In This Article

Here’s a common, nasty-surprise scenario many beginner investors have to confront: An investor with a few properties makes a move to expand their portfolio. They have an excellent credit score and are confident that they’ll have no trouble getting future loans. Except that the lender denies them financing. 

What happened? Actually, the investor did nothing wrong, per se—they just hit the conventional loan limit imposed by both Fannie Mae and Freddie Mac. Most new investors are unaware of this cap, which is 10 properties per investor, including your primary residence, until they hit it. 

The wrong conclusion to make here is that, as an investor, you don’t have any way of scaling your business. But the cap does mean that you have to do some financing research and planning beyond your ninth property. Investors should be thinking about strategic financing as early as possible if their goal is to scale their portfolio.

Here’s how to avoid the nasty-surprise scenario and reframe your investment property financing as a scaling strategy decision made before you buy your first property—not a problem you solve when you’re already stuck.  

Why Do Fannie Mae and Freddie Mac Have the 10-Property Cap?

Once you cross the 10-property threshold, Fannie Mae and Freddie Mac stop viewing you as an individual investor and start viewing you as a commercial enterprise, one far more exposed to economic swings. Below that threshold, financing is based on your personal financial health. Beyond it, your personal finances no longer matter: lenders need proof your investment business can weather a downturn or vacancy spike, and your income is disregarded entirely. This makes sense given that Fannie Mae and Freddie Mac are GSEs whose mission is supporting primary homeowners, not commercial investors.

The Mistake: Treating Financing as a Deal-by-Deal Decision

This is a shift in perception, not in your actual finances. Your income and credit score haven’t changed, only how lenders see you. That means scaling investors need a mental shift too: stop treating purchases as linear, one-at-a-time decisions and start strategizing ahead. If growth is the goal, your financing strategy should be in place by property #2, not discovered by accident at loan #11.

The Solution: Portfolio and DSCR Lending

If this is all beginning to sound a little esoteric, rest assured: There are practical solutions that go along with the shift in strategy, and they’re widely available to investors. They are portfolio and DSCR loans, offered by lenders such as LendingOne, which work differently from conventional loans. These are asset-focused loans, not borrower-focused loans (which is what conventional loans are).

Instead of assessing your ability to cover your debt, a DSCR (debt service coverage ratio) loan assesses the property’s ability to cover its own debt. Typically, a DSCR lender will look for a DSCR ratio of 1.2 or higher; that is, they’ll want to see that your property generates at least 20% more income than is needed to cover costs. 

A DSCR loan is a great option for investors who are still planning on buying investment properties one by one. If you’re planning on owning a total of 15 properties, for example, DSCR loans will help you overcome the 10-property threshold. 

However, if your plan is to own and manage a significant number of real estate investments, you’ll need to start looking into portfolio loans, which assess an entire portfolio’s ability to cover unexpected costs rather than the financial capabilities of individual investments. These loans are efficient and crucial for investors looking for significant expansion of their business or those planning to consolidate debt. 

What Planning Ahead Actually Looks Like

It can all sound far-fetched if you’re on your fifth property with conventional loans. But still, if your long-term vision is a substantial property portfolio, you need to start thinking differently from the very beginning. What that can look like in practice is lining up a DSCR/portfolio lender now, before you need one. 

What you don’t want to do is delay this strategic shift until you hit your ninth property and start getting rejected by lenders. Trying to scramble for financing your next property will set you back, resulting in deals that fall through and, ultimately, a less successful investment business. 

LendingOne is a lender built for the investor who plans to scale—not just a “next option” once you’re rejected elsewhere, but a strategic partner from earlier in the journey. LendingOne’s DSCR/portfolio loan products are flexible and come with options for new investment purchases, refinancing, and cash-outs. Moreover, there are options for break-even properties, which will hugely benefit investors who can’t quite meet the stringent 1.2 ratio requirement for a DSCR loan. 

The best place to start is by contacting Lending One to discuss DSCR/portfolio loan options as part of a long-term scaling plan.

Henry:
Real estate investors love to talk about things like cashflow or appreciation, but they rarely talk about the total impact that a single property has on your net worth. You may generate a little bit of cash flow from real estate investments in year one, but the real power comes from buying a great asset, holding it, and letting it run its course. And when you actually do the math on a property you’ve owned for five, 10, or 20 years, the results are eye-opening. Every one ordinary rental property can create hundreds of thousands of dollars in wealth. Today, Dave and I are breaking down a couple of properties from our own portfolios to prove that point. These are actual deals that we own and manage, and we’re going to share all the real numbers. Are there bumps in the road? Of course. As you’re about to hear, you can overpay for a property.
Renovations can go over budget, but real estate is far more forgiving than you think. If you buy a good asset, play the long game, and stay patient.

Dave:
Hey, everyone. Welcome to the BiggerPockets Podcast. I’m Dave Meyer, joined by my friend and co-host, Henry Washington. Henry, what’s up, man?

Henry:
What’s going on, buddy? Good to be here.

Dave:
Yeah, it’s going to be a good show. We’re doing something a little bit different today, and I’m excited to talk about it because we often discuss acquisitions, buying new properties. We debate the benefits of cashflow versus appreciation, but we don’t always talk about what might be the most important thing in real estate, which is sort of the cumulative benefit of real estate and how a single property contributes to your portfolio, to your net worth, to your financial freedom mission over time. So that’s actually what we’re going to be doing today. Henry and I have each wrote down some information about a single deal that each of us has done in the past. And we’re going to talk about the ways that a single deal evolves and changes and grows over time. And I think this is going to help everyone, not just help manage their individual properties and the things they already own, but going back to the acquisition phase, help people pick which deals they should be buying today to maximize that benefit and advantage over time.

Henry:
Yeah, this is super fun because when you study real estate like online, social media, books, podcasts, all of it, it’s all talking about what it’s like to purchase property, what it’s like to disposition property. And there’s tips and tricks for operations, but you never really hear the details of how an individual property is

Dave:
Performing

Henry:
Over time in someone’s portfolio. It’s like this missing link of real estate study.

Dave:
Yeah. People are like, “Oh, I bought it for X and then I sold it for Y,” but they never tell you what happened in between. And although sometimes those equity numbers are real and they are impressive, it’s not the only benefit. Or in between buying it for a hundred and selling it for 300, you put 400 into it and you didn’t actually make any money. So we’re going to go into it. And I picked what I think has been sort of an average deal for me over time. It did well. It’s not the best deal I’ve ever done. It’s not the worst deal I’ve ever done, but sort of just representative of a deal that I think works for people. But let’s do yours first. Tell us about what deal you’re bringing.

Henry:
So I bring this property up because it had a lot of hiccups, but I’ve held on through them and I’m glad I have. It’s an amazing property. So this is an eight unit property that I bought. I closed on it, I believe, January 2nd or 3rd of 2020. So this was literally as the pandemic was becoming a thing.

Dave:
Right before toilet paper weekend.

Henry:
Yes.

Dave:
When everyone was freaking out. When

Henry:
People were wearing grocery bags over their heads, tucked into their clothes, going to the grocery store. When no one knew what was happening, when it was really, really scary still. Oh God. What a
Crazy time to close on a property. And my biggest project to date. So I paid $500,000 for this eight unit property. It’s across the street from the University of Arkansas. So it is a fantastic location, but it needed quite a bit of work. And I made the classic newish investor mistake of underestimating what the rehab was going to take. So given normal times, I underestimated that rehab. But if you remember what happened during that time was it started to get really hard to find anybody that wanted to go outside and do any work. And the cost of materials and labor went through the roof. So I think I budgeted somewhere around $100,000 for the renovation of this property, and we probably ended up spending closer to $250,000 when it was all

Dave:
Set

Henry:
Down. Whoa.

Dave:
And you bought it for five?

Henry:
500,000, yes.

Dave:
Well, that’s a good buy. Eight units.

Henry:
Great

Dave:
Buy. 500,000. Yeah. I mean, 60 something thousand dollars a unit. I imagine even in your area, that’s pretty darn cheap.

Henry:
Phenomenal buy, especially for the location. And so performance-wise upfront, I mean, this property ate my lunch because we blew through that $100,000 pretty quick.

Dave:
How’d you finance that? I mean, if you were budgeting for 100K, how’d you get the other 150?

Henry:
We did a commercial loan from a local bank. It was a commercial construction loan. So they gave me 90% of purchase and $100,000 for renovation. So they gave me 100% of the renovation costs. I had to put down 10%, so I had to put down $50,000. And then we actually got the seller to carry that back on a note for a couple of years. So we paid him 10% interest on that seller carry back of the down payment for

Dave:
Two

Henry:
Years while I was renovating. So I didn’t have to come out of pocket any money to buy this property.

Dave:
But wait, when it went from 100 to 250, where’d you get the extra 150?

Henry:
Yeah, great question. So about 50 grand of that came out of my pocket, maybe a little more. And then the remaining, we were able to tap into the equity because the equity bump that we got during the pandemic years was good enough for us to tap into some of that equity and pull out the rest that we needed. And so the bank essentially gave us a little more on our line of credit to finish up the renovation.

Dave:
Still not looking good for you right now. No. If you’re following along, if you’re betting on this one. No, it’s not great. It’s

Henry:
Not great at this time.

Dave:
Your polymarket odds are very bad.

Henry:
We’re carrying the note during all this time. We’re renovating. There’s nobody living there because we had to essentially put everyone out. Everybody either left and the one or two people that stayed were problem tenants who weren’t really paying anyway. And so we had a completely vacant property that we were renovating. I was carrying the note on it. Those were dark days. Those were dark, dark days. And so when I bought the property, rents were at about between three and $500 a unit. That’s how not great these units were. These people were just slum lording it on this property. And we were able to start getting renovated units leased at between 1,000 and $1,200 per

Dave:
Unit. How big were they? Two bedroom?

Henry:
800 square feet, two bedroom, one bath.

Dave:
I mean, I imagine you get that from a college student all day.

Henry:
All day long we were able to get these rented. We also added laundry to each unit, which helped boost the rent and helped boost desirability. And so once we got that first unit online and saw how quickly we got it rented, we knew we were going to be okay, but it was a long ride to get there. And I want to point that out for people because real estate is truly a long game. When you hear me talk about this property, it sounds great. Yeah, I bought it. I paid $500,000 owner finance on the down payment. I didn’t have to put any money out of pocket. And then we renovated it and we’re renting the units for a thousand to $1,200 a unit. That sounds amazing.

Dave:
I mean, you went into the red for a while, it sounds like. For

Henry:
Several months during the renovation.

Dave:
And even then, your cashflow is still good, but you probably couldn’t have sold it for a profit even though the equity was probably pretty good just with transaction costs and paying off your debt. It just takes time. You have to let the thing run its course.

Henry:
It takes time. And I think the thing that people don’t talk about with real estate is that, yes, I was able to carry that property, but what carried that property? Money from flips and cashflow from my other cash flowing rental properties. Cashflow is great, but you can’t always rely on it. If I was relying to live off of my cashflow, I might not have been able to sustain holding this property through the downtime we had of having to take everybody out. And the renovation, not only was my budget more than doubled,

Dave:
But

Henry:
My timeline went longer because of the state of the country at the time. And there’s literally nothing I can do about that. There was very few people that were working at that time. And so that’s why we say you have to have some other sort of income stream. Just because you bought a great deal doesn’t mean you’re going to be able to hold onto it. My other assets in my portfolio are what kept me afloat with this property. And I’m glad that it did because we talk about real estate being the long game. So now we’ve got eight renovated units. They’re renting very well. And we did an appraisal recently as I was refinancing this property. This property appraised for $1.4 million.

Dave:
Wow.

Henry:
So not only is it cash flowing great now, but it’s got a crap ton of equity in it because of the location that we bought it in, because of the appreciation in this market in general. And that’s the paper appraisal. My agent said that I should be able to sell this for 1.5 to 1.7 all day.

Dave:
And how much debt is on it?

Henry:
$720,000.

Dave:
Okay. So you’re walking with eight after sales expenses? Yeah, it’s amazing.

Henry:
And the cashflow is decent. My note on this property, principal and interest run me somewhere around $6,200 a month. And we’re bringing in over 10 in net cash flow. And obviously it’ll depend. So there’s four units that we did a lighter renovation on and four units that we did a complete gut overhaul on. So the complete gut ones, they get 12, 13, 14 depending on what we can get for it at that time. And the ones with the lighter renovation get anywhere between nine to 11. So we’re above 10 grand in gross rents, paying about 6,200. You take some expenses. It’s not a crap ton of cashflow, but

Dave:
It’s still

Henry:
Positive cashflow and crazy appreciation.

Dave:
Yeah. So what are you going to do with it now?

Henry:
I’m going to keep this one forever.
I love the location. I’d love to be able to give it to my kids. There’s going to have to be some other maintenance items I’ll have to do big ticket. That parking lot in the back will have to be redone at some point. It’s an asphalt parking lot and it’s wearing down. So I’d like to come back with something a little more durable, maybe do some concrete back there. It’s going to be quite a big capital expense on that property. Some of the HVACs are getting older that we’ll have to replace soon. But in terms of location and appreciation and rent growth, you couldn’t be in a better location.

Dave:
So rents are still growing. You think the cash flow will get better over time? The

Henry:
Cashflow will get better over time, especially as I start to pay this unit off. But this is one I plan on keeping in the fold for a long time.

Dave:
So I mean, yeah, the strategy, which I like is you have a great assets that it’s appreciated. Maybe it’s not a great cash cow, but if it’s in a great location, it rents well, that’s like a prime property to pay off over time. Whether you do it quickly or just wait 15 years, that’s just one to hold onto.

Henry:
Yeah, absolutely. The longer I hold it, the more valuable the land and the asset is going to get just because what’s around it. The University of Arkansas has grown since I bought this property. So it’s like they’re inching the campus closer to me. So I’ll take it.

Dave:
Even better.

Henry:
Right.

Dave:
This isn’t some crazy thing. You just bought a good asset at a really good price, renovated it, made it more desirable for your tenants, increased the occupancy and the rents, and that’s it. Yeah. That’s just the formula, but it just takes time. It doesn’t work in the first year or the second year. It sounds like you weren’t trying to pull off a perfect burr and refinance 100% of your money in nine months. It was just like a patient approach. You found a great asset, you figured out what was going to work with this particular property and didn’t try and force anything out of it that wasn’t going to be realistic.

Henry:
Yeah. And I think part of the key here is I didn’t use short-term financing in the terms of hard money. So my interest rate was very reasonable.
And the construction period, so I had a 12-month construction period where I’m paying interest only. That allowed me to keep my holding costs lower than if having to pay principal and interest during a time when it was very hard for me to get this thing up and running due to underestimating the rehab and then the situation that was happening in the country with the pandemic at the time. So yes, this is a very run-of-the-mill real estate deal. Buy a dilapidated asset, add value to it and rent it out. But I don’t think people often understand that sometimes that doesn’t go smoothly. If you don’t want to lose the money you have in the asset, you’ve got to be able to hold. And had I not had other cash flowing assets and had a stream of income through flipping, plus I had my day job for part of this, all of those things allowed me to sustain and carry that property through it bringing in absolutely no income.

Dave:
All right. Well, this is a great example that everyone can repeat. You don’t have to go out and buy commercial property, but what Henry did, buying an undervalued asset, fixing it up, renting it out, getting appreciation, using it to finance other deals. This is the benefits of holding onto real estate for a long time. And we got to take a quick break, but after the break, I’ll share with you an example I have. Very different approach, very different property, but that still showcases how the long game usually wins in real estate. Stick with us. We’ll be right back.

Henry:
All right, we are back on the BiggerPockets Podcast, and Dave and I are talking about properties that we currently own and giving you essentially some behind the scenes on what it’s been like for us to own and operate these properties and what it has done for our portfolios having owned and operating these properties. So I’m very interested to hear what kind of property you brought for us, Dave. I

Dave:
Have the total opposite end of the spectrum. Just a single family home that I lived in for a couple of years. So it’s not a traditional house hack or what most people think of as a house hack where I was renting out one unit and living in the other. My girlfriend at the time, wife now, and I lived in this home for three years.

