Ryan and his business partner have a successful flipping business which will net 1.8 – 1.9 million this year. With the large income, you would think they’re giving themselves large salaries. That couldn’t be further from the truth, Ryan and his partner only pay themselves $60k a year. Hear how they’ve grown to where they are and why they leave so much cash in the business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
[spp-tweet tweet=”“At the end of the day, direct mail isn’t working as well as it did last year” – Ryan Scialabba “]
Ryan Scialabba Real Estate Background:
- Started investing in real estate at 19 – currently 25
- Met business partner in 2015, formed Urban Capital Group
- Had first seven figure year in 2017
- Will buy and sell about 50 houses in 2018, netting over $2M
- Based in Pittsburgh, PA
- Say hi to him at: http://homebuyersofpittsburgh.com/
- Best Ever Book: Extreme Ownership
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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, Ryan Scialabba. How are you doing, Ryan?
Ryan Scialabba: Doing great, Joe.
Joe Fairless: Your last name is very fun to say, by the way.
Ryan Scialabba: [laughs] Thanks.
Joe Fairless: Ryan started investing in real estate at the age of 19; he’s currently 25 years old. He is the co-founder of Urban Capital Group, which was formed in 2015. Last year he had his first seven-figure year, and this year will buy between 45-50 houses. Based in Pittsburgh, Pennsylvania. With that being said, Ryan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Ryan Scialabba: Yeah, absolutely. Again, I appreciate having me on. I’m a long-time listener of the show so it’s pretty cool. I started wholesaling back in 2013. I was 19 years old at the time. I was in college, and I just decided that it really wasn’t for me… So I had a lot of conversations with my old man about wanting to go into real estate, get my real estate license, get into some form of investing… I didn’t know anything about that yet, so we ended up going to a flipping seminar; we joined up with some really good guys, some good mentors, and just started rocking and rolling from there.
Joe Fairless: Which seminar?
Ryan Scialabba: We went to a Fortune Builders, actually. [unintelligible 00:02:18.17] So we’re rocking and rolling… The first three months was really rough; I didn’t get anything done. I didn’t really even take any action… I just kind of danced around the perimeter. I ended up getting my first deal about six months in, and then actually in October of that year — and a lot of people who know me have heard that story… I actually lost my dad in a motorcycle accident in October of 2013, so the world just kind of stopped there at the moment, and I really had to decide what I wanted to do moving forward…
And after it was a pretty tough couple of months, but really thinking about the long-term and everything — one of his greatest experiences that I got to experience with him was just that feeling of freedom after having worked for someone his whole life, and just us doing things on our own… That was something that gave me the drive to really wanna go and build something entirely for myself and my future and my legacy.
In 2014 I started ramping back up, and then I met my partner in ’15. That’s when we formed Urban Capital. Now, fast-forward to 2018, we’ve got our team fully built; 14 employees, and then Arch and I. Most of the employees are on the construction side. We’re gonna do somewhere between 1.8 and 1.9 in this year on the flipping side, do between 12 and 13 million in retail sales, and traveling the world, having a little bit of fun, starting to get things to run a little bit more independently of ourselves, starting to head down that path.
Joe Fairless: Let’s unpack this a little bit. You gave some pretty phenomenal numbers and I wanna make sure I’m tracking properly… Because one thing I did not mention, that you had in your bio – because I wanted to clarify this… You’re gonna buy and sell approximately 50 houses in 2018, netting two million dollars. In my mind, netting means you’re going to make two million dollars in profit. Is that correct?
Ryan Scialabba: Yes. We’re pumping out somewhere around nine million dollars in sales at the end of the year. That’s gonna bring back in around 4.7, and then take away all the overhead and everything like that, we’ll break into that 1.8-1.9 margin there.
Joe Fairless: And is that split 50/50 with you and your partner?
Ryan Scialabba: Yup, exactly.
Joe Fairless: Let’s see… 2017, last year, was your first seven-figure year. What does seven-figure year mean exactly?
Ryan Scialabba: Well, we broke a million dollars in — let me clarify on that one, because it’s one of those things… We had a seven-figure year, we brought in well over a million dollars in gross profit, but the net number at the end of the year on the P&L was 986k.
Joe Fairless: Oh, man… [laughter] You should have done like a little donation, or something…
Ryan Scialabba: It is what it is… You know how the calendar year goes, but… I always joke around, because it really ticks me off, you know? [laughter] But no, I mean… It’s set up for a really good year. 2017 was a big team-building year. We made a lot of money, but we also invested most of that back into the company itself, ramping up the marketing, hiring all these employees, taking on the overhead, and bringing construction in-house… Because the goal was for us to be able to begin running independently and get out and travel a lot more, and still run the volume that we’re running at.
