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JF1254: From Losing Money On The First Deal To Paying Cash For New Investments with JD Martin

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JD and his wife thought the best thing to do with their first deal was new construction. They didn’t make money on that deal, actually they lost some. They sat out for a little while before getting back into real estate. Now JD has a full time job and multiple part time jobs, along with having a portfolio of 12 properties he rents out. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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JD Martin Real Estate Background:

Real estate investor and Owner of Biz Brainstormers, a real estate business, and personal consulting

– Executive director of a utility system and adjunct professor for two major universities

US Navy Gulf War I veteran and holds a doctorate degree in public administration

– Based in Johnson City, Tennessee

– Say hi to him at: http://www.bizbrainstormers.net/

– Best Ever Book: Your Money or Your Life

 


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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 fluff. With us today, JD Martin. How are you doing, JD?

JD Martin: I’m doing well, how are you?

Joe Fairless: I am doing well, and thank you for joining us. Here’s the deal about JD – he has got some real estate experience that he’s gonna talk to us about, but first, thank you sir for your service; he is a U.S. Navy Gulf War vet.

JD Martin:  Thank you, I appreciate it.

Joe Fairless: I first and foremost thank you for that, and now let’s talk about real estate. You hold a doctorate degree in Public Administration, and JD is also a real estate investor and owner of Biz Brainstormers, which is  a real estate business and personal consulting company. He is the executive director of a utility system and he’s an adjunct professor for two major universities. With that being said, JD, do  you wanna give us a  little bit more about your background and your current focus?

JD Martin: Sure. All of that was right. What I do mostly in real estate is we have buy and hold properties; we don’t have a lot of them, we’ve got about a dozen of them, but we kind of started this off about 15 years ago was the beginning of our real estate adventure, and we lost a boatload of money and kind of got out of it for a little while. Then when we came back, we decided to focus on the rental properties, and since then we’ve created a pretty good stream of income and about seven figures in equity.

Joe Fairless: You started 15 years ago(ish) and you said you lost a boatload of money; how did you lose it?

JD Martin: Well, when we first started messing around with real estate, we were just middle-class workers and we had had a couple of houses that we had owned ourselves, and we decided to build a house. We had originally started off with new construction; we thought we would actually live in the house, and then as we kind of got into it, we thought “Well, maybe we’ll sell this and make some money and kind of go that route.”

The entire process turned into a disaster. Our timing was wrong on everything, our numbers were wrong on everything, our relationship with the bank was rough, and when it was all said and done, we had lost over $100,000 on that project, and we were people who didn’t have $100,000 to lose. So we lost this big chunk of money… We said, “Okay, I don’t think we’re gonna do real estate anymore. We’re just gonna work our jobs and maybe put a little away for retirement… We’ll come back to this maybe someday, or maybe someday never.”

Then about 5 or 6 years ago we had accumulated a pretty good chunk of equity, and we saw it wasn’t making any money, and we said “Well, what do we do with this?”, so we started looking at real estate again. We had some of the typical things people have – IRAs and a pension fund and things like that, but nothing that was really too exciting; it wasn’t making a lot of money… And we said, “You know, we’ve got this education of hard knocks from losing all this money on this new construction, so maybe we can use of that knowledge and apply it to something that will create a cashflow”, and it just kind of snowballed from there.

Joe Fairless: On the development deal, is that all on one deal that you lost 100k?

JD Martin: Yeah, that was all on one house.

Joe Fairless: And that was the house you were gonna move into and live in?

JD Martin: Yes, originally we had started off — it was going to be a new construction for ourselves. We had a house, we were gonna sell the house we were in while we were building this house; so we were gonna build this house and then sell what we were in. Then once we got into it a little bit, we said “Well, the market seems kind of slow for used houses, so to speak, but new construction is popping, so let’s sell this, make some money, and then we’ll kind of figure it out from there”, and neither strategy worked out.

Joe Fairless: What did you end up doing?

JD Martin: We ended up selling the new construction. So we did end up selling it, but we sold it at a huge discount. We had cost overruns everywhere, we had self-inflicted mistakes, things that we didn’t understand the numbers very well on, we had problems with our draws — we had construction loans from the bank that came through in draws and we had problems with the draws…

Then we had a competition that started when we were about maybe three-quarters of the way through this thing… We had major competition – a developer bought an enormous farm essentially across the street from where we were building; he bought an entire farm and just started dropping houses everywhere, and we could not compete at all with that.

Joe Fairless: Oh, man…

JD Martin: They were putting houses down so fast… These guys had houses down faster than we could do simple things like run plumbing. [laughter] And their margins — I mean, I don’t know what their numbers were, but I’m sure their margins were really tight… But they were doing 200 houses, so they could be really tight, and we just didn’t have that luxury. By the time it was all said and done, we were lucky not to go bankrupt.

Joe Fairless: Yeah, that was the perfect storm of disaster, what happened there.

JD Martin: It was a perfect storm of disaster. Yeah, it was a very expensive education. It worked out in the long run I guess, because when we started buying the rental houses, without that education, knowing what goes into — because we were the GC’s, so without knowing what went into electrical and plumbing and framing and roofing and drywall, and even things like grading property, without knowing those things then we probably would have been at a disadvantage when it came to looking at rental properties.