Henry:
Did you call it a house hack because you charged her rent?

Dave:
I did a little bit. I covered the vast majority. The majority of it, but a little bit. Yeah.

Henry:
Well played, sir.

Dave:
So I bought this house, single family home back in 2016 when I was living in Denver. It was actually right after I started working at BiggerPockets. I got this under contract, I think maybe within a month of working at BiggerPockets, because I remember sneaking out of the office to go cold call someone because I wanted to get houses. Oh, this is your one cold call that you’ve ever made. This is my one direct to seller deal I have ever done. But let me just tell you about why I went out of my comfort zone and did this. I got really into the idea of path of progress and figuring out what neighborhoods were going to be popular in Denver because it was growing a lot, but it was very neighborhood by neighborhood. And the city announced that they were going to be building a brand new light rail that went from downtown Denver at this train station that they were pouring millions of dollars into out to the airport.
That was always this big pain point and it was going to go through this neighborhood that was kind of up and coming. And they were deciding between two different projects. The one route might go north, one route could go south. And so my agent and I went, or he first went to the city planning meeting and figured out that regardless of which one they chose, there was this one sweet spot that they were going to get this park and a train station and the city was going to be investing in it. And I was like, “I got to buy right there.” And so I actually had been in this house six months earlier and though it was too expensive at 425. And knowing what I knew now, I was like, “All right, I’m going to call that guy back.” And so I called him back and was like, “I was in your house.
He didn’t sell it because it was too expensive at 475.” And we finally negotiated for it. And I remember to this day the exact price that was $462,000 is what we agreed on. So more than I thought it was worth. But I was like, “This is crazy because that is the exact price. 462 was the exact same price I had paid six years earlier for a four unit in Denver. And now I was paying that for a single family home and I was like, this is crazy, but I really believe in it.” And so I wound up buying this, and I’ll tell you how much it’s worth and what it’s done for that, but was able to finance it just using money I had saved up and refiing a deal I had bought two and a half years earlier, had done some value add to that and had raised the rents a lot.
So I was able to refi that to go out and buy this.

Henry:
462 for a single family even back then. Wow. Wow.

Dave:
It’s a lot.

Henry:
That’s a lot. So I assume you did just a conventional loan on this one?

Dave:
I did. Yeah. Owner occupied loan. I actually wound up putting 20% down on this. I had saved up enough for 5%, but I did a refi and was able to put the full 20% down. So I got good financing because I really didn’t want to pay PMI. And I think my loan then was five and a half. I refinanced it during COVID, but it wasn’t crazy low rates back then. So even that, I think my mortgage payment was something around 18, 1900 bucks to live there, which to be honest, to rent a two bedroom in Denver, which is what we were doing, it was going to cost 15, $1600 easily. So the payment wasn’t that crazy.

Henry:
And how long would you say it took before you started to realize that your research about what was coming to this area was actually there and giving you the boost you had hoped for?

Dave:
Oh dude, it took a while for the value to get there, but within three months of buying this property, I knew I had hit a home run. But the house that I bought was in decent shape. There wasn’t a lot of value add. The value add I did was living in a very uncomfortable situation for three years because then they just did construction for three years. They eminent domained the houses across the street. Sort of tweakers moved in across the street. They were constantly living in there. There was a triple gang shooting two houses away. Jane and I, they built the train, and I didn’t know this at the time. Sometimes ignorance is split, but the train, when they launch a new train, they have to blow their horn every time they cross a street for two years before it can be quoted a quiet zone.
Oh wow. So 24 hours a day for two years, two blocks away from us, trains were just blowing their horn. So we were just living in this. It was a nice house, but that’s kind of value-add to me. It was like I knew once this was over, it would be worth 700,000.

Henry:
Once you moved out, what were you able to rent this for? And do you still own it?

Dave:
Still own it. So when I moved out in 2019 alone, got 3,000 a month in rent. Rents in Denver have went up and now they’ve kind of come down. And so I think I’m getting 3,250 right now a month. And my payment, because I refinanced it, has actually gone down even though taxes and insurance have gone up. So I’m paying about, I think it’s just under 2,000 bucks a month on my payment for that. And that gives me 1,400 bucks cushion. I do pay a property manager, but it produces 10, 15 grand a year in cashflow.

Henry:
That’s pretty cool. Now, I know Denver has a lot of older inventory in some parts of town, and that can cause you problems maintenance-wise over time. How old is this property?

Dave:
Oh my God. I think it was 1892. I think it was, but it had been renovated. There had been some work done on it. So it’s actually been pretty low maintenance costs for. Man, I moved out of it six years ago. I’ve been renting it out and knock on wood, no major capital expenses. Is it like a cash cow that I’ll hold onto forever? Probably not. I will probably sell it. I’m moving towards selling it maybe even in the next couple of months, which I can get into. But I think it’s worked for me in so many ways from tax benefits to appreciation for cashflow and holding it over the next couple months. It really has kind of checked every box.

Henry:
Absolutely. I think you should get into it because my next question for you was going to be, what’s the plan? Are we keeping this or are you going to sell it? And if you’re going to sell it, what are you going to do with the proceeds?

Dave:
Yeah, so this is the way I’ve been thinking about it is that I still owe 230 on the loan. I’ve just been paying it off. So if I went to sell it, which I think I could sell it on the low end for 720, that’s pretty conservative because after I bought here, I wound up buying another house down the road because I really just liked the neighborhood and saw it was happening. But I sold that other one. It was almost an identical comp. I sold it for 810, but that was in 2022. And Denver market has definitely come down. So I’m just conservatively saying 720, it’s probably somewhere maybe closer to 750, hopefully. So I mean, that’s a lot of equity. That’s like 300 grand in equity. And yeah, it’s making cash flow like 10, 15K, but that’s not a good cash on cash return.
And I would consider holding onto it or paying it down if I thought there was any juice left, but there just isn’t. The neighborhood has done what it’s going to do, which has been fantastic. There’s not really room for value add. The layout is kind of weird. I can’t add another unit. There’s just no way to really get more out of it. And so I think I’m going to sell it because the cashflow’s not amazing. It’s run its course. I’ve done the long game on it. But I think a lot of times with these kinds of plays, seven to 10 years, you kind of peak out and the performance peaks. And so I will likely 1031 into something else. That is sort of what I’m thinking right now, but I’m still getting some quotes on what it’s going to cost me to get it sales ready and kind of make the final decisions, but that’s where I’m leaning right now.

Henry:
Yeah, I mean that makes sense. And that’s absolutely true. If you feel like you’re just going to get your normal modest appreciation bumps from this point forward, then it’s just either you hold it because that fits your investment strategy or you find something else where you feel like you can get a better cash on cash return with that money. I don’t think there’s a wrong decision with a property like this. And I don’t want people to listen to this to think that you have to sell your properties after the seven-year period. Dave’s doing what he feels like best fits his investment strategy going forward, and that strategy fits the lifestyle that he wants. You need to do the same thing for you. So for me and my property, I can’t add a ton of value to it either. It’s just going to appreciate because of the location, but that asset paid off would be a great one to leave to my kids, and that fits my investment strategy better.

Dave:
Exactly.

Henry:
The goal is to get in, force value, ride the appreciation, and then make the determination on is it better to sell or keep based on what you want to do with your portfolio? It’s what’s the right call for your investment strategy.

Dave:
All right. So you’ve heard each of our deals, but we have more analysis and to discuss on today’s episode right after this quick break. Welcome back to the BiggerPockets Podcast. Henry and I are sharing stories about the long-term performance of two deals that we picked out. Let’s jump back in.

Henry:
I think as investors, we have to be very educated on the types of loans that are out there for us to finance these deals and pick the ones that make the most sense for the asset you’re buying. Because like I said, if I would’ve bought my property with a higher interest loan, hard money, something that was a whole lot more holding costs, I probably wouldn’t own that asset today. I don’t know that I

Dave:
Would’ve

Henry:
Been able to sustain through the delays in the underestimating of the renovations. And if you used a different type of loan product, it may be a different story that we’re telling now. So if you can buy a property that’s a good asset in the path of progress, and it takes a little longer to get to your profitability that you’re looking for, you don’t want to put yourself in a position where you’re limited on your ability to hold onto that property.

Dave:
Because

Henry:
That’s how you lose in real estate. You don’t just lose by buying a bad deal. You can buy a great deal with the wrong financing, and then you’re stuck in a position where you either can’t refinance, can’t carry the note, and so you have to sell the property. And if you’re forced out too early, I mean, that’s when you take losses and that’s when you don’t build the wealth. The wealth comes through equity and appreciation. The wealth doesn’t come through cashflow. Cashflow is a measure and it’s a good measure and you want to shoot for it, but that’s not what builds the wealth. And you don’t get to the wealth building if you’re forced to sell because you used the wrong type of loan or because you didn’t have cash reserves. Real estate is about your ability to hold onto your assets for the long haul.
The more you can do that, the more wealth you’ll build.

Dave:
That’s absolutely right. I think what you said before is spot on where you said it’s sort of an educated guess. Because I think a lot of people might listen to my story in particular and say, “That’s speculation.” Or yours even because you were buying it at what, three, $500 rents and you had to tell yourself a story that I can get a thousand plus in rent for this. That’s not speculation, it’s a business plan. I think that’s sort of the key here is I do hear people say like, “Oh, I’m thinking about buying in this neighborhood because it’s just an up and coming area and I just think the prices are going to go up.” Maybe, but I think you need a business plan to really back that up. And I acknowledge that what I did on that deal might come close to speculation, but I had a plan and I knew that at the very least, I was basically net neutral on my own living expenses.
I limited the risk. I had, to Henry’s point, owner occupant financing, very advantage financing. That made that possible. Would I have bought that as a flip or a burr? Probably not. The whole plan, the business plan was to live in it through the inconvenience and through the transitionary period. And that’s why it worked. Just going out and saying, “I’m going to buy on the street because everything goes up,” that is speculation. Holding on for a long time is the goal, but you have to still have a business and an idea of how you’re going to take it from where it is today to where you want it to be in six, 10, 15 years. Otherwise, you’re just guessing and waiting. And it’s not like you have to do that much, but implement a plan and wait is really what we’re saying, not just go buy anything and wait.
So I like these stories because it’s so funny. In retrospect, everything looks like it was easy and genius. But the whole point I think of both of these stories is like mine didn’t look great for the first three years. I overpaid. Or people would’ve said I overpaid. Henry’s didn’t look good in the right way, but we were both following a plan. We both had a business plan and the plan was never, how do I get out of this in nine months? For rentals that you are trying to acquire, the plan can take shape over two years, over three years, over five years, over seven years. It not only doesn’t have to be quick, but often as these stories show, it works better for it not to be quick. Being slow can be a deliberate strategy. It is not necessarily some consolation prize that you’re taking.

Henry:
Very, very Very true. And don’t forget, it could and very well may for other investors who are getting started now, it may take even longer than the time horizon that Dave and I are talking about because we did get a 2021, 2022 bump in equity that none of us were expecting. So buy the best asset you can, try to add as much value as you can, and then make sure you’re in a position to be able to sustain that property if and when it doesn’t perform like you want it to.

Dave:
You’re right that it might take longer, but I want to caveat that with two things. First and foremost, no one knows when these bumps are coming, but they come. And they’ve come throughout history and they’ll come again. No one knows. So that’s kind of the whole point of holding on. No one knew it was going to be 2020 to 2022. That’s when it happened. And the people who held onto things were rewarded for that. The second thing though is that better assets are on sale. It is easier now to buy something that you want to hold onto than it was in 2021 or 2022, at least in my experience. And so I think that’s why we always talk about, you take what the market’s giving you, and that means the bump might not be next year. It probably won’t, right? It’s probably not coming for the next couple of years.
But that’s why you buy good assets now. I bought mine in 2016, it took four years. I bought other assets in 2010, took 12 years, whatever. But you find things that work in the short term that are good, and then the upside comes and that’s what turns them great. That’s what we talk about all the time on this show, and it absolutely can happen and can work right now. All right. Well, this was fun. I liked going through the show. Let us know if you like these shows. We could do more of these, just Henry and I, or we can bring on other investors to share examples of great or bad stories that if going into these kinds of things and showing sort of the life cycle of a deal is useful for us, let us know. Drop it in the comments. Let us know on Instagram.
We would really appreciate it because I learned from you about your deal. I think it’s just a super helpful format.

Henry:
Yeah. If you enjoy talks like this, we’d love to be able to do more. So let us know if it’s helpful to you.

Dave:
All right, that’s our show for today. Thank you all so much for watching this episode of the BiggerPockets Podcast. He’s Henry. I’m Dave. We’ll see you next time.

 

Tony:
The average salary in the United States is around $65,000. That means there are millions of Americans who are working for the man, punching in and out, and depending on someone else for financial security when they could be living off of a cash flowing rental portfolio instead.

Ashley:
If you do it right, real estate investing can give you the freedom, flexibility, and yes, the actual income you need to create the lifestyle you want. So fewer hours behind a desk, no more missed soccer games, and the ability to finally take that dream vacation.

Tony:
But look, this doesn’t happen overnight or by accident. The decisions you make today determine where you’ll end up five, 10, 20 years from now, which is why you need to be intentional about buying rental properties that can gradually replace your income.

Ashley:
Today, we’re showing you how to do just that with a clear, proven formula that will give you more than enough cashflow to live on. Follow these simple steps and you could have the option to leave your W-2 job in a decade or less. This is The Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I’m Tony J. Robinson. And with that, let’s get into the plan. So I think first, Ash, let’s just start with a little bit of our own quick backstory on how we used real estate to get to the point where we are. I’ll jump in first, but a lot of you guys know my story. I was a high income earning W-2 employee working for Tesla. 2020, lost my job. And we had a small portfolio at that time. We had a few, I think four long-term rentals. Two of them were still being renovated. We had two active short-term rentals. And my wife and I said, “Hey, instead of going back to work, what if we try and build our real estate portfolio instead?” And in the 12 months after losing my job, we went from three short-term rentals to 15. We scale up to over 30 at our peak.
And now today we’ve got 26 active short-term rentals and a small 13 room motel as well that we run. But it was really that 12 month period of just grinding where the portfolio grew exponentially that kind of gave us the runway that we needed to go into real estate full-time. So that was me. That was the process that we followed.

Ashley:
Yeah, mine was a lot longer period of time. At first, I started as an accountant. I could not stand it sitting at a desk, so I knew I couldn’t do desk work. So I quit after six months after I went through all of my schooling and I found a job as a property manager. And so that was kind of my insight into real estate. And from learning and watching this investor, I realized what real estate could do for you. So after working for him for a little less than a year, I bought my first property and slowly from there I built a long-term buy and hold rental portfolio. And so I didn’t quit my W-2 job until 2019. And I gave all my properties to a property management company and the properties I’d been managing, they all went to the property management company too. And so yeah, that was kind of my first experience without a W-2 is when COVID hit.
So it was definitely a benefit to have the property management company in place because they took care of a lot of the things that came along with COVID and being a landlord and tenants and things like that. But yeah, so from 2013 to 2019, it was December 2019, I still had a W-2 job working as a property manager and kind of an assistant to this investor.

Tony:
So different paths, right? But we both kind of ended up in the same situation where we ended up doing this full time. But let’s talk a little bit about replacing the average salary. Now again, obviously different parts of the country, this is going to be wildly different. In some parts of the country, this is a great income. Other parts of the country, you might be struggling to make ends meet, but the average salary is $66,000 and the median salary is $61,000, about $62,000. But we’re just going to round to 65,000 or roughly $5,500 per month. That’s the number that we’re going to use for the context of today’s conversation. And the goal is how can we reverse engineer $5,500 per month using rental income? So just like some quick example math, 5,500 bucks per month in cashflow, that could be 11 properties at 500 bucks per month in cashflow.
And if you’re doing one property per year, that’s 11 years. If you’re doing two properties per year, that’s five and a half years, which is way faster than retirement at 65. Or you could just have one killer property that’s like a short-term rental or like a self-storage facility or a sober living home that’s doing 5,500 bucks per month. So there’s a lot of different ways to skin the cap, but 65,000 per year is the number that we’re going to be working towards.