Up until six months ago Arch and I didn’t even take a salary. Arch is my partner. Now we only pay ourselves 60k/year and we just invest everything back into the business. The business itself is cash-rich; we have a lot of equity in some deals and we’re starting to get into some multifamily flips, some larger developments and stuff that’s sucking up cash, but all of it is just to continue driving the company forward itself.
Numbers are good, numbers are big, but it’s just to keep pushing forward.
Joe Fairless: Just so I’m tracking, you mentioned 1.8 million this year in income, on flipping, then 12 million income on retail sales?
Ryan Scialabba: Yeah, we’re agents as well – myself, and then we have an employee in our office now that handles all of our retail and wholesale disposition, and then I’m also an agent as well. The nicest part for us and our business – a lot of people see retail sales as a distraction when they’re investing, but a lot of times they’re right, it doesn’t make sense when you’re on 50/50 commission splits and things like that. We’re with a very, very investor-friendly brokerage overall where I’m on a 100% commission split. So when you start looking at the numbers that way, now your retail pipeline becomes that much more viable to really spend the time and money going after that.
Joe Fairless: Yeah, there is no commission split if it’s 100%, right? What do you pay on a monthly basis or annually for that?
Ryan Scialabba: We’re at $299 a month, and then $299 per transaction.
Joe Fairless: Got it.
Ryan Scialabba: It’s money, it’s really good.
Joe Fairless: Yeah. Okay, so 1.8 million in income and flipping 12 million in income and retail sales. Are those the main two income sources?
Ryan Scialabba: We wholesale too, but we don’t do that that much.
Joe Fairless: Approximately how much of income do you get from wholesaling?
Ryan Scialabba: 110k or 115k so far this year.
Joe Fairless: 115k?
Ryan Scialabba: Yeah, so we might tap out at 150k.
Joe Fairless: Okay, 150k. Got it. And then of the two million dollars of projected profit this year, what percent comes from flipping, versus retail sales, versus wholesaling?
Ryan Scialabba: Our 1.8-1.9 is directly profits from flipping projects, the sales of our actual rehab projects.
Joe Fairless: Got it. So now let’s talk about your business model, because we go into the numbers — we did this in reverse; usually I do the opposite, but that’s okay, it’s good. Now let’s talk about how you’re generating the income. Help me understand the math though – if you’re bringing in 1.8 million dollars in income from flipping, how are you making 2 million dollars in profit from flipping?
Ryan Scialabba: No, 1.8-1.9 is the profits. We’re gonna bring in around 4.7 in actual revenue.
Joe Fairless: Okay, got it. So 4.7 in income on flipping, and then 12 million in retail sales.
Ryan Scialabba: Yes. And the 12 million at the end of the day – that brings in like 200k, wholesale is like 150k, and then we’re projecting somewhere between 1.8 and 1.9 on the flipping side… So we will break the two million dollar mark this year.
Joe Fairless: Got it.
Ryan Scialabba: For me, I like to focus mostly on the flips, because…
Joe Fairless: It makes you more money.
Ryan Scialabba: Yeah, and the other things are ancillary, right? Flipping and internal construction is our core business, and what we’ve done is just we’ve got our core to where we’re comfortable, then we started building our retail, then we started wholesaling properties. We weren’t trying to do all of this at once, and I think that’s where a lot of people get caught up – looking at one deal eight different ways, versus being very niche, very in their lane, and then after building up experiences, building up a good pipeline of income, then bolting things on. That’s what’s really happened in the last 18 months for us, is the bolt-ons.
Joe Fairless: So each house is on average about 110k at the end of the project?
Ryan Scialabba: 150k.
Joe Fairless: 150k. Got it. Alright, so that’s where the 45-50 homes come into play, where you’re selling them…
Ryan Scialabba: We run off of 20% margins on the buy side, but we’re doing bigger flips… We’re buying them for 100k to 125k, we’re putting 150k into them and we’re selling them at 400k+, so we’re making 100k whops on those. We’re doing 6-8 of those a year; sometimes it’s good, sometimes it’s not… Sometimes we make over 100k, sometimes we make 80k.
Then on the smaller stuff, our bread and butter – these are those little ranch flips, the little Cape Cods, just like the stuff you have over in Cincinnati…
Joe Fairless: Hey…!
Ryan Scialabba: We’re buying them for 60k, we’re putting 30k into them and we’re selling them for 140k. So we’re making 25k at the end of the day.