So we were buying things that were value-added, where the properties had become dilapidated and were gonna need work. And without that kind of experience and background and education, when we came in to look at these rental properties, we could look at them and say “Well, I pretty much know what’s involved in doing this, or I know what the cost is gonna be involved in doing this” and I believe it gave us a competitive advantage in the marketplace and we started buying houses.

Joe Fairless: Who’s “we”?

JD Martin: Me and my wife, I’m sorry. I’m married, so me and my wife, yes.

Joe Fairless: When the dust settled on the $100,000 loss, what were the conversations like between you and your wife about the project?

JD Martin: [laughs] Some of them were kind of ugly. We never came close to divorce or anything like that, but that would have broken a lot of relationships; it didn’t break ours. I guess the conversations, once the dust had settled and we had finished, it was like “Okay, how do we repair this damage?” We finally unloaded the house, but we were left with huge tax bills everywhere. So the question was “Okay, well how do we repair this damage?”

The way we repaired it is probably the way most middle-class people would approach it at that time – we just kind of put our noses down and got to work. We just went out and worked our jobs, and did a side hustle here and there, wherever you could make a little money, and applied all that money towards becoming solvent again and cleaning up the mess that we made and the mess that we were left with. That took a while.

On a middle-class salary, that’s a multi-year project, for sure. But after a few years we managed to clean up all that debt and clean up that damage, and from there we were able to start taking money and putting it to the side. We’ve always kind of lived underneath our means; we’ve never really been big spenders or ostentatious people, so we just started setting money aside and kind of accumulating this little nest egg. We didn’t really know what we were gonna do with that nest egg… Eventually we went into the rental properties, but at that time we just kind of set it aside as “Hey, let’s have something to fall back on and some cash reserves, instead of where we were before.”

Joe Fairless: For a Best Ever listener who might be going through something similar to what you two went through, and they have a significant other – husband or wife – any advice or thoughts that you have for them for how to approach those conversations? You just went through the situation for how to resolve it from a tactical standpoint, but from a more conversations standpoint before you get in that – any tips for those conversations?

JD Martin: I think the thing that helped us is 1) we never were accusatory towards each other; I’m sure I made the bulk of the mistakes, because I kind of spearheaded the project, so I would say a lot of the fault lay with me… But even things that my wife might have been kind of the lead on, or maybe didn’t put enough input on – we never got accusatory. When everything was done, we kind of looked and said “Okay, this is our mess. This is not Hey, look what you did to us, and now what are we gonna do?” We always kind of approached it as a team, and approached it as “Okay, so we went into this together, it didn’t work, we’ll get out of it together.”

Even during the process, there was a point where we knew we were gonna lose a lot of money… It wasn’t like we were all done and said “Oh, we’re gonna lose money!” There was a point about three-quarters of the way in that we knew it was gonna be a beating at that point; it was just “Finish it up and let’s get out of this.”

When we were at that realization, it was just a matter of being honest with each other, not holding back information, or even kind of holding back your feelings. There were times when I was scared, “Hey, we’re gonna lose the house that we live in. Forget about the new construction, we’re gonna lose our own house.” Just being honest with those feelings and not running from them, so to speak.

Joe Fairless: Now, you started putting away some money, and then how many years until you bought your next property?

JD Martin: It was about ten years. So it was a pretty good distance, but when you come out of something that traumatic for people… At that point, I had never even made $100,000; neither one of us had. Combined we hadn’t made $100,000. So when you come out of something that traumatic, it took a little bit of time before we had the — I don’t wanna say guts, but the wherewithal to get back into even looking at real estate. And even when we did, I remember the first couple conversations we had about it was like “Do we really wanna do this?” We’d been down that road before and it was ugly; it was not good at all.

So it was about ten years, but you have to realize that five years of that (maybe even six) was just cleaning up the damage, really, that was left over from that. So yeah, it was about ten years.

Joe Fairless: At that ten-year mark, right before you two pulled the trigger on the next deal, what was the conversation like, and were one of you going in one direction and the other the other direction? Was one good cop, the other bad cop on doing it?

JD Martin: To some extent I think that’s true. My wife was probably more bad cop than me. I think when we started having that conversation it was like “Okay, we accumulated this chunk of money” and we accumulated a pretty healthy pot of cash at that point… So we said, “We’ve accumulated this chunk of money, we have some IRAs and we have some other stuff, we could put this in an index fund or something else like that”, but neither one of us were comfortable with the stock market… We don’t know a lot about it; we have Vanguard funds and things like that, but… “So we have this money, what should we do with it?”

When we kind of kicked around the conversations of what options were out there, real estate kind of kept coming back, and we kind of looked at the market and saw what we thought maybe was an opportunity locally to get into doing some rental property.

I guess my wife was probably more the bad cop than me in terms of being more “Hey, let’s make sure we really have the numbers straight on this before we even think about doing it”, but we were more or less on the same team. I don’t think there was really that much disagreement either way on doing it or not doing it. We had a lot of conversations about it before we even started looking at houses.

Joe Fairless: Now let’s fast-forward to today – what type of deals are you buying?

JD Martin: What we’re buying today is we’re generally looking for value-added buy and hold properties. We’re usually looking for 2-3 bedroom houses, 1-2 bath; 2 bath if we can get it, 1 seems to be more typical. And we’re usually looking at things that we can get in at 50% or less of the after-rehab value. So if a house is worth $100,000 fixed up, we’re looking at things that we can pick up for 50k or less. Mostly, these houses will need anywhere from 5k to 20k worth of rehab to them, so that when we’re done… And we haven’t really leveraged much; we’ve leveraged a few houses, but most everything we hold outright. But when we’re done, if we want to leverage out of it or sell it, that we have a pretty good chunk of equity already in it that’s really — if we wanted to get our cash back out of it, we would essentially leave nothing behind; all of our own money would be cashed out. So that’s mostly what we look for.