Ashley:
Now, obviously the cashflow depends on several factors like your market, your strategy, how much you’re putting down. You could go ahead and hit that 5,500 per month cashflow if you buy a million dollar property in cash and rent it out, you could have that cashflow because you don’t have a mortgage payment. So make sure when you’re comparing yourself to others and looking at how they’ve gained financial freedom through rental properties, you understand the exact factors that went into them actually doing that. For me, it took me a really long time because I was literally buying properties with none of my own money. I used a partner, used their capital. I borrowed a line of credit. I’d buy properties with the line of credit and then I would refinance them and pay the line of credit off. But that was very little cash flow because I was basically doing a full burr on the property where I’d go and refinance, pay myself back, and I wasn’t putting money to sit into the property.
So my cashflow was a lot smaller, like 200 to $300 per property to kind of get my start. So I had to get to those 18 properties before I actually could cover my expenses.

Tony:
Ashley, let me ask, you talk about this often, right? Because I remember when I first started on the podcast, so this is what, almost six years ago now, and one of our first episodes together you’re like, “Oh yeah, I bought a house for like $25,000.” Knowing what you know now, would you have still started that way?

Ashley:
No. So I definitely wouldn’t have bought those dumpy duplexes as I like to call them. I was just in acquisition mode and I was buying these properties that were fine. They were rented out, some of them when I bought them. It wasn’t like they were in complete disrepair. But what I did find is they had zero appreciation because they weren’t in gray areas. There was long-term problems to actually fix some of these long-term problems. For example, redoing all of the electric in the property, that would’ve cost a lot of money. And because of the market, it wasn’t a great market, that I wouldn’t have been able to increase rents enough to actually cover the cost of the rehab or make the rehab worth it. Because in some of those smaller markets I was investing in, there was a cap as to what people paid. Even if you put granite countertops in, even if it was the nicest unit in the whole town, people just couldn’t afford to actually pay more.
So it wasn’t worth it for me to go in and do these extensive rehabs because I couldn’t even get the rent back that I would need to actually make the deal worth it. So I’ve actually sold off a lot of those. I think I have three left. One I’m trying to sell right now. And then two I’ll probably keep for a while. They’re not that bad. But yeah, I definitely want to do that. What I would do to start again is actually be more diligent and buy less houses, but buy better quality houses. So if that meant if I had my line of credit and instead of buying five $20,000 duplexes, I would’ve just used that money to buy one property instead. So yes, I would do that differently going forward. And plus now I think it’s definitely harder to find $20,000 duplexes too that are actually rentable in good condition because that was back when I bought the five of the $20,000 ones.
That in 2017. So very different times.

Tony:
And I asked that question knowing the answer because I think it’s important for Ricky’s to also understand that how you start isn’t necessarily how you’re always going to invest. And as you do more deals, you start to get a better sense of what is it that I actually do like to do and what do I want to do more of? And what do I never want to do again? And what lessons have I learned? But sometimes it’s just more important sometimes to get started, even if it’s not necessarily under the right circumstances because deal number one is what helps you get into deal number two and beyond. But let’s keep moving though with this example. So I think the first thing, Ash, that folks have to focus on is once they’ve identified this goal, I want to get to 5,500 bucks per month. We need to focus on picking a market.
I think a big mistake that I see a lot of new investors make is that they start with this shotgun approach where they’re just trying to look at deals all across the country. They’re in the northeast, the southwest, the Midwest, the Pacific Northwest, Southeast, in between. And they’re analyzing deals in all these different places. But I think you’ll be able to analyze deals more quickly and with more confidence if you first narrow down and you become an expert in a small subset of markets. And for me, the sweet spot is usually like three-ish markets. If you can have three markets where you’re really, really dialed in on, that usually gives you enough kind of breadth of options, but without getting too wide that you’re diluting your knowledge of those markets. So for me, I’d say narrow that list down to three to five markets first before you do anything else.

Ashley:
And then here are some things that you want to look at when you’re analyzing the markets is what is going to be your main driver here? Is your goal out of this? Is it going to be cash flow? Is it going to be appreciation? Is it going to be a mix of these? And here’s some things you need to think about when you’re considering what your end goal of this property is. So if you’re a peer cashflow play is like you want to replace your W-2 income as soon as possible. So you’re going to look at properties that have a solid rent to price ratio. You’re going to want to buy in an affordable market where you’re going to get a great rent price and also a great price for the purchase of the property. And then something else to watch when you’re comparing markets is insurance costs because your insurance will be baked into your mortgage payment and you want to keep your expenses as low as possible.
If you’re looking into coastal markets, you might get hit with flood insurance, which is going to drive your monthly expenses up. So that’s going to definitely decrease your cash flow. Then we can look at appreciation. So this is what I learned is I like markets now that have better appreciation even if the cash flow isn’t as great. So you’re not going to see an immediate return of getting that cash flow every single month. But say you have a five-year plan or a 10-year plan where you want to be able to quit your W-2 job. Well, maybe you don’t, you just take a little bit of cash flow now and you just bank on that appreciation. Yes, there is the risk of the property not appreciating in 10 years, but there’s also the risk of you doing an eviction like in New York State and it taking a year to actually get the tenant out and you had no cash flow that whole year anyways.
So there are risk and pros and cons to both, but make sure you understand what your main driver goal is. And maybe appreciation is actually a better play for you than even cash flow is. So maybe you should kind of tailor how you’re looking at markets based on whatever one you’re going to go after or a mix of them. If you’re looking for appreciation and maybe a mix of cash flow, some of the Southeast markets are actually good for that like Georgia, Tennessee and the Carolinas.

Tony:
I think for me, if I were in this situation where I’m rushing to try and replace my income, which is the situation that I was in, for me, I’m focused on cashflow first because I want to replace the income. I want to keep the lights on. I want to make sure that I can pay my mortgage and feed my family. So for me, it’s like, man, where can I go get the best cash flow? Let’s get to the number I need to get to. And then I was able to kind of turn my attention to other things and different projects and different goals, but I’m leaning a little bit more so toward the cash flow. But agree, every market has a different benefit. And people use it for different reasons. But once you’ve got your market, I think you then need to layer on your strategy.
And really it could go either way. Maybe you pick your strategy first. I might even say that. Maybe we pick strategy first and then we say, go pick your market. Because depending on what you want to do, some markets are really great for one strategy and not great for others and vice versa. So I might actually flip that around where let’s pick your strategy first. But either way, the different strategies that you have in front of you, you’ve got traditional long-term rentals, you’ve got short-term, you’ve got midterm, you’ve got flipping. Those are probably the most well-known strategies that kind of exist. And then you kind of have co-living where you’re renting by the room. That’s gained a lot of traction over the last couple of years. And then there are the strategies that are businesses more than they are real estate investing, but they just kind of layer real estate in there.
So you have things like assisted living facilities, sober living. Gosh, what are some other ones that we’ve seen people do here on the podcast? The options are limitless. Self-storage is probably another big one there. Hotels. But picking the strategy that you feel makes the most sense for you and for that market that you focused on. And again, I think each one has its own merits. Short-term rentals, midterm rentals, typically you can produce more cashflow per square foot. I can buy the same house. And again, depending on the market, maybe generate 2X, 3X, 4X, 5X, what I would generate if that property were a long-term rental. My five bedroom cabin in the Smoky Mountains, it would make no sense as a long-term rental. I don’t even know if it would cover the mortgage as a long-term rental, but as a short-term, it does incredibly well. So depending on the strategy and depending on the market, I think you got to align those two things together.

Ashley:
Now you also have to figure out how much capital you have, and this could actually factor into what market you’re able to select. So maybe you select LA, you want to invest there and do a short-term rental, but you only have $50,000 for a down payment. You’re most likely not going to be able to purchase a property in that market with only $50,000 as a down payment. So you have to understand where your money, where the funding is coming from for this property. So what do you want to put down as a down payment? How much do you have for reserves? You want to have at least at very minimum three months and at best six months of reserves in place for this property. So you’re not going to take your whole life savings and put it as a down payment and have nothing left afterwards.
So typically on an investment property, 20% is down. There’s some second homes if you’re going to purchase a property that’s going to be a short-term rental, but you’ll also use it. Tony, what’s the rule? I know it’s a very gray area, but for second homes, you have to at least use it X amount of time or something.

Tony:
Yeah. There’s no hard and fast rule from the actual housing authority, but generally lenders say you’ve got to use it personally for maybe seven to 14 days out of the year. You got to have some level of personal use.

Ashley:
And what’s the down payment right now for those 10%?

Tony:
10% typically. Now rates are a little bit higher than what they used to be. It used to be you can get them in lockstep at the primary, but now they’re a little bit higher than a primary residence would be.

Ashley:
And then also if it’s going to be your primary residence, you can use an FHA loan for three and a half to 5% down. There’s even conventional loans that will do 5% down if it’s going to be your primary. And then VA loans, 0% down. And also USDA loans. So there’s tons of different loans options out there for you, especially if it’s going to be your primary residence. There’s also a DSCR loan. So this is where they actually look at the performance of the investment property to make sure that you’re going to collect enough rent to actually cover the expenses and the mortgage payment on the property. And they don’t look at you as much. So if you have a high debt to income from other things, then this is a great option for you is to look at the DSCR loan. But those are typically 20 to 25% down.
And then if it’s a commercial property, you could be seeing even higher, like up to 30% down on the property too.

Tony:
The only other loan I’d add, Ash, is the, this is my favorite one to talk about, but it’s the NACA loan. If you haven’t heard of the NACA loan, I’m going to blow your mind right now, but basically if you’re owner occupying a house, now you can’t have any other open mortgages. So this truly is for true rookies. But if you have any other mortgages under your personal name, you won’t qualify for this loan. But if you’re buying a property, you can go up to four units. It’s 0% down, zero closing costs. 0% down, zero closing costs. And the interest rate is typically about a point lower than whatever the prevailing interest rates are for the day. So you can literally go to their website, naka.com, and they always have their interest rate posted. Right now on a 30-year fix is 5.75%. If you go check any other website, it’s probably like 6.7, somewhere in that ballpark.
So you get a point lower typically on the interest rate, no down payment, no closing costs. Now it is an absolute terrible application process and there’s a lot of restrictions on refinancing. I think you have to hold the property for I think five years or so before you can refinance. So there are some restrictions. But if you want to get into a four unit with the least amount of capital possible and start building your net worth and building cash flow, it’s one of the best loan products out there.

Ashley:
And what’s harder? Finding a property, saving more for a down payment or having to do extra hoops to jump through to get an actual loan. Just because you hear something is hard doesn’t mean you shouldn’t try for it because it actually could be easier than you trying to save up a ton more cash to actually get into a property. So just kind of think about that. Sometimes those hurdles are all just the mindset thing. It’s actually going to be easier for you than if you go the long way around. Okay. So you’ve got your market, you’ve got your strategy. Now it’s time to buy your very first rental property and create some cashflow. We’ll show you how to do just that right after a word from our show sponsors. Okay. Welcome back. Now let’s work on replacing your salary with cashflow, starting with property number one.
Okay. Step one, you’re going to buy your first rental property. Okay, we’re actually going to buy a sample property here, a $200,000 duplex in Cleveland, Ohio as your first example here as your first property you’re going to buy. So this property tends to be a C-class area, but you could actually turn it into a B class with a little paint and sprucing to get this property up because it is in a decent area. So obviously not every market has $200,000 duplexes, but we’re just using this one as an example. So for another example, Tony still finds cash flowing properties in higher priced markets using short-term rental strategy. I, as we talked about, have found $20,000 duplexes even more affordable than this one as a long-term rental. But this one, we’re just going to use Cleveland, Ohio as our example today.

Tony:
Now guys, as we go through this, having the right tools helps a ton as well. So if you go to biggerpockets.com/calculators, you’ll find the BP calculators. And Ash and I have talked about this before, but the first real estate deal I ever purchased, I ran through the BP calculator. So these are tools that actual real estate investors are using. But let’s just get some assumptions here on this 200K duplex. But we’re going to go with long-term rental strategy on this property. We’ll make some assumptions around expenses and income. So for example, 3% average rent growth for this market, 5% average insurance increases, 3% average property tax increases, 5% increases on maintenance. So those are just some of the ballpark assumptions we’ll make going into this deal. So let’s go over some of the options on how we can actually take this deal down. And the first option, which I think is one of my favorite options, especially for Rickies who maybe don’t have a ton of capital saved up, is to house hack.
And again, for rookies that aren’t familiar with that phrase, house hacking is simply buying an investment property, but also living in it. And it can take a lot of different shapes and forms. But for this example, let’s say that you get three and a half percent down. That’s a $7,000 down payment for this deal. So when we look at your, again, ballpark principal interest, taxes, insurance, maybe even some PMI, we’re just at about 1,800 bucks per month that you’d be spending to own this property. And then we’ve got repairs, maintenance, vacancy, and then we’ve got rental income of about 1,200. So what that does is that if we take the mortgage payments, your principal interest, accident insurance at 1,800, we add on expenses of about another, I don’t know, what is that? 350. Yeah, right? So we’re somewhere in that ballpark. And then your rental income for those other units is 1,200.
Your net housing cost is only 861.
So some people say, “Well, man, it’s not covering everything to live in that house. Is this even a good house hack?” Well, look what you’re getting. You’re getting a place to live subsidized by the other people that are living there. And it’s like, could you go control an asset for that amount that’s going to appreciate over time for 800 bucks a month? You’d probably be sending that on rent somewhere else anyway. So even if your living costs are the same, at least you’re putting it into an asset that you own. And then once you move out, once you actually move out, well then what happens to the cashflow? So feels like a solid first option.

Ashley:
So now for option two, we’re going to look at another property that’s going to be a 20% down payment. So we’re going to do $40,000 down. And this is going to be a conventional loan with a 7% rate. Okay. So that’s going to be if it’s your primary residence. But if you are actually purchasing this property as an investment property, not going to live in it, we’re going to do a conventional loan, 7% interest with a 20% down payment, which would be about $40,000 down. Your mortgage payment now is going to be 1,447. It’s going to be a little bit lower because you put way more money down on the property. You’re not going to have PMI because you put 20% down. You’re still going to have insurance, maintenance, a vacancy. Rental income will be about 2,400 because now you’re renting out both units instead of one.
So your cash flow is going to be $477 per month. And we even did it with just like if you hired a property management company and just to see what it would be, and it would be $285 based on what the average cost per month is for a property management company. So just based on the year one numbers alone, you would need around 11 to 19 of these properties to replace your 5,500 per month salary. But the numbers also tend to get better over time. So I have a perfect example of this. I bought a property for 143,000 in 2017. That property cash flowed very little. I put 20% down on the property gain and was only cash flowing about $300 a month. Now that property cash flows about $1,200 a month. I haven’t done a major rehab or anything like that. I fixed the bathroom.
We replaced a shower. I think it was maybe like a $2,500 job, but it’s not like I went and did a big, huge change and it’s worth more money now. This property just over time, rents have increased in that area. So the same thing can go with these properties. As you hold onto them over time, a lot of your expenses will stay fixed except for probably taxes and insurance, but you’ll be able to increase rent over time and your cashflow actually gets better and better as time goes on. So that’s also something not to bank on that. Don’t take negative cashflow now to hope that in two or three years you’re going to have positive cash flow from increasing your rents. But it’s just something that can actually help your cashflow grow and grow is just from doing rental increases every single year.

Tony:
And Ash, one thing I’ll add too, right? If we go back to the house hacking option one, again, they were paying about just over 800 bucks per month to live there and assume that their rent would’ve been 1200 bucks somewhere else. They’re saving about four grand a year in rental income or paying out rent to someone else. So even if they did nothing, but save that four grand and then just set that aside into a different account. Within two years, they’d have enough saved up again to go buy another duplex. And it’s like every two years basically with doing nothing else but saving the money that they’re not paying into rent, they can go buy another property. So even if you did nothing but that, over the course of a decade, you basically have enough to replace this average income. And that’s assuming no increases in rent.
Assume that you never get a raise at your job so you can’t save anything else. If everything was just static and you did nothing else but save four grand a year, within a decade, you could replace the 65K that we’re talking about. And guys, obviously a decade isn’t a short period of time, but think about how simple that process is. Think about how uncomplicated and unsexy and easy that entire process is. Buy a property, live in one piece, rent out the other piece, save the money you’re not paying a rent, do it again. And now you never have to work again for the rest of your life. It feels like a fair trade-off.

