and organizations that I believe in, and giving my time and money to those places as well.

Joe Fairless: How can the Best Ever listeners purchase your book and listen to your podcast, or just connect with you?

Kathleen Shannon: Oh yeah, so the podcast is called Being Boss. You can listen to that wherever you listen to podcasts, and you can learn more about the book at beingboss.club/book. You can also buy it wherever books are sold.

Joe Fairless: Kathleen, thank you for being on the show and talking to us about how you have built your real estate investing business, and also from a creative entrepreneurial standpoint, for any or all Best Ever listeners who are creative entrepreneurs, because we are all entrepreneurs… As real estate investors we’re entrepreneurs, but from a creative entrepreneur standpoint – not all of us will identify with that, but some will, and for those of you who do identify with being a creative entrepreneur, sometimes perhaps the worst-case scenarios come to mind for what could happen, and as you mentioned, know there are solutions to the worst-case scenarios and they might not even come up, even if they do.

Kathleen Shannon: Totally, and even more than that, just trust that you’ll be able to deal with it. That usually even the worst-case scenario isn’t that bad.

Joe Fairless: And then the first step is — just focus on the smallest first step, as you said, and that’s just get qualified for the loan, and then continue to go from there… As you just said, trust in yourself and in the process. Other people have done it before you, you’ll be able to do it too, with the right mentality and tactics.

And then also, as you mentioned, having a personal brand is incredibly helpful for your bottom line from a real estate standpoint – filling the vacancies at your properties, as well as your overall approach of, well, being a good person (first and foremost), and then from a more tactical standpoint, having beautiful, clean, airy, bright homes (to use your words) so that you’re proud of the product that you have and you’re able to be consistent throughout all your businesses that you’re involved in with your overall approach.

I’m really grateful… Congrats on the book; we’ll have a link to your website in the show notes page where everyone can get the book. I hope you have a best ever day, and we’ll talk to you soon.

Kathleen Shannon: Thanks so much.

JF574: LIVE-IN FLIP and His Plan to Contract the Work!

Listen to the Episode Below (27:22)
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Today’s guest is about to jump into his first fix and flip while he invests on the side. He won’t actually live in it during the flip (he will have his contractor rehab the home while he is absent), but it will be an owner occupied home. He is slowly but surely buying rentals and building his wealth!

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Tyler Flagg real estate background:

  • Owns three properties in Oklahoma City, Oklahoma
  • In process of closing on a HUD foreclosure for his primary residence then will flip it for practice
  • Been a pilot in the United States Air Force since 2011
  • His Best Ever book: Four Hour Work Week by Tim Ferriss

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