We have a specific niche that we aim for, which is we’re in a college town, so we aim for neighborhoods that appeal to college students – mostly graduate students, but not exclusively… So we kind of look in that niche. We have a pretty narrow scope, probably a lot narrower than most real estate investors, but I still work a day job. I’m a few years from retirement, and we always look that this is just the way to invest this nest egg; we never really set out to be real estate moguls or create an empire, but as we went and kind of picked these houses, it just kind of snowballed from there and created a pretty healthy stream of income.

Joe Fairless: How many different streams of income do you have?

JD Martin: We’ve got a dozen properties. Other than that, of course I’ve got my day job, and I’ve got two part-time gigs. My wife is retired, so we’ve got her retirement income. If you looked at each property as its own income stream and then everything, we’ve got 15-16 streams of income, which I think is probably paramount to existing in this new economy where anybody who’s dependent on just their job, or even just their two jobs if they’re a dual income household (both people working), to me it’s — I don’t wanna say it’s crazy thinking, but if you are depending, you’re putting a lot of dependence on one or two things going right… So creating this multiple stream of income approach has been fantastic for us. It’s created a situation where I could leave my work and we’d just keep chugging along.

Joe Fairless: Do you manage your own properties?

JD Martin: We do. It’s a small portfolio, and everything is local. I can be at any property that we own in 15 minutes. So it’s a pretty small portfolio, and it’s a local portfolio.

Joe Fairless: How many hours  a week do you work in your day job?

JD Martin: My day job works out to roughly 50, maybe a little less than that. But I’m running a utility district and I’m not that far from retirement… So it works out to roughly 50; some weeks are less than that, some weeks are easier than others, but if you averaged it out, it works out to about 9-10 hours a day.

Joe Fairless: What advice do you have for someone who is looking to efficiently manage their portfolio — because you clearly have a system in place with a full-time job… You have to be incredibly efficient with your 12 rentals, plus you said two part-time gigs, which means you have to be even more efficient with your rentals… So what tips do  you have?

JD Martin: Well, the first thing – one thing we do, and we kind of did this in the beginning – when we pick up a house, the house is fully rehabbed before we put it on the market. So we don’t put it on with a roof that’s got one year left of age in it, or appliances that have seen their better days and are just about to break down… When we get a house, we go through it and anything that’s anywhere near the end of its life gets replaced, so that when we put it on the market and somebody gets in it, there’s almost nothing for us to do.

Some of our houses, we have been — other than going back for an inspection once a year, looking at it, we haven’t been back to that house for a year. And by putting that in place, that’s one thing we’ve done to minimize time that way.

Another thing we’ve done is we’ve been very stringent on our tenant screening. Our rental prices are probably a little bit lower than what we could get if we really wanted to push it on the market, but from my point of view, I want a big pool of renters, and I want a strong pool of renters. I wanna have my choice of the cream of the crop, rather than just whatever is left over. By doing that, we get strong renter pools and then we screen them very heavily, because I think if you minimize your tenant turnover and you minimize the aggravating tenants that you can get, it’s gonna really make your life a lot simpler.

So those are two things… Aside from that, I have a small pool of trusted contractors that I can use to handle things I don’t wanna deal with. I have a good plumber, I have a good HVAC guy, I’ve got a good electrician, so if anything major comes up that requires some kind of immediate attention, I can pick up a phone call… Actually, I will do everything by text mostly; I can pick up the text and say “Hey, you’ve got a heating unit that’s not firing.” He says, “Okay, I’ll be out there by 11”, and that’s the end of it; he sends me a bill and we’re done.

Joe Fairless: How much do your homes rent for on average?

JD Martin: I won’t buy anything that I don’t think I can make at least 1% per month of whatever my basis in it is. For me, I consider my basis whatever I paid for the property, plus whatever it costs me to rehab it, plus any ancillary opening costs – if I had to keep it the first six months and pay electric for six months, or whatever the case may be. So if I have a property that I bought for 50k and I put 20k in it, I have 70k in it, that house has to rent for at least $700 or I wouldn’t buy it.

Most of our properties are running for 1.1% to 1.6%, 1.7% above what we have in them, so the annual cash return on them, if you take out expenses, might be for some of them as low as maybe 10% or 11%, and for some of them as high as 17%, something like that.

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

JD Martin: My best real estate advice ever is know your numbers and believe your numbers. On the house we lost all that money in, we had no clue about numbers. We weren’t dumb people, we just didn’t really understand how to truly figure out the cost of holding that house and the cost of construction. We could figure out “Okay, we’ve got an estimate of $10,000 to do framing”, but we forgot about $2,000 in doors, and things like that. So we really had no firm handle on the numbers…

Even today, when we buy the rentals, every once in a while I’ll see a property and be like “Oh, I really want that property”, and then I run the numbers and they just don’t work. Then you get into the temptation of “Maybe I can make these numbers work, maybe I can kind of finagle here, and make this…” and it doesn’t work. If the numbers aren’t there, don’t pretend that you can make them there.