Ashley:
And I think that’s the thing is a lot of people over complicate it. And really it can be that simple, but you also have to be very diligent. So after you’ve bought that first property, step two is really to reevaluate and buy more if this is working for you or pivot. So here are some questions to kind of ask yourself after you purchase that first property. Are you breaking even and are you cashflow positive? How long does your property stay vacant if you’ve had any turns? Is rent keeping pace with your expenses? So are you increasing every single year? Are you keeping up with what market rents are you in area? Did all of a sudden your insurance skyrocket on this property? And then how many hours per week, what is your time that you’re putting into this property? Is it way more involvement than you thought it would be?
And then even on the short-term rental side, is it making the cash flow that you thought? Would it be better to pivot to maybe an MTR or a long-term rental? Does your property stay booked? What’s your occupancy? What’s your demand seasonally looking at all of these different things? And the same with midterm rentals. Is it properly occupied? Are you seeing a lot of vacancy in between? Maybe you should adjust to short-term rentals. So really evaluating where that first property has gotten you and what it looks like before you actually make the next purchase. I think I made that mistake because I was just in acquisition mode and I didn’t focus on operations or the performance of my properties. I just wanted to get as many properties as possible as fast as I could. And so step number three is stabilize and increase cash flow. So really put intention into making sure your property is stabilized.
It is operating properly. You’re not just rushing into the next deal. So there are several strategies you can use to boost your cashflow. And of course, obviously buying more properties per year, raising rents to keep up with market demand of what rents are in your area. Or you can offer renovations to your tenants and say, “Hey, these carpets are pretty worn in the property. I’m not sure. I just bought it, so I’m not sure how long they’ve actually been in there, but if you would like, we’re willing to replace all the carpets for you in the area and increase your rent by $50 per month or something like that.” And I have done that before. And most of the time people say yes. If they say no, okay, that’s fine. You wait and do it at the turnover, but kind of gives you some options to increase the rent and cover the cost of actually making those updates.
And then you can also create additional income dreams from the property, if there’s storage space, if there’s parking, charging extra for those, putting coin operated washer and dryer on the property. Other things are, instead of buying another property, you can take all of your cash that you’re saving and actually pay down your property. If a rate start to drop, you could refinance the property. And then one big thing don’t forget to do is when you actually have a lot of equity built up in the property and you put down maybe three and a half or 5% and you’re paying PMI, make sure you go back to your bank and request to get that taken off when you have that 20% equity built up in your house. So sometimes it doesn’t even mean that you’ve paid down all of that extra, like say you put 5% down and you’ve paid off the rest of the 15%.
Sometimes your property will just appreciate enough to give you that little extra boost you need where they’ll come in and probably do a book appraisal on it and make sure that you hit that amount and go ahead and remove it. I mean, sometimes that can be like a hundred to a couple hundred bucks a month that you’re saving. That’s a pretty nice increase to your cash flow.

Tony:
After all this, how close are you to actually handing in your two week notice or retiring early? After the break, we’ll crunch these numbers. We’ll be right back. All right guys, welcome back. Now let’s help you quit your job. So we talked about the strategy, the markets, building the cash flow and what that looks like, but now it’s time to repeat and retire. So that’s the fourth step here. So again, if we go back to option one, I talked about this a little bit before, but it’s like if you’re house hacking and you just move out of that property and say you’d stay there for 12 months, you move out, you rent out the other unit, that makes more cashflow plus the rent growth, and you house hack again. So in year number two, property one looks a little bit like this. And again, these are ballpark numbers, but your principal interest taxes and insurance is about 1,700.
That also includes your PMI. You’ve got landlord insurance of about 120 bucks, maintenance about 175, vacancy at 8%, call it 200 bucks. Management fee, another 200 bucks. Rental income is now just over 2,400 bucks, almost $2,500. So your cashflow after everything with now even a property manager in place is about 924 per year. If you’re not using a PM and you’re self-managing is about 3,300 bucks per year. Now again, if we scale that out by year 10, again, if you just keep doing the same thing, you’ve been able to increase your cashflow to call it almost six grand a year if you’re using a PM and about almost nine grand a year if you’re not using a PM. So guys, again, very simple process to kind of keep this moving along by just reinvesting those profits back into the next deal.

Ashley:
Now, if you were going to do the second option of using this as an investment property and not your primary residence, let’s look at what this property would look like in year two. So this would be your mortgage stayed the same at 1,400. Your rental income is 2,472, and your cashflow without a property manager would be increased to $518 per month. But now let’s skip to year 10. So your mortgage is same, 1,563. Your rental income has increased to $3,131. So that now leaves you with cashflow without a property manager of $877. And when we say without a property manager, I always think you should run your numbers with a property management fee in place. So in this case, you’re at year 10, you’re close to retirement here with all your properties. You may want to just hand it over to a PM, so your cashflow would be $627 with that.
So if you’re buying and holding these properties for 10 years, you really only need six to 11 of them to replace a $65,000 salary with rental cash flow in that time. That means you could buy one to two rentals every year over a decade and reach your goal. And this is just if you’re scaling the slow, boring way, taking it simple, small multifamily properties and renting them out to long-term tenants. And I think a big thing that can really help you with this is you look at the $65,000 salary and to some of you, you may say, “That’s not enough. My salary is way higher than that. I couldn’t live off of that.” One thing you really have to take into account is the tax advantages of this. Amanda Hahn, a CPA who works with a lot of real estate investors, she posts a lot about this on her social media about one person in a relationship quitting.
So one spouse quitting their job and becoming full-time real estate professional status to be able to write off the properties, do a cost segregation, increase how much you’re able to depreciate in that first year. And you’re going to be able to offset what you would have paid if you were a W-2 employee. So let’s do an example. Say I made 100,000 as a W-2 employee. I pay taxes out of that $100,000 that maybe my net anyways is around 65,000 is what I’m actually getting anyways. Well, with real estate, you could actually offset that cashflow that you’re getting with depreciation where you’re not paying any taxes. So just something else to think about. Maybe talk about this with the person you do tax planning with or your CPA as to what you pay in taxes now and what’s actually your take home pay and what would that need to translate?
So maybe it’s not actually converting your salary, your gross that you’re making, but what’s the after tax dollar amount that you need to make to actually get the cashflow for these properties?

Tony:
And I think the last thing I’d add before we wrap here guys is that as you start to do more deals, you start to build your confidence to do other things. So even if you’re doing, hey, I’m house hacking a new deal once a year, maybe you layer on house flipping. And now you’re flipping a house a year and you’re bringing in an extra 20 to 30K per year just flipping one house a year. Maybe you take on managing for other owners in your market. And now you’ve got consistent cashflow coming in from a management business. There’s so many different ways and strategies and things that you can leverage as you start to build your portfolio because you start to see what’s really possible in the world of real estate investing. So guys, our hope is that it’s walking through this model. Obviously it’s an example.
Don’t beat us up in the comments on YouTube because they’re like, “Hey, you can’t find a duplex and know how for 200K.” The goal here is just to lay out a path, a roadmap of what this could look like and to give you realistic expectations of if you just follow a very simple, straightforward process, the goal of you replacing your income or at least getting close to that is pretty reasonable.

Ashley:
Now, if you guys are interested in getting your first deal, make sure you head to biggerpockets.com and check out all of the resources and tools that we have available for you to use, such as the BiggerPockets calculators. We also have resources such as downloadables that are checklists, templates, guides to help you get your first deal. I’m Ashley, he’s Tony, and we’ll see you guys on the next episode.

 

Dave:
Buyers, sellers, renters, and landlords all say the numbers are getting harder to make it work. Affordability is just strained. In New York, flippers are facing shrinking margins and a proposed new tax. Meanwhile, fewer housing starts could strengthen apartment rents by 2027 and senior housing occupancy continues to climb. I’m Dave Meyer here with Kathy Fettke, Henry Washington, and James Dainard. To break down all the headlines you need to know, this is On the Market. Let’s dive in. Kathy, we’re going to call you up first. What do you got for us today?

Kathy:
All right. Well, this article is actually from CRE Daily, so it’s going to have a commercial real estate focus, but I think
It applies to home owners, home buyers, because a lot of commercial real estate looks at residential first to see if there’s enough roofs. They want to make sure there’s enough roofs for their commercial project. Anyway, the headline is US Housing Starts Slow Giving Apartments Room to Recover. So the story is basically that US housing starts fell to an annualized 1.18 million units in May, and that is the lowest reading since April of 2020. Single family completions are also declined 16% year over year. Again, the lowest level since 2020. So builders are not building, they’re not able to sell like they would like to, especially with interest rates having gone up over the last few months and they’re slowing down. So this article is basically saying this is going to help multifamily because multifamily, as you guys know, overbuilt over the last few years, and they’re still working through that excess supply.
So this article is basically saying this is going to be good for landlords because there’s going to be less supply. What it’s not good for is the renter. It’s for people. For people. Yeah. But from an investor perspective, less supply, more demand, rents go up, home prices go up. That’s basically what this article is saying.

Dave:
Yeah. I mean, it’s frustrating in my opinion how much construction has wavered. It felt like we were just getting back to a good pace of construction towards the end of COVID. And now to see it go back in the other direction, it stinks because we have this housing shortage in the United States and we need to be building affordable single family homes.That’s where the demand is. I think that’s what’s been tough about the market talking about commercials. We’re building tons of multifamily, but people still want to live in single family homes and we’re not building enough of them. And so there’s this mismatch between supply and demand in the market, which is creating some of the problems that we’re seeing. But at the end of the day, you can’t blame them, right? It’s tough to build right now. It is not profitable. They’re

Kathy:
Not in the charity business. They’re not doing it for fun.

James:
People aren’t making money. You got to motivate people to run a business to build housing. I know up in the Pacific Northwest, builders are not doing great. They’re getting beat up because pricings came down on the backside, costs have gone through the roof, and their borrowing cost is higher. The time to sell is a lot higher. These things erode the profit down to where a lot of people are writing checks to get rid of properties. So there’s no motivation to build these units. And so they got to do something different because building start permits nationwide are down everywhere. There’s no money to be made. You got to make money and no one’s making it.

Dave:
And they’re sitting on a huge amount of inventory. The months of supply for new homes right now is above 10 months.That is high. Briefly in COVID it was that high, but it hasn’t been that high since 2008. They’re sitting on a lot of inventory. Why would you build more when you can’t move anything off your shelves?

Henry:
I mean, I feel this personally because I have a lot that I was planning to build a house on, but the values of the homes have not gone up enough for me to want to deal with now building the house. In other words, my profitability is shrinking because the ARVs are coming down a little bit. And so it doesn’t make sense for me to finish this build.

Dave:
ARVs are coming down and construction costs are going up. So margins are just getting compressed.

Henry:
I’m doing the math. And remind you, I’ve never done this before. So the people who I see who are actually still making money building new construction, they are experienced. So they’ve got their cost per square foot dialed in and they’re in more affordable markets where home prices aren’t extremely high, but rents are pretty good. But those are niche markets across the country. As a whole, it’s just too hard. And so for me, I look at my profitability. I was projecting when I first started was somewhere between 50 and $70,000, which was enough for me to give it a try. But now I’m hovering somewhere between 25 and $50,000 and I can sell a lot. I can just sell the lot for 20. So why would I do it?

Dave:
Love the do nothing and make the same amount of money approach. It’s a time-tested

Henry:
Winner.

Kathy:
Amen. We have a lot in Malibu that we bought years and years ago because we didn’t want anyone to build to ruin our view. But then we moved, so we’re stuck with this lot. And I’ve been looking at all the cheapest ways to build it out. I’m looking at manufactured housing. What can I do to make this pencil? And it’s just not. It’s just not. As far as a spec. If somebody wanted

Dave:
To build

Kathy:
It and live in it, fine. But for me to build it and try to sell it for any kind of profit, no, it’s not.

Dave:
You nailed it, Kathy. The only people who can build right now are people who aren’t looking at it as an investment, who are looking at it as investment in your life and your lifestyle, which is fine, but not like, “Hey, I’m going to build this as part of a business.” That doesn’t make any sense.

James:
No, and developers and investors get called bad guys from a lot of different types of politics, and they use it for elections and all the. People are going to come back to builders and go like, “Can you please start building stuff again?” Because there is nobody. We sell a lot of dirt in Seattle. I don’t know a lot of people buying. I’m buying houses for 25% cheaper than the lot price, and builders still won’t want to buy it.

Dave:
That’s crazy.

James:
It’s like, because there’s just no margin. Way too much barrier entry, way too expensive, way too many headaches. Why would you want to do that? It’s the worst sales pitch to start a business of all time.

Dave:
Your

James:
Upside’s

Dave:
Tiny and your risk is huge. Does this sound huge?

Kathy:
It’s tough. I mean, as you guys know, we have retail subdivisions all over the country, and it’s very interesting to look at it like our one hour north of Tampa, but kind of inland. There’s a lot of growth happening there. Those are still flying off the shelf. It’s incredible. Then we’ve got our Bozeman Montana one, just been steady, steady, just regular sales. And then the most recent one we did in Oregon, just sitting. Eight homes built. Yeah, it’s crazy. We lower the price. It’s tough. It is tough out there depending on the market you’re in, obviously.

Dave:
I think the takeaway for an investor, at least for me, is that this puts a floor on the single family correction that we’re in, at least in my mind. The fact that fewer new homes are going to be hitting the market in the next few years limits how much home prices could fall or could help them start growing again in certain areas because this is competition for existing homes. And I think a lot of times right now, actually for sure right now, the median new home price is lower than the median existing home price. So new construction has been undercutting existing homes for a while. And so if we see that backlog clear out, it should help us find some more footing. Now, single-family homes are still up one, 2% year over year. It’s less than the pace of inflation. And so I think this just continues to show that even though the market is slow and weird, it’s probably not going to get much worse than it is right now unless we see massive unemployment is the one caveat to that.
But there’s no evidence that’s happening right now either.

Kathy:
I think also being in development and knowing that these projects can take 10 years, they take forever if they’re large. You just don’t want to take that kind of risk if it looks like the population is growth is slowing. It’s something to think about. Is this just a now problem? And we don’t want to encourage too many builders to go in and build because then there’ll be a bigger problem later when there’s too much supply.

Dave:
Totally. Yeah. We did do a show on this. If we keep building at historical levels, we might have a glut of supply, not in the next few years, but 10 years from now potentially. I think that’s a really good point, Kathy, and something that stinks for the next 10 years. But eventually when you look at the math, it just makes sense. If you look at how many boomers own real estate, it’s so many. It has to go somewhere in the next 10 years. I’m not a big silver tsunami person. I don’t think that means there’s going to be a crash. But I do think that the balance between supply and demand will even out over the next couple years, especially if immigration stays as low as it is right now. We have low population growth, both because of a declining birth rate and historically low immigration.
And yeah, Kathy, I think you’re right. That’s a topic for a whole other time, but a really good point.

Henry:
Yeah.

Dave:
Well, thank you, Kathy. It’s a really important story and great conversation here. Henry, you’re up next. I think you got something related to this, but we have to take a quick break. We’ll be right back. Welcome back to On the Market. I’m here with James, Henry, and Kathy going over the latest headlines. Henry, you’re up next. What do you got?

Henry:
All right. I have an article from AEI Housing Center, and this article is titled The Capital Gains Tax Trap: The 29-Year-old Tax Law That’s Quietly Strangling the Housing Supply. So what this article is essentially saying is that Congress set the capital gains tax exclusion for primary home sales to 250,000 for singles and 500,000 for married couples in 1997. And it hasn’t been adjusted once in the 29 years since. And previously you were mentioning with Kathy that so many baby boomers own homes. Well, because so many baby boomers do own homes and they bought them so long ago and housing prices have gone up tremendously, sometimes tripled and quadrupled in value that there are millions of boomers who own homes that if they sold now would be over the 250,000 for singles. And a lot of them would be over the 500,000 for married couples, which would trigger tax bills.
This article’s saying of anywhere between tens of thousands and hundreds of thousands of dollars. And that is keeping them from selling because they don’t want to pay those taxes above the capital gains tax. So that means those houses don’t enter the market. And as the baby boomers are obviously aging, they’re predicting this may have some substantial impact on housing supply.