Joe Fairless: I think that was a subtle jab from someone who lives in Pittsburgh to someone who lives in Cincinnati, but I’m not sure…
Ryan Scialabba: No, dude… We’ve got ugly housing stock. It’s not like flipping homes in Texas or California or New Mexico, where we’re talking about saltbox ranches on slabs. We’ve gotta be picky and choosy about the types of houses we buy, because they’re not extremely desirable on the resale side, you know what I mean?
Joe Fairless: Okay. How are you finding these properties at the volume in which you’re finding them?
Ryan Scialabba: Agents is really big for us, wholesalers is really big for us this year, and mostly direct mail marketing; we do pay-per-click, SEO, all of that… But I think the biggest thing too is that we’ve really positioned ourselves over the last two years as one of the larger companies in Pittsburgh, so it’s nice when — a big tactic for us is when the flipping seminars come into town, people know our name, and when they start wholesaling, we want them to start driving their leads to us.
But when I look at our marketing metrics for this year, at the end of the day, direct mail isn’t performing the way that it did last year. Our biggest buying this year has been from wholesaler agent referral and MLS, so far this year. It’s pretty interesting, actually… But we’re still spending the money on direct mail, because we know it works.
Joe Fairless: When you say it’s not working that well or as well as before, what metric are you basing that on?
Ryan Scialabba: Cost per buy. Last year I was at $2,500 cost per buy on direct mail. This year I’m up to $4,740; I’m looking at it right now. $4,740 cost per acquisition on my direct mail, so it doubled.
Joe Fairless: Same list?
Ryan Scialabba: We’re running different lists. I think a lot of your regular lists are getting tapped by many people… So the basics – your absentees, your owner occupieds, your equity lists… What we’re doing is we’re hitting those, but we’re also trying to tap into new things and just adding little nuances to the lists to see if they work or not. So it’s just been a big experimental year for that.
Joe Fairless: Your company has been around for about three years, and you said you’ve positioned yourself as one of the larger companies in Pittsburgh… How?
Ryan Scialabba: By saying it and doing it. All of our Facebook groups — I mean, as far as we know, we are the highest volume rehabbers in Pittsburgh; that is actually out there marketing, that’s in the communities… If there are other people that are under the radar – hey, that’s great, and props to them; we’d love to meet them. But as far as we know, we have positioned ourselves as the team that’s actually growing a team and investing back in… Because I think a lot of what you find in Pittsburgh is — if you came over here and you said, “Okay, who are the couple of companies?”, you’re gonna hear of a big landlord company called RE360, and you’re gonna hear of our company.
RE360 is a landlord company, but we’re really the only two that have even built out teams. You’ve got a lot of solo flippers, husband and wife flippers… And that’s great, because the standard of living is so low in Pittsburgh… If you come here and you flip four or five houses, you’re living really, really good. You’re just not gonna find too many companies out there that are really looking to go and do high volume.
Again, it’s not like your Texases and your Florida markets, where people are doing high-volume wholesales and things like this; it’s more of a smaller community market.
Joe Fairless: Do you have to have your high volume in order to support the overhead that you have now with the 14 employees?
Ryan Scialabba: Yes and no. I’ll give you a couple of metrics that we track, and this is kind of gonna be where my best advice comes from. The way that we look at things is we have ten in-house construction employees – and this was a big hurdle for me to get over, but my partner explained it best… He goes, “When we’re talking about construction money, it’s anyway money. Now we’re controlling the material, the process and who’s on the job. So we’re gonna spend the construction money no matter what, whether it’s going to GC’s or subs. We would rather control the process, and the system, and everything that goes into the houses, because we feel like we’re that much more efficient than the best GC’s in Pittsburgh.”
So that part of it is “anyway money”, and that’s funded by lender draws. So whatever our overages are, including our overages on the year – let’s say they’re 10%, and then our insurance, that’s our actual overhead on the construction team; let’s call that about 70k, or two extra houses.
So if our team in-house can knock out two extra houses per year than a GC team, well I’m gonna take that deal all day long, because I can control the process.
So the way that we track this – our teams are built out at $75/hour, whether it’s three-man teams or four-man teams. That’s $3,000/week in labor. In your lower-end markets, or middle-markets, whatever you wanna say, that’s what flippers can afford anyways to get $30,000 flips done.
If we’re talking $7,500/week material and labor, well I want a $30,000 job to be somewhere between five and six weeks. So we build out based on $75/hour teams, and then we say okay, if our one team – as long as they can do eight houses per year, we’re in really good shape. If we get anything above that, that’s gravy.