That’s my best advice – you have to know how to do the numbers, and then you have to believe your numbers; once you put it down, if you figured out the most you can pay for this property is 75k and they come back at 76k, you’ve gotta walk. It doesn’t sound like nothing, but if you’ve done your numbers and you trust them, and 75k is your top out point, then 75k and one dollar is over that point, and you’ve gotta go.

Joe Fairless: That’s also a great way to condition yourself if you do walk on that seemingly minor difference in price point, because then that would help you walk during more high stakes situations, because you’re not continually letting things slip for what you want, versus what you’re getting.

JD Martin: I agree. I think what happens is that you rationalize, you say “Oh, well it’s only $1,000 over what my max was.” Yeah, but your max is already the highest thing you could make this work at to begin with.

When I do a max number, I know that hey, if I have to pay more than this, then this property is not gonna make any money, and why would I wanna own any properties that don’t make money?

Joe Fairless: Are you ready for the Best Ever Lightning Round?

JD Martin: I am.

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

Break: [[00:20:43].29] to [[00:21:32].19]

Joe Fairless: Best ever book you’ve read?

JD Martin: Best ever book I’ve read in business would be Your Money Or Your Life, by Vicki Robin. Kind of maybe a close second might be The Millionaire Next Door. Both of those are life-changing in terms of changing your mindset. So business-wise, those would be probably my favorite books.

For enjoyment, I like Flight of Passage by Rinker Buck. It was a good book.

Joe Fairless: Best ever song you’ve written?

JD Martin: [laughs] Best ever song I’ve written? I guess I would have to say Gut, Guns and Nascar, because that’s a song that made it to the Super Bowl; although it personally might not be my own favorite, it’s certainly my most famous.

Joe Fairless: And it made it to the Super Bowl in what way?

JD Martin: It was played at the Super Bowl at the 49ers and Ravens. It was actually — I play in a professional rock band when I’m not doing all this other stuff, and we had played at some clubs and one of the sound people worked sound for the Tennessee Titans NFL team, and he was part of the sound crew for the Super Bowl, and our song was part of his playlist.

Joe Fairless: What’s your band?

JD Martin: My band is the Rhythmbrewers, and it’s rhythmbrewers.com if anybody wants to look us up.

Joe Fairless: Best ever deal you’ve done?

JD Martin: Best ever deal I’ve done was probably one where it was a foreclosure and we had put in an offer in on it and the bank didn’t move on it. Then later there was people coming out of the woodwork, everybody putting in an offer. There were probably 15 offers on this thing, and the bank realized they had something that would go for pretty good money, so they said “We think we’re gonna reject all the offers and just put it on the auction.” It looked like everybody was [unintelligible [00:22:57].25] Well, in between that, before they could get it on the auction site, an investment company came in and bought a huge portfolio from this bank, and bought maybe 1,000 houses. I guess the deal was when they bought this 1,000 houses, the bank made them take some things that were in areas that they thought they might not be as well received, and this house was one of them.

When this investment company had come through and bought this, they realized we had had an offering on it before, and they called our agent and said “Hey, are your investors still interested in this house? We don’t really want it, it doesn’t fit our portfolio, so we’re willing to just give it to them for their offer.” We said, “Oh, yes, we’re ready”, because we ended up with 60k in it, and it was worth about 150k. If we sold it today, we would make (I don’t know) a couple hundred percent.

Joe Fairless: What’s a mistake you’ve made on a transaction that you haven’t mentioned already?

JD Martin: A mistake I’ve made on a transaction that I haven’t mentioned already… I would say probably a house that I bought where when I did the numbers I had inadvertently left something out that the house that was being for sale, they had already priced it with leaving that number out. We got into a deal, and then when I went back and realized, “Oh, I really should have accounted for this…” It still ended up being a good deal even with that, but they weren’t willing to move on that number once we had come to a price. So it still ended up being a good deal, but it cost me a few thousand dollars just on the error of not accounting for that. I think it was the roof, and when we had gone through it we didn’t account for that in terms of our offer.

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

JD Martin: I’ve got this little website called BizBrainstormers.com, and I do kind of real estate and personal finance mentoring. It doesn’t really make any money… I charge a little bit of money; I do that just to make sure they’re serious, because I talk to a lot of people, and I’m on some other real estate websites, and I talk to a lot of people and there’s a lot of dreamers and tire-kickers out there…

So I charge a little bit of money, but it’s minuscule for the amount of time I spend with people. I wish that something like that was around when I was doing my first deal, because I didn’t even have anybody to talk real estate with at that point; we just kind of winged it. If we hadn’t winged it, somebody else that could have been a disinterested viewer could have said “Hey, you guys are getting in way over your heads here”, and maybe saved us a bunch of money. So I try to do that.

Outside of that, I meet a lot of times with investors that live locally and say “Hey, can we go to lunch and talk?” and I do that with them for nothing. I participate in online forums and try to give out whatever knowledge or advice I’ve been able to accumulate… So those are kind of the ways I try to give back.

Joe Fairless: How can the Best Ever listeners get in touch with you?

JD Martin: They can go to that website, which is bizbrainstormers.com, they can go to my band’s website, which is rhythmbrewers.com, they can just send me an e-mail, and I’ve got e-mails on both of those websites; they can send me an e-mail for me at a place there and I’d be glad to talk to anybody.