Dave:
Let me guess, a boomer wrote this.

Henry:
Probably did.

Kathy:
Yeah, but yes, but you have to keep in mind that that isn’t adjusted for inflation. So they didn’t really make that money. They have to pay tax on inflation, basically. It’s not fair.

Dave:
Oh, I don’t know. It’s not fair. I pay taxes when I sell a stock. I pay taxes when I buy something at the store. I personally think this is such a champagne problem. Oh my God. It means it’s a champagne problem. $600,000 and I don’t want to pay tax on the $100,000. No one wants to pay taxes, grow up.

Kathy:
Yeah. But for many people, that’s the only wealth they have. You’re coming from an investor perspective. But I will tell you from a personal situation that my mother was left with nothing but her home. That is what she had to live on. And she was living much longer than my dad. And so we as a family had her sell her family home and she lived off of that money and rented somewhere else. It basically kept her alive for decades. So we’re not talking about people that are listening to this show. These are people who that’s all they have is the equity in their home.

Dave:
I get that, but them’s the rules.

Henry:
I want to give some numbers, Dave, for the article. I’m not saying I agree or disagree with you, but I want to put the perspective around for people. So the article says, consider California or the Pacific Northwest, New York, or Massachusetts. A couple who bought in San Jose in 2000 for $350,000. They’re sitting on a home now that’s worth 1.5 million. So that’s a gain of 1.15 million. So if they can exclude the 500,000, that’s great. They don’t have to pay taxes on that, but they owe capital gains taxes on $650,000. So at the 20% federal rate plus the 3.8% investment income tax for higher earners, that’s over $150,000 in federal taxes that they have to pay. That’s a lot of money.

James:
Really a lot of money.

Dave:
That’s still lower than someone making a hundred grand a year pays on their federal income tax as a rate. I hate the tax exclusions. I think these kinds of things just don’t make sense to me. We’re all in real estate, so we’re like, oh yeah, they should get a tax break. I don’t like taxes either. I don’t like paying taxes.

Henry:
But that’s not the point of the article, right?

Dave:
What

Henry:
Is? The point of the article is that they still feel like they don’t want to pay the taxes, which means is it going to affect the housing market? Are there going to be less inventory?

Dave:
Henry, I would sell half my stock today if I didn’t have to pay taxes on it. So what do you want to do? Free up my stock? It’s the same question. I don’t know. It doesn’t make sense to me. I don’t think this is the reason people aren’t selling their homes. I think this is just a champagne problem where people who have tons of money are complaining about paying taxes. I’m not saying I want higher taxes. I don’t like taxes either. I just think this is like. People just say this because everyone wants their own personalized tax break.

Henry:
So Dave went off so early in this article, I didn’t have a chance to make my point. But one of my favorite things on the planet is Dave on his high horse. It makes me so mad.
I love aggravated Dave when he’s arguing about the subject. That is primetime television. But first, what I want to say is I don’t think this is a big deal. That was the point. Here’s why. They’re going to sell, they’re going to make the money. Exactly. You set aside that amount and you pay that amount. It’s not like they have to come out of their pocket from some magic source of money to pay it. It comes out of the proceeds. Does it suck? Yes, but they will have the money to pay it. So I actually don’t think this will cause people not to sell. I think they’re trying to get someone to make a change so they can keep more money. Now, if this was a situation where they had to come up with $150,000 out of the blue to pay some tax bill they weren’t expecting, yeah, that might be a problem.
But this just comes from your proceeds. You just have to be disciplined enough to set it aside and pay the taxes in a few months after you’ve sold. I don’t

Kathy:
Think it’s

Henry:
A

Kathy:
Big deal. Unless they did a cash out refi. You’re going to get all upset again. I hear it coming. But if they did a cash out refi and they already took the money out and then they sell the house and they don’t have the money to pay the tax, that’s a problem.

Dave:
I understand that. But when I look at the big picture of the tax situation where most of our tax dollars already flow are to older generations. If you look at how much is made up by Social Security or Medicare, that is directly going to seniors. I just don’t know if the solution to the housing market situation, the solution to the low inventory problem is giving wealthy boomers who already get all of these advantages and get a lot of our tax dollars should get even more of that. To me, this is already probably one of, if not the greatest tax benefit in the tax code. The fact that you could own a home and sell it as a married couple, and if you have $500,000 in profit, all of that is tax-free. That’s already amazing. To me, I don’t see why we have to sweeten the deal even more than that.

James:
What I will say is I think this will affect the housing inventory though, and California is a prime example of how that works. Prop 21, right, Kathy? When people purchase in California, their taxes are locked on their purchase price. They don’t increase over time.

Kathy:
They increase a very small amount.

James:
Very small, but it doesn’t reset until they’re sold, but that locks up inventory.

Kathy:
It

James:
Does. Yeah. People do not sell in California, especially in your good neighborhoods. They keep it just because that tax role is so much cheaper. And so this could affect in nice neighborhoods, high demand areas, families that are inheriting these houses, they might not sell them. They might pull a HELOC on them instead because you do see that people are trying to, with right now, inflation, all these things, the dollar is getting stretched out. I think we all feel it on a daily basis. This might be a way that people are like, “You know what? I don’t want to give any more back.” I think it could affect the housing stock, and especially in higher median home areas.

Dave:
So what’s going to happen then? They’re just never going to sell. But if someone inherited, then they pay a tax on that. There’s always just an untax.

Kathy:
It steps up to market value, so then they don’t.

James:
Oh, yeah. I mean, they’ll trick it somewhere. I mean, even in California, they try to repeal that Prop 21 all the time where they’re trying to take away this tax benefit. I mean, at the end of the day, the state and the federal are always going to try to tax you for a new thing. I agree. But that’s just the way it is. In Washington, they pushed everyone to do EV cars, energy efficient cars. Everybody, you’re going to save money, you’re going to save money. What do they pass? A new tax against EV cars to pay for the freeways. It’s all smoking games. But I do think in good neighborhoods, established homes, and if people are looking at a big tax bill outside of their estate tax that they’re going to have to pay, they might not sell it. And it could lock things up, especially prime real estate.
I think it’s your top 5% real estate, but not 95% America.

Kathy:
I’m going to try to understand, Dave, a little bit. I’m going to not battle you. I’m going to understand you. Please. No, battle me. Okay, we had a year where we had 9% inflation. Let’s say you bought a house and that there was 9% inflation and what we went through in 2022, and then you’re selling it essentially, you’re kind of selling for the same price you paid for, but you’re paying taxes on it because of inflation.

Dave:
But you’re not. That’s not inflation. You actually made money on that. People’s home prices went up way faster than inflation over the course of COVID.

Kathy:
So I know some people have said just across the board, you remove the inflation factor and that’s the break you get across the board on stocks, houses, whatever, that you shouldn’t have to pay that. But if it were you and you were president for a day, would you remove all tax breaks?

Dave:
Yes.

Kathy:
You would?

Dave:
Yeah.

Kathy:
So just everybody just –

Dave:
Flat tax.

Kathy:
Pays their tax. Flat tax.

Dave:
Yes. Okay.

Kathy:
I was curious.

Dave:
It creates weird incentives. I agree it would be impossible to unwind in the United States at this point. It would be so difficult, but a flat tax, it just makes sense. Why wouldn’t everyone just pay the same amount?

James:
So no scale on federal either?

Dave:
No, a graduated tax, but no tax deductions. You just pay.

James:
You know what? I was going to switch my vote from Henry Washington to you when you said tax across the board, but now you say graduated. I’m out. I’m out on

Dave:
This one. No, you need a progressive tax. You can’t have everyone paying the same amount, in my opinion.

James:
You would’ve got my vote if we got taxed it. All

Dave:
Right, fine. But dude, most people would pay way lower tax if they did that.

Henry:
You’re literally arguing with a boomer about this and a super rich investor. No,

Kathy:
No. I was just curious. I do agree that it’s unfair, but that is why I invest in real estate because I look at stocks. I’m like, “I don’t want to pay all those taxes, all the gains. I’m going to invest in real estate where I can 1031. I can live in a home for two years, sell it and get that $500,000 gain that James loves that strategy so much. I could have a rental property or have a property live it at two years, rent it for three years, and still get that $500,000 gain tax-free.” So it is totally unfair, but that is why I invest in real estate. So I di’t make up the law. Same.

Dave:
No, I agree. I play by the rules. I pay all the taxes I owe, and I try and reduce them as much as possible. I totally agree with that. But this is why I just think when you have these carve-outs, everyone has a carve-out and they’re like, “Make mine a little bit better.” It’s like, okay, that’s what’s basically they’re saying is I already have this massive tax exclusion. I want mine a little bit better. Then everyone else is going to say, “I want mine a little bit better, and I want mine a little better.” Meanwhile, we have $40 trillion in debt. At some point, that needs to get addressed. You can’t just keep lowering taxes and spending money as much as we do and just assuming things are going to be fine. Oh, God. Wow. Okay. Got me riled up.

Henry:
Deep breaths, Dave. Deep breaths,

Dave:
Dave. I know. Wow. Well, hopefully I’ll be in a position to be that mad about my own having to pay taxes on my $500,000 gain on my house one day. Anyway, we got to take a quick break. We’ll be right back. Welcome back to On the Market. We got a fun episode for you today. James, you got a controversial story for us? Please.

James:
It actually has to do with taxes.

Dave:
Let’s go.

James:
Actually, I’m probably going to do this fired up as Dave about this. The article I brought in today, it’s called The Math Has Stopped Working. NYC Home Flippers Drop. As state legislators propose a new tax, they’re talking about passing a flipping tax in New York City. If you don’t pay enough tax money already, I think if you’re a high earner in New York, you’re like 52, 53% of your money goes to taxes. So now they want to add in a flip tax. And this was mind-boggling to me because I’ve actually heard these same rumors in Seattle that they’ve been talking about doing, doing a city tax or starting to tax people that buy and sell properties, which is just a terrible idea to start taxing you on the gains of your proceeds. But what the article also talks about, which is going back, this actually ties in perfectly with everybody’s articles, that there isn’t enough people flipping anymore because it’s not that motivating.
It’s too hard. It’s taking too long. The money isn’t there just like builders. They’re not properly motivated. In New York State, flipping went down 10% year over year, the amount of transactions. The gross profit went down 11% in that flipper’s ROI fell 3%. And so it’s basically margins are getting compressed, things are taking longer, and now they’re coming up with new taxes that they want to propose. And this isn’t the first time this has happened because in Pennsylvania, they passed an anti-flipping, buy and dump bill. And this is where, again, it talks about taxing again. And what’s happening is the margins are getting so compressed when you talk about adding these additional taxes on, the risk is not worth the reward. New York’s tax would end up being around 65% of the income after you’re done paying your federal, your state, and your flip tax.
So if I basically flipped a house with you adding in all these taxes, it would be like I’m walking with 35 cents on the dollar.

Kathy:
I’m going to use Dave’s philosophy here because it goes both ways, right? Yes. People want their tax benefits, and then some people want to just tax certain people more for certain things. And so right now I’m going to agree with Dave. It’s just profit.

James:
It’s just profit. This is ridiculous. You know what? No one’s going to do this. Why would anybody want to flip a house?

Henry:
I wouldn’t care if the numbers make sense.

Dave:
This is why we need a simple tax bill. It should just be a flat rate on profit regardless of what industry you’re in. We shouldn’t pick on flippers more than anyone else. The same thing, something shouldn’t be exempt. That’s my whole thing. It’s like whoever’s in power, they’re like, “Oh, we’re going to favor this industry this week, or we’re going to hate this industry this week.” And as a business person or a regular person, it’s impossible to keep up. And maybe real estate is helpful. That’s why I do real estate because I don’t want to pay more taxes either. But it’s just like your whole business could get upended because a new administration comes in and they don’t like your business and they’re going to raise your taxes for whatever reason. It’s just like the whole thing makes

James:
It so

Dave:
Complicated.

James:
Well, and the thing is, these states, so they talked about Rhode Island, it jumped from what they did is they raised their conveyance tax, which Washington did the same thing. They put it on a graduated. But basically now in Rhode Island, if you’re buying and selling, flipping, instead of paying 230 per $500 in value, it went up to $3.75. That’s a huge increase on the tax you got to pay there. These federal taxes, everything’s getting compressed and the risk is not worth it. And the thing that makes no sense is at the end of the day, what’s going to happen is that all these things pass. The flippers aren’t going to pay the tax. We’ll pay the tax.
The sellers who, Kathy, you’re talking about that need that money to live off of, they’re going to get paid less for their property. That’s just how this works. Because we’re seeing it with building right now. People’s land values in some of these metro markets have dropped 25, 35%. That was their entire retirement. Why? It’s too hard. There’s too many taxes. There’s too many things you have to pay for, and you have to build that into the spreadsheet. Those costs get paid, but they end up getting paid by these sellers that really want the highest price. So all these legislations and things they’re passing, they’re actually going against the people that they’re trying to help the most. And that’s what makes no sense. The flat tax would fix this.

Dave:
But maybe that’s not who they’re trying to help. They’re trying to lower home prices, which is exactly what they’re doing.

James:
But then they also want generational sellers and everybody to stay in their name. It’s like they want it all, but they don’t want to do anything about it. Either way, these taxes are. If my tax bracket goes up to 65% in Washington and they pass the same thing, I’m retired from flipping. I will not flip again. There’s no point. What’s going to happen is you’re going to have a bunch of inventory that’s rotting and it’s not going to come to market. It’s not going to produce housing stock, and then people can figure out how to deal with it. But at the end of the day, you have to quit beating up these investors.

Dave:
I’m with you. I mean, 65% is insane.That’s crazy. And again, not arguing for a higher tax rate. I think this is what you get in a tax system like ours that is just convoluted. You just get unfair rules. You might benefit in one area, you might lose in another area. It’s just complicated. There’s no consistency to the way we administer taxes.

Kathy:
It’s just political, you guys. That’s all it is.

Dave:
It is. All right. Well, let us know what you think. People are going to get pissed at me in the YouTube home. I can’t

Henry:
Wait. How much are going to be fire on this one?

Dave:
It’s fine. Come at me. If you made $500,000 on your primary residence and anything over 500,000, if you can’t pay 20% on that, I don’t know what to say.

James:
And here’s the thing, you don’t have to pay that tax. Just move like I do every three years. It’s a nightmare. It’s pain in the butt. There’s ways to do that. But I don’t pay the tax. Exactly. I sleep in my car sometimes. That’s the way it goes. But I don’t pay that tax. Move.

Dave:
Yeah. Have a cake and eat it too. All right. Well, that’s our episode for today. Thank you guys so much for listening to us yell at each other about taxes today. We will see you on the next episode of On the Market.

In This Article

Name	Jefferson Simmons
Location	Manhattan, Kansas
Occupation	Full-time real estate investor (former underwriter, Realtor, and university fundraiser)
Assets	17 properties, 39 doors, $20,000/month in cash flow
Investment strategy	Single-family and small multifamily buy-and-hold, BRRRR-style renovation, creative seller, and private financing
Financing	Parental co-sign, family JV equity, private money line of credit, seller financing

Jefferson Simmons was 20 years old and about to be homeless. His entire fraternity house was getting renovated, and every rental in town wanted nothing to do with a group of college guys. 

On a whim, he flipped a Zillow toggle from rent to buy and found a mismarketed three-bedroom house that was actually a 2,700-square-foot property with three extra rooms in the basement. He pitched his parents to co-sign, negotiated the seller down seven rounds to $178,000, and moved his fraternity brothers into the basement. 

Nine years later, he’s walked away from law school, built partnerships with an uncle and a private investor, and grown that first accidental deal into 17 properties and 39 doors. 

Here’s how he built it.

You were a sophomore in college, with no income and no credit. How did you actually get that first house?