That’s how we initially started building out these teams, and now we’re up to four internal teams. Basically, we said okay, our in-house guys can very easily complete 32 $30,000 rehabs per year. Then you tack on your bigger projects where we’re subbing out and putting GC’s on those, like our gut jobs – we run those like new construction… Like I said, we do another 6-8 of those.
So we’re averaging 15-17 active job sites going at a time, to where guys are bouncing on and off of them. So it’s really kind of become a beautiful little orchestra that I give all the credit to my partner and project manager for building that out, and I just track the numbers and make sure it makes sense.
Joe Fairless: Where are you getting your money from for these properties?
Ryan Scialabba: Private money. I actually have kind of a crazy story, man… I’m back in scramble mode. We actually just lost our largest private lender; he had a heart attack at 52 years old… And he had somewhere around 1.3 with us.
We don’t need that much money. We usually have about four million going for these projects. We basically work with four or five lenders, so him passing away has put me in this major money scramble, because I’m like “Oh my god, a quarter of my money is kind of off the table…” So I’m having to learn how to go back to the basics of raising money, and I’m not gonna lie, it’s kind of uncomfortable and challenging again, even with such a track record, just going out and finding these guys. It’s put me back out of my comfort zone, but I kind of like it.
Joe Fairless: What are the terms?
Ryan Scialabba: 12%. We pay everyone 12%, and then the biggest thing that we try to do is get interest defer at least three months. That’s why we try to do, where about half of our money is about three months out interest-deferred. Because for us, that’s just — are you gonna put your cash out up front, or are you gonna put it out at the end? I’d like to put it out at the end, you know?
Joe Fairless: And no points, or anything?
Ryan Scialabba: Yeah, no points.
Joe Fairless: How long does the project typically take?
Ryan Scialabba: $7,500/week is the metric that we try to hit, so if it’s gonna be a $30,000 job, we try to be in between five and six weeks. A big metric we’ve been tracking this year and trying to get better at tracking is the time it takes from when we say a job is complete to the time it actually goes on the market… Because that last year was a major killer for us; it literally stalled our business out. We would get to 98%, and then we just couldn’t get these dang houses on the market.
It’d be like, “Okay, it’s a five-week job, but it took us nine weeks to actually get it on the market; what the heck happened here?!” If you’re not looking at your numbers, tracking things, then you wouldn’t know that… So that was something we tried to close the gap on this year, and it’s been a challenge, but it’s getting a lot better.
Joe Fairless: So from the lender’s standpoint, what is it, on average? Eight weeks, or nine weeks total?
Ryan Scialabba: Well, in and out of a project we’re averaging right around four months on the smaller ones. When you’re getting into 50k-60k rehabs, I would jump that up to six months, and then our 100k to 150k rehabs we’re usually 8-9 months into those projects front to back. And obviously, that’s conservative. A lot of times our biggest thing with our guys that give us three-month defers – we try to not make an interest payment. That’s our goal. If we cannot make an interest payment or just make one, then we consider that a win.
Joe Fairless: I’m thinking about my investors, and how most of them are more interested in assessing an opportunity and then getting locked up with terms, so they don’t have to continually reassess opportunities. I imagine that’s gonna be a challenge, or you’ve come across that challenge with investors… Larger investors; not investors who are putting in 50k or 100k, but another four million dollar investor – I’m guessing that they’re gonna want something that they have to continually put focus on every nine months. How do you solve for that?
Ryan Scialabba: I’ve never even been in the room with a four million dollar investor.
Joe Fairless: I thought you just —
Ryan Scialabba: 1.4.
Joe Fairless: Oh, 1.4. Oh, you usually HAVE four million dollars out. That’s — I’m messing up your numbers all day long, aren’t I? [laughter] I love misquoting people, and then that way I can tell the story that I’m looking to tell. It works out for me.
Ryan Scialabba: I know where you’re going with it. So for us, we’ve been working with these guys — I mean, I have one guy, I’ve been working with him… He lent to me on my first flip… So what happens is he went out and he started raising money at 10%, and then he gives it to us at 12%. Now, obviously, not everybody gets the same terms, but because we’ve been with him so long, he’s kind of been raising the money for us… And that’s happened with two of our guys.
The guy who just passed away – his first loan with us was $100,000. Then as we built trust and as we built rapport, all of a sudden he had half a million, and then all of a sudden he had a million with us… Then we looked at the board and we’re like “Man, where did you get all this money?” [laughter] He’s like, “Well, I’ve been slowly pulling out of my other investments, because you guys have been my safest bet when I look at the real estate.” Because a big thing that I’ve been — and I’m obviously kind of like a numbers guy, but I think that that’s very important with this business… A number that I tracked at the end of last year was “What did we borrow at?”, so our initial ARV versus what our loan was – what was our LTV? It’s always 70%, right? For us, it is. We always borrow at 70%, we don’t borrow any more.