Joe Fairless: JD, thank you for sharing lessons learned and what you’re doing now that has built your portfolio. From the lessons learned standpoint, holy cow – timing and numbers. Know your numbers, know your timelines, and believe in your numbers and hold true to your numbers. Starting out with new construction right out of the gate is incredibly challenging, and it is something that if we do that, then we’ll definitely – as I’m sure you’ll agree – wanna be aligned with some other people who perhaps even have money in the deal with us, who have the experience… That way it mitigates risk.

JD Martin: I certainly wouldn’t recommend that as a starting strategy. I think there’s other ways to get your feet wet.

Joe Fairless: I completely agree. And when something like that happens, because as long as we’re doing real estate over a long period of time, we’re gonna have some projects perform unfortunately the wrong way, not how we had planned… And when we’re in business relationships or relationships in general, one insight that you have is don’t get accusatory, instead focus on solutions and really grow together, not grow apart. That’s something I have recognized…

When I was working in advertising, I worked with some people who when we got into a challenging situation, we knew that they were just gonna attack us, and we were gonna eventually grow further apart, versus it’s actually an opportunity to grow together as a team, and that’s an important part.

Then the additional streams of income – you’ve got lots of streams of income, from two part-time gigs, a day job, and then your rental portfolio, as well as how you lower or make the management as efficient as possible by fully rehabbing the homes before you put it on the market, that way you don’t get as many phone calls.

Thanks for being on the show, I really appreciate it. Thank you, again, for your service. I hope you have a best ever day, and we’ll talk to you soon.

JD Martin: I appreciate it, thanks a lot. That was a lot of fun.

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. I hope you’re having a Best Ever weekend.

Because it’s Saturday, we’re doing a special segment called Situation Saturday where our best ever guest talks about a sticky situation they were in and how they overcame it. How are you doing, Chris Clothier?

Chris Clothier: I’m doing phenomenal, man. How are you?

Joe Fairless: I am doing phenomenal as well, and nice to have you on the show again. Best Ever listeners, if you recognize Chris, that’s because he’s been on the show before. Originally, he was on episode 58, titled Turning Smiles Into Profits, where he talked about his customer service program and how they call every single client of their with this turnkey company every month, and get feedback.
From that interview, I implemented a question that you talked about, Chris. You talked about how you always talk to potential partners about the mistakes that they’ve made, and if they say they haven’t made any, then they either are being dishonest or they haven’t been in the game long enough. I actually ask that on my normal format ever since then, for the last 900 episodes, because of you.

Chris Clothier: Wow! Are you kidding me? 900 episodes – that’s cool! I’m glad I could contribute to that.

Joe Fairless: Yeah, and there have been so many good answers as a result of that. There are so many lessons learned just from you mentioning that one thing. I guess it was 900 days ago, I guess that’s how it works. [laughs] Ain’t that crazy? 900 days ago, whenever we talked.

Well, a little bit about Chris. He is the co-owner of Memphis Invest. It’s one of the largest passive turnkey real estate companies. Memphis Invest does over 100 million in annual revenue. They purchase over 600 single-family homes yearly in Memphis, Dallas and Houston. He’s based in Memphis, Tennessee. With that being said, Chris, do you want to give the Best Ever listeners just a little bit more about your background? And then let’s dive into the tough situation you’re in.

Chris Clothier: Yeah, absolutely. As you said so eloquently, I am a partner in Memphis Invest, and I am partners with my father and my younger brother. My older brother Kent, while maybe not being a partner in the company, obviously had a huge influence on us. He’s got his own real estate company out in California, but what’s important is that my family, all of us have been raised in this very entrepreneurial environment. Ever since we were kids — I started working when I was 11, and everything that we’ve ever done has been really customer service centric, no matter what the industry was, no matter what the particular company was that we started. Each of us has started our own companies, and always based on customer service, no matter what the product was.

For that quick little background, we’re managing, as you said, 4,000 properties for passive investors from around the country. We love real estate, probably more than anything, just being in business in general. We love having clients and vendors and team members and building things… I guess it’s in our blood, it’s in our nature, from doing it for so long to this point.

Joe Fairless: From managing 4,000 properties to buying a whole bunch of properties on an annual basis, to building companies, I know you’ve come across many sticky situations, so you’ve got lots of different stories to choose from. Which one do you wanna talk about?

Chris Clothier: Let’s talk about one that may hit closer to home for many of your listeners. It’s just about doing a deal yourself, and I’m gonna talk about bravery… Being brave enough to go out there and try and take on a challenge on your own, rather than feeling like you have to go with a partnership. It really boils down to… Early on, several deals that I had done went really well, and one went South really fast. But the point of it was that all of it I did with a partner, because I wasn’t brave enough to go on my own.

It’s interesting for me, because I look back on it… I had all the tools, I had everything that I needed, I just didn’t have the confidence and the bravery to go on my own, so I chose a partnership instead [unintelligible [00:06:15].15] but that’s a partnership that no longer exists and it’s a friendship that got hurt because of it, so I’d love to share that.

Joe Fairless: Yes, please do. You’ve piqued my curiosity.

Chris Clothier: Well, I was in Denver, Colorado recently at the Best Ever conference event out there in Denver. It gave me a chance to kind of go back to some of my old stomping grounds, where I got started as a real estate investor. It’s also the place I founded my first company, which was a grocery arbitrage company. I was very successful thanks to having some really good mentors and my family around me that helped me to build my first company successfully. And I was taking my earnings from that company and I began to invest in real estate.