I’d saved money since high school from selling firewood and doing livestock projects, and I got a full academic scholarship right before graduation, so I had a nest egg but no income a bank would lend against. 

I went home and pitched my parents using an Excel spreadsheet and a full 10-year pro forma showing rent increases, and they agreed to co-sign. I negotiated the seller down from their asking price to $178,000 over seven rounds of back-and-forth, partly because I knew from the listing agent that the family was highly motivated to sell, and partly because I genuinely had no more room to go higher. 

My mortgage payment has stayed the same the whole time, about $1,300 a month, including taxes and insurance. I rented it the first year for $1,600, and it’s currently leased through 2027 at $3,100 per month.

Your second deal was a foreclosure auction property you bought with your uncle. How did that partnership actually work?

I saw a duplex next door to my first house heading to a bank foreclosure auction, and I had zero money to buy it myself. My uncle, who’d built a portfolio of his own and was a big mentor to me, agreed to fund it as a money partner. 

We could only look through the windows before the auction since we couldn’t access the interior, so we did our underwriting from the driveway over coffee, and he told me we could afford up to $140,000 after repairs. Then he left the country on a trip and told me he’d be completely unreachable, so I was the one bidding live from my laptop. 

I got it to $100,000, and even though it didn’t technically meet the bank’s reserve, they wanted it off their books and took the offer anyway.

You walked away from law school after one semester to go all-in on real estate. What made you pull the trigger?

I sat in my first law school class, and they described the bell curve of graduates, meaning that where you rank determines your salary. I realized I wasn’t going to be at the top of that curve, and I’d be leaving school with over $100,000 in student loan debt for the privilege. 

I’d already closed two real estate deals by that point and had real proof of concept, so I decided I’d rather take on another mortgage that pays me back than debt that doesn’t. I left after one semester, worked as an insurance underwriter making $42,000 a year, got my real estate license on the side, and kept buying single-family homes for years while working two jobs.

You’ve done some creative financing since then, including turning a house sale into a line of credit. Walk us through that deal.

I was working as an agent for a cash-buyer client during an insane seller’s market where every listing was already pending within hours. He was getting frustrated that we couldn’t move fast enough on anything. 

Around the same time, tenants in a house I owned asked to break their lease early to buy their forever home, and I let them out of it. That left me with a vacant house I knew fit exactly what my client wanted. 

Over dinner, I gave him two options: I’d sell it to him for $25,000 more than I paid, or I’d sell it to him at my exact cost if he’d write me a $200,000 private line of credit instead. He laughed, looked at the house with his wife over FaceTime, and agreed to the line of credit. 

Three months later, I used it to buy a $171,000 house, and he wired the full balance the day of closing with no appraisal and no bank fees. I pay him 7.25% interest, which beats his T-bill returns and costs me less than a bank would. We’ve since done several more deals together and become genuine friends.

What does your portfolio look like today, and what’s actually driving your growth now?

I’m at 17 properties, 39 doors total, and I own all of them outright except for a minority stake in a 15-unit I hold with a few partners. Altogether, that’s about $20,000 a month in cash flow. 

A big unlock along the way was sweat equity: I helped my uncle renovate a 12-unit he bought in 2019, doing new kitchens, floors, and paint myself, in exchange for a 10% stake, which let me build equity without putting up much of my own cash. I also stopped thinking I could only buy one house a year by saving for the next down payment, since that mindset was actually limiting how fast I could scale. 

Between the family partnership, the private line of credit, and just getting comfortable asking people directly for capital, that’s what let me go from one deal a year to where I am now.

Dave:
Are you in danger of coming up short in retirement? When Brian ran the numbers, he realized he was nowhere near the amount he’d actually need to walk away from his nine to five. But what could he do? He was already putting in long hours at the fire station. He couldn’t possibly take on a second job. Well, like many people searching for financial freedom, he turned to real estate. In just five years, he’s scaled to 20 rentals and against all odds, he’s on track to retire early. When we last checked in with Brian, he was buying simple, affordable turnkey rental properties 2000 miles away from where he lives. But recently he’s pivoted to a hybrid strategy you’ve probably never heard of, but one that’s helping him scale his portfolio rapidly. In the last six months alone, he’s bought six more rental properties all while working his full-time job, coaching football on the weekends, and staying fully present with his family.
And Brian’s about to give you the highly repeatable strategy he’s using to tie it all together. What’s up everyone? I’m Dave Meyer, chief investment officer at BiggerPockets. Today on the show, we have investor Brian Waters, a firefighter who is building a portfolio of affordable rental properties long distance from his home in California. Brian, welcome back to the BiggerPockets Podcast. So good to see you again.

Brian:
I can’t tell you how excited to get on here for the second time. I obviously had a great time the first time, so it’s a pleasure to be back, you guys. Thank you.

Dave:
There are people who didn’t catch your first episode, so maybe just tell us a little bit about yourself and a little bit of background on your investing.

Brian:
Yeah, absolutely. So my name is Brian Waters. I live out in California, married, have two amazing twin boys that are 13. I was an airline pilot for a number of years, got laid off, became a firefighter for Los Angeles. I’m a captain there now. And I realized at some point the pension just wasn’t going to cut it. So I did all the other crazy stuff that males do in their younger age from just investing in this and that, came across BP, BiggerPockets, and it changed my life. Now I’m just scaling my portfolio while combining that with my W-2 job as a firefighter, a busy dad, a football coach, all those things. And yeah, I would love to get into how I’m doing that from 2,000 miles away.

Dave:
What was your approach when you realized you wanted to buy rentals, couldn’t do it in California? How’d you go about figuring out the solution that you ultimately landed on?

Brian:
It was almost out of necessity, to be honest, because once I bought that first property out in California, I didn’t have a lot of capital. And I was like, “Well, I can save my way up, but I’ll see you in 10 years when I have enough to do it.” And so listening to a lot about what you and Henry talk about on the show, you got to come up with a strategy, a plan. Standing there at parade rest for me is not an option. So what I realized is I’m making a very good income and I’m blessed to have my job as a fireman in California, and I’m going to go take it, that money and that capital and go put it to work in markets where it makes sense. So for me, it just became out of necessity, truthfully.

Dave:
And tell us a little bit about what the strategy is you chose.

Brian:
Yeah, so for me, the initial strategy, which we’ve talked about on the previous episode was turnkey. I think it’s a very fantastic way for busy professionals. Like I said, I coach my kids’ football team, I’m a busy dad, all those things, just like I’d say most of the listeners are on BiggerPockets.

Dave:
For sure.

Brian:
So what that is for the listener is you’re buying a property that a company goes out and finds, they do all the remodeling, they put a tenant in place, they take care of all the CapEx, all that cool stuff, and they put it out there and you can buy it. It’s off market, and then they go ahead and professionally manage it for you. The only problem with that after you do two, three, four, I ran into the same exact problem that I was having in California. Now I have to save my way to the next one. And so I decided to eventually take those skill sets that I was learning, because you’re going to learn a lot even in Turnkey and bridge that into doing the Burr process, which you guys talk so much about. And so I think it was a perfect segue into that.
I learned a lot during those things and I’m still learning, but I was able to put those things to work in doing the Burrs, and that’s what I’m doing now.

Dave:
Great. And we’re going to talk about the Burr a lot and how you’re doing it long distance, but curious just to hear a little bit more about your experience with Turnkey. People have very different opinions on the merit of buying a turnkey property. And again, just for our audience, people use the word turnkey in two different ways in real estate. One is if you went out and bought an on-market rental that was move-in ready, you could just put a tenant in it right away. Some people call that a turnkey deal. But there’s this other business where you go to a turnkey provider and they actually find the deal for you, they renovate it for you. That’s what Brian was talking about. So what was your experience like with that, Brian?

Brian:
So these turnkey providers, they deal with a lot of out-of-state investors, and I think it’s a good combination. So they’ve solved a lot of our problems. Number one, deal flow is a big deal. The interest rates, that’s a big deal. Being able to professionally manage it and also on the back end, knowing what you’re going to rent. So what I wanted to do initially was not have to do a lot of analyzing and stuff. So they’ll bring you these properties and they’re great. They basically do all the work for you, all the CapEx stuff’s done. They know the markets, they’ve done hundreds and hundreds and hundreds of these, but most importantly, the incentives that they give you. It’s wild. So right now they’re buying the rates down to five and a half percent or lower for you at no cost, which is That’s amazing. That is great.
It’s great. They’re giving us deals on the property management fees. They’re also giving us rent guarantee for the year, which another one is like, what? I

Dave:
Can’t believe they’re doing that. Oh, I did hear about that.

Brian:
Yeah. Well, that’s a new thing that they’re doing because the truth is you’re going to have evictions, you’re going to have stuff that happens, but they want us to have the best experience possible. So for that year that the tenants are in there, if it’s an eviction or whatever they leave, they’re going to guarantee that rent that you sign on the lease. So I’m like, “You cannot lose you guys. You can’t lose.”

Dave:
That’s pretty good.

Brian:
So that’s a risk mitigator, especially when you’re coming from across the country.

Dave:
That makes a lot of sense. If you think about the way that a turnkey provider, one of these companies operates in their business model, they need to move deals. They rely on velocity and volume of deals to make money. And so they’re buying deals, they’re renovating, and they got to sell them quickly. So they will offer incentives. In the same way, if you look at what’s going on in new construction with builders right now, they’re offering incentives too because their business model relies on velocity. They need to keep moving stuff. And so that presents a great opportunity. The trade-off that you get with a turnkey provider is that a lot of the equity growth of doing a renovation yourself, that opportunity is gone because they’ve done that and they’re selling it to you hopefully at a fair price. But you don’t typically go out and buy from a turnkey provider and then say, oh, I’m going to renovate this property because it was just renovated.
And so if you’re a kind of investor who just wants hands off, “I don’t want to do very much. I get some cashflow, but I don’t need some big bump of equity,” great option. But Brian, it sounds like you’ve in your own life reached a point where you said, “I can’t just keep sticking with this strategy because I got to come up with 20 or 25% down every time I’m doing this, and I’m not building more equity that quickly in these deals.” So that’s when you decided to do what?

Brian:
I started to do the burr stuff, and that’s what I’ve transitioned it into. And that’s how I’ve been able to scale my portfolio from the last time we talked at 14, now up to 20, and I’ve put four more under contract.

Dave:
Whoa. I mean, that was less than a year ago, right? Yeah,

Brian:
It was six months ago.

Dave:
Well, we’re going to talk about that, but why Burr? What stood out to you about this strategy is what’s right for you?

Brian:
I’m kind of a type A personality. I’m a go-getter. I don’t like, I love real estate. And so when I fell in love with doing this stuff and the connections and the relationships that I made, and so my initial goal was never to have a bunch of these. But once I realized that the process is just a repeatable system, it became really fun for me. And so I started to jump into the Burr stuff. I had learned it and I’m like, “This is actually a pretty good method.” And the benefit, as we all know, is you’re getting a lot of equity right away. You could recycle your capital right away, and you can take this as far as you want. And that’s, I think, the benefit of that system.

Dave:
And that gets you around the challenge you were having, right? Because if you only have X amount of equity, let’s call it a hundred grand, you put it into, just for ease of math, you put it into a deal on a turnkey provider, it will grow, but it’s stuck in that deal until you refinance it or you build up enough equity to take out a HELOC or whatever. With the Burr strategy, you put that money in and you build more equity. Let’s say you invest 50 grand and you raise the value of your property by a hundred grand, you’ve built $50,000 in equity that you can take out of that deal and put into your next deal. So that’s why it’s just so popular for scaling is because it allows you to use your money extremely efficiently to build up your portfolio. But what most people do, Brian, as you know, is they do a burr in their own backyard because you’re managing a renovation and that could be intimidating even for people who are down the street.
So you’re doing this from thousands of miles away. How did you gain the confidence and build the right team to do the first one? Because then I want to understand how you’re doing six of these in the last six months.

Brian:
Yeah. I think even with the turnkey stuff, I started to realize what they’re doing. I’m somewhat emulating what they’re doing. So what I started to do is getting deal flow coming from them and from real estate, other investors and stuff. And what I started doing is going on Redfin. I would go on there and put a little tag or heart on these properties. What I started to notice is that these turnkey providers were investing in the same areas. It became like a shotgun spread. So I’m thinking, these people are professionals. They do this all the time. I know what numbers they’re selling them for, and I started to work my way backwards. So when I would go onto Redfin, I would pull up that area and I’d go, okay. I would find another property on Redfin and it was a total outlier. I’m like, okay, I’m not getting there.
I’m going to stay with the herd and do what they’re doing. So that was how I started to understand where, that’s part of it. If other people were there, it’s probably a pretty good idea to be in the

Dave:
Same place. You don’t need to be some genius market picker. There’s a reason why people buy in certain areas, and it’s kind of obvious if you start to just dig in for a little bit.

Brian:
Right.

Dave:
So you built a team. How do you do that? Because that I think is what most people get tripped up on when they’re looking to invest out of state. Because if you live in an expensive market, want to buy rentals, you look at a property in the Midwest, you’re like, damn, I want to do that. That seems way more accessible than everything else I could buy in my area. But then there’s the practical realities of who’s going to manage these things? Who’s going to look out for this thing that I’m investing so much money in? So how do you go about it?

Brian:
Yeah, so everyone talks about OPM, other people’s money. There’s something called OPK. It’s other people’s knowledge. So I like to go out there and I think real estate is so unique in the fact that you have to get out there and network. And guess there’s a really cool company out there. I don’t know if you guys have ever heard of it. It’s called BiggerPockets. Anyone ever heard of that one? Well, guess what? It’s probably the best networking real estate company in the world. That’s

Dave:
The whole point. Yeah,

Brian:
Exactly.

Dave:
Within

Brian:
The forms I’ve met contractors, have met so many good connections. I met my real estate agent at BiggerPockets last year that’s helping me –

Dave:
Oh, at BPCon?

Brian:
Yeah, awesome. I went up

Dave:
And

Brian:
Sat next to him and that became my realtor that’s giving me deal flow in Detroit right now. So you got to be willing to get on the phone and make connections. But I kind of wanted to talk about one little secret, another little sniper thing that I do that’s pretty cool because besides funding, besides an agent, there’s a million of those. Probably the hardest one to find is contractors, I would say. Good ones, reliable ones. So one little thing that I’ve done is I call it the Facebook group method. So a lot of people go into these Facebook groups, investor communities, it could be even the BiggerPockets form that you’re going into, and they’re going to post a question. And the question’s going to be, anyone know a contractor in X city? That is the wrong method because you’re going to get blasted, absolutely blasted by people dropping their cards, this and that.
So what I personally do is I find a question that not every person would know, kind of a more detailed contractor type question.
And what I’ll do is I’ll send a picture in there. Hey, how would you handle this situation? And it could be like a front porch and I want to see their response. The educated response means, guess what? They’ll probably know what they’re doing. Or what I’ll do is I’ll kind of call it lurking in a sense, but I’ll sit back and I’ll go through and search other questions that people have asked. And if someone’s just firing off a business card, they’re desperate for work. They’re probably not the best ones out there. So I’m waiting for really knowledgeable response, that OPK, that knowledge that they have. And once they give that, then I go, okay, I’m going to dig in more and find out who this person is. And in that response, I’m going to give them a chance, at least have an interview. And so what I do is I put together an interview process checklist and I want to find out how they handle different stuff and how knowledgeable.
If they know that one little thing, chances are they at least know what the heck they’re talking about. So that’s

Dave:
Good. Absolutely. I love that. I think that’s a great example of how to think creatively and to network really well. That’s kind of the whole idea behind BiggerPockets forums. I don’t know if you’ve ever heard of this term, I think it was Gary V came up with it, Gary Vanderchuk, where he talks about the thank you economy where it’s just like, look for the people who are just going out and sharing their knowledge and not just trying to pitch you something. So in your example, if someone’s spending the time on a Facebook group giving you a thoughtful answer about how they would approach a problem instead of just trying to make money off you right away, that contractor winds up getting more work because they’re just giving and trying to be productive and trying to help other people. And it just shows you who they are.
And that’s the same thing you see in the BiggerPockets forums. People are just on there. Absolutely. Experienced investors answering questions for free. It’s the same idea. Just try and help one another. And if we can do business together, great. It’s a really good approach. I think a lot of people who get into this just think about networking as one directional. You just like, “Hey, I need this one thing from you.” But networking in my experience, if you start doing it in this way where you’re contributing and having conversation, instead of just getting to that point right away of can we transact together? Again, it’s counterintuitive, but you go faster and find better people quicker than if you just try and jump the gun. And if you want to do it, everyone, you can do this for free. I know there are people who listen to this podcast who don’t know that you can just go on BiggerPockets website, biggerpockets.com.
It is free. You can go on and network with literally three and a half million investors who are out there and ask questions and talk to one another, do deals together. It’s awesome. Go check that out. So you’ve also accomplished something very impressive, Brian, which is the scale that you’re doing at. I want to understand just how you’re doing that, but we got to take a quick break. We’ll be right back.
Welcome back to the BiggerPockets Podcast. I’m Dave Meyer here with investor Brian Waters talking about how he’s built a system where he can invest long distance and not just buying turnkey properties, but doing the Burr method. So Brian, tell me, once you had a team in place, how did you set it up so that you’re not just doing one of these a year or one every couple months, you’ve done six in the last six months. How have you built that business?