So I said, okay, based on that ARV, and then what did the projects actually sell at? What was their ending LTV – it ended up being at 60%. So I went back to all those lenders and I said “Look, I just wanna prove to you how conservative we are as investors, because look at where your LTV started and look at where it ended. It wasn’t the other way around.” Some of them didn’t even understand what I was telling them, but the more sophisticated ones – that was their favorite metric they had heard. They went “Wow, no one’s ever showed us this.” They’re numbers guys, so they loved it.
I think if we are getting back into working with higher net worth guys, they just wanna see the proof, but you’re right, they don’t wanna get caught up in the details of the deals.
We’re working on a development right now where we just raised 2.4 million from the builder, and it was a handshake. We ended up doing loan paperwork and stuff, but they were just kind of like “Alright. Yeah, here’s the terms, and we’ll let the attorneys figure out the rest.” That was a massive eye-opener for me, because I was just like “Okay, this is how business gets done at a higher level. Let’s figure out the x’s and o’s and let the rest of the team dot the i’s and cross the t’s.” That was the insight.
Joe Fairless: What’s your best real estate investing advice ever?
Ryan Scialabba: If you’re just getting started, you need to decide whether this is gonna be a hobby for you, or you’re gonna turn this into a business… Because those paths are two completely different paths. If you’re gonna flip four or five houses a year, 90% of what we just talked about probably doesn’t pertain to you as far as metrics and tracking and reinvesting back into your business and looking at cashflow and things like that.
But if you’re going to run a business, be very prepared to constantly be investing back into your business, to be uncomfortable, to make those hires and to build out that team, because that is where momentum is built. I always say “Entrepreneurship is simple – it’s a multiplication of efforts and how efficiently you can make those efforts happen.” If you’re not willing to reinvest back in and continue to build out that team, then it’s gonna be a very tough go.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Ryan Scialabba: Let’s rock and roll.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Break: [00:24:37.03] to [00:25:40.29]
Joe Fairless: Best ever book you’ve recently read?
Ryan Scialabba: Extreme Ownership by Jocko Willink.
Joe Fairless: Best ever business decision you’ve made recently?
Ryan Scialabba: Hiring a team and building a team.
Joe Fairless: Best ever deal you’ve done that we haven’t talked about?
Ryan Scialabba: Last year we made 295k on one single-family flip.
Joe Fairless: What’s your average profit margin?
Ryan Scialabba: In between 45k and 50k.
Joe Fairless: Okay, so what’s the reason…?
Ryan Scialabba: We bought a house at just a higher price point; we bought the house for 200k, we put 120k into it and we ended up selling it for 630k. I actually screwed up at the end of the day… I thought the house was worth 450k, 475k, and the market shifted and all of a sudden we were sitting on a goldmine. We had comp pop down the street, I looked at price per square foot, and we went for it and we got it. Some people out of California bought it cash, so… I guess I got lucky.
Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?
Ryan Scialabba: I bought a house recently with no plumbing in it, and I’ve also recently bought a house that we thought was gonna be like a $3,000 foundation bid, and it ended up being $15,000 worth of work. That’s probably gonna suck.
Joe Fairless: Best ever way you like to give back?
Ryan Scialabba: I do a ton of free content on my Facebook and my Instagram. I’m not selling any courses, I’m not doing anything, I’m just passing on what I learn. Then I also partner on Flip Talk Podcast with Don Costa, and I do the Rookie Playbook with him, so… Just helping people get started from zero experience all the way through their first year in business. It’s been a really cool project.
Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about your company?
Ryan Scialabba: They can find me on Facebook. Just go to facebook.com/theurbaninvestor. On Instagram I’m @urban_investor, and then our company website is homebuyersofpittsburgh.com.
Joe Fairless: Lots of lessons learned today, from how you’re making the money that you’re making, where that’s coming from – it’s coming from flipping the projects – how you approach flipping, and how you’re getting deals now, through agent referrals and MLS… How you used to get a lot of your deals – through direct mail – and how that’s gone up and how you’re assessing that… The approach that you’re taking when you work with private money lenders, and everything in between. Very detail-oriented conversation, I’m grateful you were on the show. I hope you have a best ever day, and we’ll talk to you soon.
Ryan Scialabba: Thanks.