The biggest challenge that I had was the fact that I should have been smart enough to look around me and say, “I’m a smart person, I’ve got good people around me, I’ve paid attention, I’ve got good mentors…” I built a business at the time that was very successful, but I still felt like I needed a partner in order to invest in real estate, the fix and flip kind of stuff. And rather than pick the best partner, I picked — let me just be clear… Great guy, phenomenal person. He was a good friend of mine, but the problem was that neither one of us had any experience in real estate, and the funny thing was we both were scared of losing, and rather than lose alone, we chose to lose together.

That’s what happens so often in partnerships… We made the decision to be partners for all the wrong reasons. Not because he had strengths and I had strengths, but because we both had a weakness, which was lack of faith, lack of bravery, lack of courage to go do it on our own. To be fair to him, he was already a long-term buy and hold landlord that was doing okay, but we were going to do some fix and flip homes.

In the end, we picked a couple of deals and we were doing well. We had no idea that we were spending twice as much as we needed to spend and taking twice as long to do it, but we were selling the houses and making money. And we mistook making money for success, if you know what I mean. We were not doing a good job of anything, we were just spending money.

Joe Fairless: Well, selling houses and making money – on the surface that certainly appears to be asuccess from a business standpoint.

Chris Clothier: I’m glad you said that, because you’re right. But that was our problem… Anybody that is successful over the long term knows that you have to track your progress, you have to know how many dollars you spend in relation to how many dollars you make. You have to know how everything correlates, all the cause and effect of what it is you’re doing.

For us, we were moving so fast… We both had other successful companies that we were making money in. Neither one of us were holding each other accountable to anything. One of the tips I always share [unintelligible [00:09:11].26] is “Inspect what you expect”, which neither of us were doing. We basically were just kind of relying on the other to be the smart one. Looking back, it’s really funny – we were making some money; we could’ve done much better, and what did us in eventually was a home that we chose that… This is how fickle real estate is. It was right there in Denver, and it was a matter of 200 yards – that was the difference between us making money and losing a lot of money. We lost over six figures on this deal, and it broke apart our partnership certainly.

We were just not really friends anymore because of it. There was a lot of animosity towards each other, because neither one of us were holding ourselves accountable, much less the other. The problem is that we purchased a home that was literally two blocks away from where it needed – both school district, taxing district… The way that homes were gonna be appraised and what would be used as comparable sales – it literally was the difference between a home being worth 500,000 and a home being worth 300,000. We owned the home in the four hundreds.

We held the house for a very long time. I continue to write checks for it, and write checks for it, and write checks for it. I tell people on the backside when it’s all said and done that I went into a partnership with someone that I was comfortable with, someone who told me all the right things that I needed to hear, like I was a good businessperson and I was smart, and I was obviously successful; I had money together, we would be able to fix and flip homes.

I did not partner up with someone who had the ability to run good forecasts of as far as what we’re spending, how to budget that money and how to model that money. I didn’t partner with someone who could pull comparable sales and could analyze that 200-yard difference, that two blocks that really sunk us. I didn’t partner with a person that had the right skill set for me, because my skill set was absolutely at my business, and I had money. I had the ability to stay organized and stay on point, but I didn’t know real estate.

My partner, unfortunately, didn’t have money, but also didn’t have the real estate skills that were needed, so he was managing a project that he didn’t know how to do. It ended up being a disaster, and I go back to the very first thing I said… When we’re choosing a partner and we’re choosing a partnership, I did it out of fear, and that is never a good reason to go into any type of  — whether it’s a real estate transaction or a business transaction, you should never enter one out of fear.
Like I said, we were fearful of losing money, so rather than losing money as individuals, we lost it together as a partnership.

Joe Fairless: Based on what you said, it sounds like you need someone who has the right skill set to complement you, or fill in the blank for whoever is the person who is looking for a partnership… But when do you know that you should have a partnership, versus going on your own and doing your own deal?

Chris Clothier: If your choice to go into a partnership is based on your own fear, whether it’s fear of unknowns, whether it’s fear of failure, whether it’s fear of taking on a really big project and being highly successful, which believe it or not, that’s a fear that a lot of people have. When they haven’t done a really big project – they’re perfectly capable of doing it, but the simple fact that they haven’t done it before is a fear that makes them bring on a partner instead.

So when you’re making a decision on whether to bring a partner in based on fear of what could happen, then you’re probably not ready to bring on a partner. It needs to be a partnership – and you nailed it perfectly, Joe… You need to take on a partner when you can look around the landscape and say, “I’m able to bring these particular skills to this project.” Maybe in my case I didn’t have the time or the experience to know how to do comparable sales, so I wasn’t sure how to comp a property properly at the time. I did not have enough experience negotiating with contractors to negotiate pricing. I had been basically a very passive investor up to that point.

If I was gonna partner, I needed to bring someone in that had the experience of negotiating with contractors, getting them hired, keeping them on track, because I knew all those things had to be done, I just hadn’t done them before. If I had just spent a little bit of time sitting down and thinking about it, I would have realized that even though I’d never done it, I negotiated with contractors daily. It was a different kind of contractor, but I’d been negotiating for years; I knew exactly how to negotiate a contract, I knew exactly how to negotiate work to be done… I could have easily contacted one of the top real estate agents in the area, because I knew the things to do, I just didn’t do them. I strictly chose a partner based on fear, rather than probably looking myself in the mirror and saying, “I know how to do this. I’ve been a successful businessperson, I’ve been in the local real estate investors association, I’m surrounded by smart mentors… I can do this.”