Brian:
I think everyone talks about the buy box, and it is really important. It’s probably one of the most important things. I have not steered away from my buy box in the past six months, and that makes it so easy because if you’re getting all these deals coming your way, you’re going to get pulled to the left and the right and you want to analyze this stuff, you’re wasting your time. I know my numbers, I know the neighborhoods, I know the streets. I use the same product and everything. I’m literally trading the exact same recipe every single time. It just makes it easier. And I treat my contractor really, really well, and he gets it done for me. And just creating that system, that SOP and sticking to it until you get to where you want to go is the most important thing. Study that market.
I could see a deal that comes through from Redfin or wherever I’m getting it, and I could know within a minute whether or not I think it’s a good deal or not. Obviously, there’s more to that. I’m going to analyze it further, but I have to know if I even want to take a look at it.

Dave:
Will you tell us what your buy box is right now?

Brian:
Absolutely. So I’m in the Detroit market and the Memphis market. The deals that I’m looking for are between 70 and $80,000 for purchase price. And then the remodels, I don’t do cheapy remodels. I’m not going to go crazy and put a gold toilet or anything like that in there. But what I will do is I want to make sure. Brian’s keeping this for the long term. So I want to know that it’s going to last me a long time. So I’m putting new roofs, new windows, new water heaters, new HVACs, LVP flooring, kitchens, pretty much a full job. But the remodels that we’re getting, which is mind-blowing to me because in California you couldn’t even get an awning for this much, but it would be about 40 grand for that. So that’s plus or minus what I’m getting. So we’re all in for 130. And these properties are appraised.
I literally just had an appraisal come in yesterday for 170. So
That’s remarkable. And they’re renting for around 1350, $1,400 a month. And yeah, I’m sticking to that plan. I’m using the same materials. I have a spreadsheet of all that. It just makes it easy. I have the same contractor, so he knows the expectations. I barely even have to talk to him anymore. And then you said something important, you got to analyze data. So when I get my appraisals back, I’m going to look at the appraisal, I’m going to study it. What caused stuff to go up? What’s caused stuff to go down? Is it a square footage issue? Is it a bathroom, extra bathroom? All that type of stuff.

Dave:
And so let me just recap those numbers for everyone here. You’re buying between 70 and 80K in Detroit and Memphis. You’re putting about 40K in, which agree with you. I got a quote for a heat pump for my primary residence that costs that much. So that’s pretty impressive. And then you’re getting an appraisal at 170-ish. So with closing costs, you’re making 40 to 60 grand in equity on each of these deals?

Brian:
Yep. Yeah. Dude, that times five, that’s a couple hundred grand in equity a year. That’s not bad.

Dave:
That’s awesome. Wow, congratulations. So that’s great. It seems to me like your whole model is how repeatable you can make this. Is it anything that’s 70K or do you have a specific format you’re looking for?

Brian:
No, it’s very neighborhood specific because a lot of those markets all over the country, you can go on one street and it’s not nice. So I’m sticking to the areas I’ve known. And because I’ve been analyzing and I love analyzing stuff, I could tell you a million streets in Detroit because I know when it pops up, I’m like, “Yep, that’s a street I’ve bought on or looked at.” So the reality of it is a lot of these neighborhoods that were built back in the days, they had the same builders. And so the layouts are very similar. I mean, most of mine are three bed, one bath, three bed, two baths. They look the same. If I lined up all 20 of mine in a row, you’d be like, oh –

Dave:
You can’t tell them. Yeah, they’re

Brian:
All brick. It’s

Dave:
Similar.

Brian:
And so it really makes it easy.

Dave:
And what do they rent for?

Brian:
They’re renting between 13 to $1,400, depending on if it’s a normal renter versus a Section eight renter.

Dave:
So you’re getting pretty darn close to the 1% rule once you’ve put in additional equity. Yeah,

Brian:
Close enough. And then as we talked about, all the CapEx items are all done by me. And so those are coming down the road maybe 15 years, but I still keep really good reserves and I run my numbers conservatively, but those things are taken care of on the front end, which keeps the tenant happy and it keeps me from

Dave:
Having

Brian:
To deal with that stuff.

Dave:
So you said materials are the same. I’ve heard this from other people who are kind of doing this, but use the same LVP, use the same cabinets, you use the same paint color, so you’re not constantly making decisions. Is that why you’re able to allow your contractor to just do his own thing? Because he basically knows the formula and he doesn’t have to think that hard.

Brian:
Yeah. And the reality of it is, let’s say you have a tenant turnover and there was some paint issues that need to be done. Well, guess what? We probably have extra paint from the last job. We’re not going to

Dave:
Do new stuff.

Brian:
If I’m using the same exact materials and the last one appraised for 170, and then three months later on the same block or two blocks over, I’m pretty sure I’m going to get close to that. Maybe not

Dave:
Perfect.

Brian:
It takes a lot of the risk out.

Dave:
What about across markets? How does that compare? Are you able to use similar layouts, paints and stuff, or do you have to cater the approach to the market you’re investing in?

Brian:
This would be a great time to introduce my new strategy. It’s not new, but it’s pretty similar. And so I’ve partnered with a company out there after doing a bunch of projects to do what I call the burr key, which is kind of exciting. So the burr key is a kind of done with you, done for you burr, which I think is pretty cool.

Dave:
Okay. So how does the burr key say right? How does the burr key work?

Brian:
Yeah. So what the burr key is, everyone knows what the burr is, and the key part is it’s a done for you type of burr. And so I’ve partnered with a team out there. They’re not turnkey providers. They actually don’t do turnkey at all. But what they do is they have a wholesale team. They’ll go out and find the property. They have a construction team that does the remodel for you. And on the backend, they have a property management team. So very, very similar. But where it makes sense for us is we come in now with private money or hard money, and we can use that same Burr strategy where we’re building in the equity. And so the question probably that most people on the call are going to go, “Well, how do they make money?” Well, actually, what they do is their main way they make money is through a wholesale fee.
They’re finding these properties that are very cheap, which is fine. I don’t care. I want them to make

Dave:
That money. Yeah, I agree with that.

Brian:
Yeah. But they’re also the project managers. And so it takes about two to three months for them to finish the product. They’re using the same materials every time. And on the backend, they have a property management team and they’re going to manage it for you.

Dave:
So the difference is with a turnkey provider, they’re buying the deal upfront from the seller, from the original seller. They’re doing the renovation and then they’re selling it to you. With the bur key, you are buying the deal from the seller through a wholesaler, so you’re paying a fee. The team that you’re working with never owns the property, right? Correct. So you’re taking on the risk part in the renovation, but you’re also getting the reward part of the burr. So it really is a little bit of both. Are these properties in rough shape? What do they look like when you get your hands on them?

Brian:
Yeah, I don’t recommend, but the one I bought was rough. I mean, you might walk in and fall into the darn earth. So what they do is they’re going to go out there and they’re going to give you a scope of work. Probably one of the most important things when you’re out of state is the communication. So this team, and this is why I’m continuing to do business with them, is that they will answer their phone all the time. They do a once a week property walkthrough where they’re actually FaceTiming you and you’re getting to see thing. They have a Google Drive account where they’re dropping photos in. You could manage your own BRRR, but this takes a little bit off your plate because they’re turning utilities on for you. They’re dealing with permits from the city. If there’s a change order, they’re handling it all.
Instead of me being on the phone all the time, it’s a little bit easier to do out of state in my opinion.

Dave:
This makes a lot of sense to me, but you said it was a home run. Tell us about the numbers.

Brian:
Yeah, I know. I just got the appraisal back and I was like, oh, cool. I think I’m onto something here. So our all-in was 135, so more than the ones in Detroit. The timeline, it took about six months and it just appraised for ready for the drum roll, drum roll, 225.

Dave:
That’s amazing. And you’re going to rent this for what?

Brian:
The rents in those areas go for, again, $1,400 up to 16 for section eight. So the only thing is I’m going to be barely breaking even, but guess what? I just got a lot of equity, so I almost don’t

Dave:
Care. Yeah, huge equity. Yeah.

Brian:
Those times where I’m like, “If I have to come in with a hundred bucks, but I made a ton on the back end, oh, well, I can handle

Dave:
That.” Yeah, totally. Yeah, exactly. Not every deal is going to get check every box. It’s kind of like the big overall picture. If you’re making enough money on your deal to compensate you for the risk and the capital that you’re putting into it. Personally, at this point in my investing career, I don’t really care. Later in my investing career, I’ll focus more on cashflow. But right now it’s like, “Hey, I can just make a chunk of equity. Why not? Why wouldn’t you just do that?” Brian, this is super cool, man. I love you’re just inventing new strategies out here, just coming up with new business models, teaching us all. This is super cool. I want to talk a little bit more about the funding piece because that seems key piece to how you’re scaling and how people can replicate this model that you’re creating. We got to take one more quick break though.
We’ll be right back.
Welcome back to the BiggerPockets Podcast here with investor Brian Waters talking about how he’s inventing strategies, scaling long distance, doing all the things people say you can’t do. So Brian, I absolutely love the story that you’re telling us here and what you’ve been accomplishing for yourself. Tell me a little bit more about financing because I imagine, correct me if I’m wrong, but you’re working a W-2 job, you’re making good cash flow, but did six burs in six months. You’re pulling in private money, you’re using other people’s money. Tell us a little bit about how you got started with that and what your system for using outside capital looks like.

Brian:
Absolutely. First and foremost, listeners, please keep your job. It’s the golden booth. It’s going to help you. So now that’s off my plate, early on in my investing career, I just started documenting this stuff. And that’s honestly what led me to this conversation with Dave today is I started telling my story on social media. We talked about how cringe worthy it is and who cares, you guys? But what happened is I started doing all these projects, I got to around number eight, number 10, and people coming out of the woodworks. I’ll just call it Uncle Rich Rico or whoever. If you pull out your phone and just scroll through, there’s a lot of money sitting there and they want to put it to work. People are scared of other things right now. They’re scared of crypto, all that stuff. And we’re not going to get into that, but everyone wants to get into real estate, but not everyone wants to do what we’re doing.
So one way to do that is they want to partner with you. So I’m paying my lenders very, very well. But the reality of it is you don’t need to go and do that either because there is something called hard money out there. Hard money is a fancy term of saying an institutional lender who’s going to lend you the money to buy a property for the rehab. Yes, you’re going to have to pay for it. Again, why it’s important to have a job. And they want to open up that book because that’s how they make money. And the better you get at it, the more you do, the better the rates get. When you hear people say I’ve scaled a hundred rentals, it’s because of that. It’s not because they had a lemonade stand or whatever. They have investors.

Dave:
How do you recommend people start doing this if they want to scale and want to get access to this capital? Do you have to use social media? Are there other ways to do it?

Brian:
No, I think social media is your new business card. It’s funny because now that I’m going around and speaking at different places and kind of getting in that world, I don’t think I’ve ever been asked for my phone number anymore. It’s like, “Hey, what’s your social media handling?” And so they want to go back in time and they want to see what you’ve accomplished. We’re in a weird part of society right now where trust is super important. And you could tell people that you do real estate, but if they want to see it, they want to watch your journey.That’s

Dave:
A really good

Brian:
Point. And a perfect example is I had someone reach out to me that said, “Brian, I’ve been watching your social media for three years and I finally am in a position where I want to partner with you.” And I was like, “Whoa.” So if I was not consistent in doing what I’m doing, that opportunity would not have been there. And I think it’s important. We all do it. And I think another important factor is, including myself, we’re nosy. We want to know what people are doing. And when someone sees you doing the thing, they want to go –

Dave:
It’s so true. Yeah.

Brian:
I want to do the thing with you. And they’re organically going to reach out to you. So are there other ways? Yes. But I think this is just overlooked by a lot of people. And trust me, when you guys go on my social media, please feel free to make fun of me in the comments. We’re having fun. Totally. Real estate’s fun and I don’t take it too serious.

Dave:
I know. Sometimes you see these comments, people are like, “Why’d you say that?” I’m like, “I’m just a dude.This isn’t scripted. I don’t have a team behind me coming up with this stuff. I’m just saying what I feel, and it’s fun.” And that’s authentic.That’s what actually works is just showing people the reality of the situation. You don’t have to paint some perfect picture of every deal or every part of your life. Like you said, building trust comes from authenticity. Whether you do it in social media or you come to BPCon and you’re talking to someone, you got to be authentic, be who you are. And that’s how you find the good contractors, the good lenders, the people who are willing to lend you money. But I will say though, I want to call out something you mentioned before, Brian, that it was after you did a bunch of deals that people started reaching out to you.
And that’s not to say that you can’t do it right away, but man, it gets so much easier once you’ve proven the model.

Brian:
Yeah. And I think truthfully, it’s irresponsible for people that are brand new to go out and ask for it because the most important thing is you guys, we have to take care of each other. Money is the root of all things good, but it could lead to bad situations. I will never risk someone’s money. I would rather sell my house, my car. I would I’ll get a 20th job if I had to, but if you’re brand new, you probably shouldn’t be using private money. Maybe unless you have someone, a mentor, you’ve had a long conversation with Dave and you understand the process, please get good at it first because it’s very risky.

Dave:
Before I worked at BiggerPockets, I worked in tech and there was a saying about raising money the first round. If you’re trying to make a startup, they would say the first round of money you get is the three Fs. It’s the friends, families, and fools, because those are the only people who are going to give you money for your dream startup. And that’s kind of true in real estate. If you’re going to partner, maybe you have a friend or family who you want to be a sweat equity partner to, whatever it is. But most lenders are going to be sophisticated and they have other options. And so that stinks, but it’s just part of the reality. You got to prove that you can do it. And I like what Brian said. If you go out and show that you can hustle for your first one, that buys so much confidence in the lender that they will be good stewards of your capital and you have to put yourself in their shoes and how they’re making decisions if you’re going to go and try and raise that money.
So Brian, awesome. Congratulations on all your success. Fast progress. What are your plans and goals now at this point?

Brian:
Yeah. I mean, we didn’t touch on this, but we don’t have to get into, I just want to share it because it’s the power of real estate. The very first property I ever bought in California, I just refinanced that, pulled out 150 grand to buy an Airbnb in Utah.

Dave:
Sick.

Brian:
We’re going there in three days. It’s going to be amazing. That’s something that I would never have been able to do if I hadn’t bought my first one. So it’s just parlaying that money down the road. And I’m super excited, but I got this email from this legendary guy by the name of Dave, and I’m holding it right here. And when I opened it up, it just blew my mind. And so that email, I don’t have to read the whole thing, but Dave invited me as an opportunity to speak at BiggerPockets Orlando. And I am –

Dave:
Heck yeah.

Brian:
So thrilled to be there, you guys. It’s going to be so fun.