I chose to take the easy route, which was “I’ll get a partner instead and let him do these things. I’ll provide the money and make it on the backside.” And the worst part for us, Joe, was that we were successful for the first three or four deals we did. We made money.

Joe Fairless: Yeah, false sense of security.

Chris Clothier: Oh, yes… Absolutely.

Joe Fairless: One question I have… I’m a huge Tony Robbins student and he talks about how emotions like fear and being scared or being maybe depressed, they’re all action signals if we use them in an empowering way. I don’t remember what he said fear is and what that should lead us to, but I suspect it’s something like, “Get prepared.” If we’re fearful about something, then we need to either get educated or more prepared.

The question I have is along those lines… I have entered into partnerships with a good dose of fear, but then also it’s because I know some of the aspects that they’re good at that I’m not will help with the transaction, and it’s gone well. So I am fearful that “Hey, I really don’t wanna do this because I’m not gonna set up the project for success”, so how do you reconcile that with this approach?

Chris Clothier: You said something perfect right there… You are aware of your weaknesses. I’ve got a better way to put it – the things [unintelligible [00:15:49].26] on that particular deal, and it was that awareness that made you fearful to move forward without correcting that. What I’m talking about for me is I guess I had that same mentality, but I just didn’t recognize what I needed in a partner. Instead for me it strictly was “I like this person, I’m good at what I’ve been doing, he’s been good at what he’s doing… It will be fun to be in a partnership with this person. He and I can make some money together. We have done all this stuff together, so we can — whatever it might be… It might be playing softball on Thursday nights together, and we’re gonna meet for a happy hour…” Whatever.

These things that say “Hey, this is what makes us a good partnership, and he’s got time on his hands, he’s got some experience…” I was never asking the questions that you were asking right there – “Does this person bring to the table exactly what I need?” Forget anything else about it, and “Do they bring to the table the specific things that are gonna make me successful in this project?” Being fearful and not moving forward because you don’t have everything you need yet, that’s smart.

I love the way that you said Tony Robbins puts it, in the case of “Get educated, get yourself surrounded by the right pieces, don’t just stop.” But for me, I didn’t do that. I just chose a partner that I thought would be fun to hang out with and I can make some money with, and I thought if I do lose, we’ll both lose together so it’s no big deal, because we’re buddies.

Joe Fairless: Everyone loves losing over a hundred thousand dollars with a friend. You should experience that with all your best friends. I highly recommend it.

Based on listening to you and taking notes, I’ve condensed it into a five-step thought process, and I wanna run it by you to see if there’s anything else that you’d like to add. One is to know the skills that are needed to do what you wanna do. Two is to identify the skills that you bring, three is to identify the skills that are lacking, four is to know how you wanna structure it, and then the fifth would be when you approach someone saying, “Hey, I know skills are needed…” — and you don’t saying it exactly like this, but say, “I know the skills that are needed for this project X, Y, Z. I bring these skills, I think you can bring these other skills. I’d like to structure it as follows. What are your thoughts?” Is that the approach that you would take?

Chris Clothier: Yes. And I will add one asterisk for everybody to understand, and we’ll see if you agree with this. I was told by a very good mentor of mine that all partnerships end, and it’s the responsibility of those entering into the partnership to decide on the frontend how it will end. That includes — as he pointed out, he’s like “Look, at some point debt is chasing us all.” Man, I will not forget what you said up there on stage, that we’re all dying. I remember that when hearing you speak on stage, Joe, and that is true. So from the very beginning, set up how will this look, because it may look like one of you passes away at some point, and what happens next?

So he said, “If you will sit down and decide on the front end if this go good, if things go bad, should there be debt – whatever happens, this is how we’re gonna handle it”, then that partnership has the pieces it needs to get started up on the right foot. If you partner with people because you like hanging out with them, as I did, you very well may end up as I did, and that is no longer with a partnership, and possibly losing money.

Joe Fairless: Yeah, and I can tell you if you bring in investors in a partnership, they’re gonna ask the same question of “What happens if one or both of you die?” I’ve been asked that many times, and we have to make sure that it is written out in the agreement, because then we go, “Oh, good question. Let me show you point three sub. three, or whatever it is.

Chris Clothier: Yeah, “Let me show you exactly what will happen.” That’s good.

Joe Fairless: I love that. This has been great. It’s a very clear theme and story. Is there anything as it relates to identifying the right partners that you wanna mention that we haven’t talked about already?

Chris Clothier: I don’t know about exactly the things you need to look for, because everything is going to be different… But I love what you said earlier, I think clarity is really, really smart. When you recognize that you don’t need to move forward on something without having the right pieces in place – and that might be a partner – let that be a great starting point for you to start defining “What do I need?” I can’t say this is always gonna be the case, but I do believe that there’s no need to be in a hurry. There’s a need to get things done, and there’s a need to have timeframes, but there’s no need to be in a hurry.

When you know that you need to surround yourself with other pieces, get to defining it. Get to learning exactly what it is you need around you, and then go get it.

Joe Fairless: As far as partnerships go, we don’t necessarily have to have partners, we just need to identify the skills that are needed, and then perhaps we hire someone instead of bring on a partner, so maybe we hire a vendor to do that.

Chris Clothier: Well, like I said earlier, sometimes the skill is already in you, you just don’t know it. Maybe it’s just learning a different way to look at something, taking a different approach. Some of that happens when you surround yourself with mentors and you run your ideas past them and what it is you feel like you need to move forward on a project, and they’re able to educate you that you have these particular skills, you just need to hone in on it, you don’t know it yet. Or you don’t need to have a partnership to bring that skill, you’ve already got it. You need to bring it out of you.

Had I been told some of that back in the day, maybe I wouldn’t have moved forward on that partnership… Who knows? Maybe I still would have, because I would have had a different kind of fear, but hopefully you get the point there, that it’s all those steps: surround yourself with good people, know your strengths, know what you need, be clear, and see what happens.

Joe Fairless: Chris, where can the Best Ever listeners get in touch with you?

Chris Clothier: I am always at MemphisInvest.com. They can send me an e-mail, chris@memphisinvest.com, or they can go right there onto our website and take a look around. There’s tons of videos of me, I guess, and they can certainly register to get more information on our company. I’m more than happy to try and help people get educated.

Joe Fairless: I love this conversation. It is about when to find the right partner, or if to bring on a partner at all, and that is first know the skills that are needed for your venture, second, identify the skills you bring, third, identify the skills you need, and like you just said, make sure that you don’t have those skills and you just haven’t uncovered them yet. Lastly, look to structure it as follows for however you wanna structure it and, as you mentioned, having an idea of what the end looks like, because all partnerships end, we’re all gonna die, or it’s gonna go in opposite directions for whatever reason (who knows? life happens) so know how it will be dissolved when the time does come to be dissolved.

Thanks so much for being on the show, Chris. I hope you have a Best Ever weekend, and we’ll talk to you soon.

Chris Clothier: Talk to you soon, man.

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JF914: How to VISUALIZE Your Success Amidst Failure #SituationSaturday

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Imagining your success is a pivotal part of your journey towards it. Our guest visualized what he wanted and manifested his dreams by taking massive action after having clarity and a vivid dream of who he wanted to be. If you are failing or if you feel that your efforts are not earning you what you want, it’s time to change how you see yourself and visualize your own success.

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Bryan Harris Real Estate Background:

– Owner with Homesfor10k and Real Estate Mentor
– Built several multi million dollar businesses from conception to 8 figures
– By age 27 owned and managed an 8 figure real estate portfolio including over 120 properties
– Mentored over 300 individuals on how to start a real estate investing business
– Based in Memphis, Tennessee
– Say hi to him http://www.homesfor10k.com 

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JF905: Flying Planes, Flipping Houses, and Hiring the Right People

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Too busy doing what you don’t want to do, or the tedious things that need to be done? Hire someone! Today’s guest did just that and was able to close more transactions and remain an Air Force pilot.

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Bill Allen Real Estate Background:

– Owner of Blackjack Real Estate, LLC
– Active duty Navy pilot who fell into REI due to his constant military moves
– In 2016 he flipped 13 houses and wholesaled 54 in Pensacola, FL with plans to double those numbers in 2017
– While still working full time he has turned to systems and building a business
– He is now expanding to Chattanooga TN
– Based in Nashville, Tennessee
– Say hi to him at http://www.blackjackre.com
– Best Ever Book: Traction

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JF890: STORAGE UNITS Acquisition You NEVER Would Have Guessed and Quitting His Job 5 Days Ago!

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Extremely simple approach to acquiring storage units, yet very unconventional at this level. Our guest is a free man as he quit his job just five days ago, and now he’s investing full-time. Hear how he got started and how you can jump into storage units.

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Michael Rogers Real Estate Background:

– Full-time real estate investor and Owner of Chandler Properties
– After 15 years in the corporate accounting world, he retired from corporate job on January 20, 2017 to become full time investor
– Manages residential rental portfolio including 350 storage units and entrepreneur office space
– Also flips and wholesales properties thru http://www.SellMichaelYourHouse.com
– Based in Chattanooga, Tennessee
– Say hi to him at http://www.chandler-property.com
– Best Ever Book: The Essays of Warren Buffett

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

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JF722: 23-Year-Old Builds 26 Homes and How He Funds Million Dollar Deals

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Hold on to your hat, he’s 23 and he is putting together million dollar deals constructing 26 brand new homes. He’s young and highly driven, and he’s rocking the Nashville, Tennessee market. Hear how he found funding for this project and all other deals.

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Devan McClish Real Estate Background:

–  Owner of McClish Properties
–  Completed over 60 deals
–  23 year old currently developing several homes currently
–  Based in Nashville, Tennessee
–  Say hi at Facebook Devan McClish
–  Best Ever Book The Intelligent Investor

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JF672: Why This Investor Won’t Touch Single Family Homes Now

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Today’s guest is an accomplished real estate investor that purchases multi family properties including large multi family commercial zoned land. He shares his concern for having multiple exit strategies and why single-family resident purchases are not the best investments, hear his Best Ever advice!

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Rod Khleif Real Estate Background:

– Host of “The Lifetime Cash Flow Podcast”
– Participates in Tony Robbins seminars
– Started the Tiny Hands Foundation
– Based in Sarasota, Florida
– Say hi to him at: http://www.lifetimecashflowpodcast.com/

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