Dave:
Oh dude, it’s going to be so fun. Yeah. I put this on my page,

Brian:
By the way. This is going

Dave:
On my page. Oh, I love that you printed it out. That’s awesome. Well, you absolutely deserve it. I was sitting around with my colleague, Alex, who does the incredible job of planning BP Con, and we were talking about speakers and topics as we always do. We were talking about out-of-state investing. It’s a super popular topic. People always want to do it. And I thought Brian’s doing something super cool. He’s figured out a way to make this work. He’s doing things I wish I was doing. And so I think everyone at BP Con is going to learn a lot. And so if you’re the kind of investor who wants to invest out of state, I know tons of people reach out to me about this every day. This is the kind of stuff. Come learn from Brian. Or if you’re someone who just wants to learn, how to scale property, these are the kind of events, they’re the kinds of speakers that will be at BP Con.
Brian already talked about how he found his agent at BP Con. Amazing stuff here. So if you want to grab your tickets, go to biggerpockets.com/conference. There’s so much to learn, so much to enjoy at BP Con, and stoked you’re going to be there speaking this year, Brian.

Brian:
Yeah, thank you. I’d like to say one thing. I am super approachable, you guys. I love real estate. So after you listen to this, please reach out to me on social media. I will call you – Yeah,

Dave:
What’s your hand?

Brian:
It’s @mister. Brian. Waters, and that’s on everything. Awesome.

Dave:
And

Brian:
Trust me when I say I’m going to be the one answering the phone. You will be talking to me personally. But at BP Con, come listen to what I got to say. Approach me, talk to me. I will go to lunch with you. I will give you all the tips and tricks. I will introduce you to my real estate agents, my contractors. I love BiggerPockets, obviously. So it’s very humbling for me to say that I was sitting in the front row last year at the event, and now I’m here talking to Dave and speaking. And that’s the power of BiggerPockets. I was the avatar you guys were shooting for, and now I get to share what I’m doing. So keep at it, everyone. Big virtual hug. Big virtual hug. My BP family. I love you guys.

Dave:
I love it. Great way to end the episode. I should say one more thing though. Brian was on this show in the first time because he went to biggerpockets.com/guests and applied to be on the show. We really look through all the applications. So if you want to share your story on BiggerPockets, go to biggerpockets.com/guest. And if you do, you might be sitting here telling your story to many other investors sometime in the future. Thank you all so much for watching this episode of the BiggerPockets Podcast. We’ll see you next time.

 

Ashley:
Most people wouldn’t move into a tiny house in their own backyard. Today’s guest did exactly that at 26 years old, so he could split his house into two units, rent both of them out, and have his tenants cover his mortgage and most of his bills. He did the renovations himself, went through an eviction, rented to a family member, and came out the other side with a completely honest take on what landlording actually looks like when you’re in the middle of it.

Tony:
Elijah Ray bought his first property in Portland, Oregon in 2023. He converted a single family home into two rentable units, lived in a tiny house he parked in the backyard, and spent two years learning what real estate really costs you, not just financially, but personally.

Ashley:
This is The Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I’m Tony J. Robinson. With that, let’s give a big warm welcome to Elijah. Elijah, thanks for joining us on the Rookie Podcast today.

Elijah:
Hey, hey. Thanks for having me on, guys.

Ashley:
So I want you to take us back to 2023. You were 26 years old. You’d been learning from BiggerPockets, and what finally pushed you to stop learning and to actually buy something?

Elijah:
I was ready. I basically, I knew I was ready when I knew I didn’t want to keep on renting, and I just wanted to live in my dream basically. So I just kind of thought, I was like, you know what? Am I okay with working in a bunch? Am I okay with working really hard and getting to this goal? And I mean, turns out I was. I ended up just applying to a bunch of jobs and just grabbing two of them and working a hundred hours a week. And basically just a second that I had two years of paychecks of both jobs at the same time. Yeah, basically just when I got to the point of having my jobs, both jobs at the same time for two years, that’s when I knew it was time to jump in and start looking. And I found my real estate agent, and luckily I got the house that I have now.
Although I had to put in a lot of offers and see a lot of kind of crusty homes before I saw mine. It was a process, but definitely worth it.

Tony:
Elijah, we’ll talk about the house you ended up finding in just a moment, but I just want to make sure I didn’t misunderstand what you said or mishear what you said. You said you were working 100 hours a week?

Elijah:
Yes. I was sleeping at my Amazon job. So basically I worked a night shift security job. And then during the daytime I would work an Amazon job. On my breaks, every second I could, I would take a nap on the Amazon van shelves and stuff. It was pretty crazy. But yeah, I was working a hundred hours a week. It was hard, had no social life. I was eating rice every single day. It was actually pretty hard, but it was worth it. I knew my money was stacking up. And honestly, it wasn’t really the money. It was just I knew I needed my paychecks to say a certain number to get a certain price of a house. So I did the calculation and stuff from the stuff that I learned. So yeah, it was tough.

Tony:
Elijah, let me ask, man, because I think a lot of people, they want things in life. All of us want for something, but very few people are willing to do the required amount of work to actually make that happen. And when I hear working two jobs, sleeping on my lunch break, that’s someone who is willing to do the work. What was it that gave you not only the motivation, because I think a lot of people can find that initial motivation, but what was it that gave you the ability to stay disciplined and consistent long enough to actually get to the goal? Because I would imagine there had to be days when you’re like, “Man, is this even worth it? What am I doing?” How did you push through those moments to actually achieve the goal of getting the capital set aside?

Elijah:
I would say the hardest moments were when you wake up from a nap and you’re still at work. So I definitely know that feeling of, okay, when the motivation is gone, other things have to push in. The thing that pushed me, which is kind of hard to say, but was seeing my friends and family around me not achieving the goals that they set and also living lives that were kind of mediocre. You know what I mean? Nobody owned their own home, which is fine. Some people don’t have a goal of owning a home, but they don’t own their own home. They’re working a job they don’t necessarily like. My goal was to buy my house so I can rent out some of it so I don’t have to work a job. So I definitely was just motivated by that freedom. I was kind of tired of working so much and with no result.
You know what I mean? So I kind of just was pushed through with just thinking about my goal day in and day out. Every single week I would sit down and look at my goals on paper and work backwards. And I was like, “You know what? I can’t wait for that life. It’s going to come. So I’m just going to keep on pushing and keep on working and I’m going to get that house even though people are telling me it’s impossible.” I just was just motivated by that future goal in my mind.

Ashley:
I think that’s really interesting because a lot of people go the opposite direction. They look up to and are motivated by people who are living the life that they want. And they see the cars, the houses or whatever that may be, traveling with your family, things like that. But you actually took it the opposite. You looked at people around you and used that as motivation as I don’t want that to be my life. And I find that interesting because when I quit my very first job, I quit because I was not making enough money. And one of the CPAs that was a partner at the firm said to me, “I am unhappy with what I make and I’m a partner. That’s just how it is.” And that right there was a light bulb moment for me is like, okay, you just reassured me I’m making the right decision because I don’t want to be here another 30 years and have regrets that I’m having right now and I want to get out now.
And so I think that sometimes we look at what we want in life, but also it can also be a huge motivation of what you don’t want your life to turn out to be, and that can use that as a driving factor too.

Elijah:
Yeah, I think it’s more motivating to look at that. I mean, it’s kind of hard to look at it that way. Looking at people around you that have what you don’t want. It’s kind of sad, but it’s more motivating because yeah, if you look at people with nice cars and houses and stuff, we all want nice stuff. But when you look around and see the reality of people around you that are not quite living the life that they dreamed of, it really is motivating because you’re like, I don’t want to look up when I’m 90 years old and be like, what did I do this whole time? So I’d rather work really hard, have no sleep, maybe be a little bit lonely or just in the grind twenty four seven, but I end up with a life that I dreamed of. So definitely worth it.
Definitely worth it.

Tony:
Elijah, tell us a little bit about the deal you actually found. How much capital did you have to save? What was the purchase price and what did it cost you to actually get into that deal?

Elijah:
Yeah, so the entire two years of working the two jobs, I was actually deeply in debt. Not deeply, but I bought a car. I just got out of a divorce. So I had to buy a car. I didn’t have to, but I bought a car because we shared a car at the time. I also got a surgery and it was like 13,000. So I was in debt a little bit. So the whole time I was basically paying off debt while stacking money, but I would say the first year there was no money in my pocket type of deal while I was working all those hours. Now the second year around, I was actually saving up for the house. And at that point, I believe that I had to have $13,500 to get my house. And my house was 333,000. I think it was that little 1% rocket money mortgage situation that I ended up getting.
And yeah, it honestly kind of sucked though because the house that I got was a single family, so I couldn’t use the rental income in the deal and show like, “Hey, this is more income.” I had to fully just use my income and what I had to bring towards the table. So yeah, just like 13,000, nothing too crazy, but it definitely was a heavy penny for me at the time, but not too bad.

Tony:
Elijah, you said Rocket Mortgage 1%. Are you saying a 1% down payment?

Elijah:
Yes. Yeah. So that’s what –

Tony:
I’ve never heard of that before. Well, yeah, talk to us about this.

Elijah:
Yeah, so it was a terrible interest rate, so 7.5 interest rate, but it definitely was 1%, which was really awesome. And yeah, honestly, that was the one part about buying a house I really hated. It seemed like the numbers kept on moving around a bunch. I had no clue in that region, but luckily in the end I had enough and it was about 13,000. But yeah, it was a pretty good deal. The area was not too bad. The houses I had to see before seeing mine, the walls were missing. There was rotten racks in the walls. There were so many terrible homes I’ve seen before this one because my price range was super low, like I said, 333. But here in Oregon, in Portland, that’s an okay price for a house, but it seemed like I really was more so being able to afford closer to 300 and under.
But luckily since I had the second job, I was able to get a little bit more.

Ashley:
Now this was a single family home, but you actually converted it into two units. So was that kind of the plan going into this or did you decide to do that after you purchased it?

Elijah:
Yeah, so that was one of the big things that I learned when I was doing all my research because the whole reason why I even though to get a house to turn into two units and lived in a tiny house in the backyard is because I wanted to house hack. So I learned about the house hacking thing. I was like, okay. Basically when I went around and looked at houses, I was always looking for things like a garage or a attic or a basement or anything like that. Now the house that I ended up getting, it does have an attic, but it wasn’t something I can convert. But what it did have was a really weird back room area that was about 400 square feet. And it had a door to the outside and it really was originally the last owner’s bedroom and the back door was just a side door.
But the second I saw my house, I was like, “Yeah, I’m going to put up a wall here and that’s going to be a unit back there. I’ll add a kitchen, I’ll add a bathroom.” And then I’ll rent out the front, which was just, it was so amazing, so perfect. When I was even telling my realtor, she was like, “I don’t know about that.” But I was like, “You know what? I’m just going to do the thing and it’s going to work out.” I had to make it work out because I could not afford the full mortgage alone because I definitely didn’t want to keep on working a hundred hours after I bought my house.

Tony:
And Elijah, once you actually closed, how did you fund that renovation of partitioning off that other unit inside the house? Was it from just, again, money you had saved up? Was it through the loan? Was it some other form? How’d you fund that?

Elijah:
Yeah, so I actually did pay with credit cards initially. And actually I got really, just for the bathroom alone, I paid with a credit card. It was like $6,000 to pay a dude to plumb it and all that kind of stuff. And I actually immediately found somebody to rent my house. So I was doing YouTube for, now it’s been about 10 years, but I’ve been doing YouTube for a while and I made a video on how I was buying a house and what I actually did. And somebody reached out that lived here locally that I’ve been actually messaging back and forth as a homie on Instagram. He’s like, “Hey, I saw that you got that spot. I would love to rent that thing.” And this was before I even put up a wall or added a kitchen. I was like, “Hey, I don’t have a wall up or a kitchen and the bathroom still being renovated.
Are you sure about that?” He’s like, “Yes, I’m kind of in a position where I need to move today.” So I bought my house and I think within one or two weeks later, somebody was already back there renting it out. So yeah, it worked out perfectly. I just had to get the money to get the bathroom made because I was like, “I don’t want to share a bathroom.” You know what I mean?

Tony:
Yeah. I just want to say it’s like some people will call that luck, and maybe there’s an element of that, but it’s like think about all the hard work that went into putting you in the position to be able to capitalize on that person. And it’s like the two years of working a hundred hours a week, the courage to actually go out there and find the deal, to be sharing your journey on YouTube for all the time to build that platform. And when the opportunity presented itself, you’re able to capitalize on the way that there was a win-win.

Elijah:
Yeah, what are the odds? They would come from my YouTube. It was so perfect. I loved it.

Tony:
You might be the first rookie guest that we’ve had that found a tenant through their YouTube channel. Yeah. I’m endlessly surprised at the first that we have in the show, even 700 plus episodes into it. Okay. So you fund the renovation really with credit, you get a tenant in there pretty quickly. What percentage of your mortgage are they able to cover?

Elijah:
Yeah, so at the time my mortgage was 2,550. And right when they moved in, they were paying $1,200. So it was a pretty almost half, you know what I mean? It worked out pretty well. But the thing is though, I didn’t charge for utilities or whatever, so I did have to pay that out of my pocket. And I learned that after a year and a half, I raised it up to 1,350 and I kept it there just because I realized the water. When somebody’s not really paying their own utility, it seems like the electric and water bill are just like, it was just crazy high. So I was like, “You know what? 1,350 sounds perfect.” And then I slowly kept on renovating it. I separated the yard to make it slowly made it bigger and bigger yard for them and myself. Luckily we both had our own driving spots.
I added cameras and gates and the new fence, and I slowly renovated the whole place. But yeah, it was pretty good getting pretty much half of the mortgage from that immediately. And it worked out really well. Here in Portland and where I’m at, that was a pretty okay deal. So luckily, yeah, it worked out.

Ashley:
But you didn’t actually stop there. You ended up putting a tiny home in the backyard and then renting out your unit that you were living in. So what did that cost and how did that process work out?

Elijah:
Yes. Oh my gosh. It’s so crazy the way that my house has always been configuring different ways. Basically, yeah. Okay, so I bought a tiny house. It was $1,000. It was really like an old food cart I found off a Craigslist. And I’ve always wanted to do the tiny house living, always. So I put in my backyard, and I’m not going to lie to you, I had it back there for a year without really touching it because I didn’t know how to plumb it. I didn’t know how to do electricity and all that kind of stuff. Everybody was saying legally, you can’t connect it to your house. I didn’t know about all that. So I had it sitting in my backyard for a little while. But then my sister, she has two kids, she’s a single mom, and she was looking to start a new life.
So I was like, you know what? What if I just said, you know what? Let me just move into my tiny house, get things rolling there. Actually get it plumbed, get electricity. So I put an extension cord and I just got the hose from my backyard and plumbed it that way. I was just trying to find DIY ways to live in that thing so she can move in here because this is a two-bedroom house. And while the dude in the back was living there, she lived up here with her kids. And basically, yeah, I just lived back there for a little bit. My sister ended up finding her place on her own and moved out. And I actually had to hop back in here and renovate this place. I did everything on my house. New outlets, paint job, floors, everything you can think of I renovated in this unit at that point.
And then I found some new tenants and that’s when the eviction happened.
And I don’t even know if it’s technically an eviction because we did go to court and all that kind of stuff, but I never really received any money from it. They just left free without paying kind of deal. And they ended up just leaving. Yeah, but it was pretty tough because I never wanted to evict somebody. That was one thing I was like, I like the landlord lifestyle because I get to live off the rents and stuff like that. I live in the backyard for free essentially. But when it came down to evicting them, I felt really bad, but I was just trying to work with them and they just weren’t wanting to pay me. So they ended up moving out and I renovated this place again. And I actually asked the guy who was living in the back to move up here so I could renovate that space back there.
It’s just a whole lot of renovations that I keep on doing over here. And I pretty much just ended up having him move up here while I was still living in the tiny house in the backyard. And that’s when I hopped in the back unit and renovated that because it had a really big issue where the ceiling looked like it needed some love and the floors and the walls, everything. So I spent about six months renovating that back unit. And yeah, it was looking really good. And tell me why. The second I was done with the renovations back there, that guy who moved back there to the front, he ended up putting in his notice. So I was like, oh my gosh. So I spent six months renovating the back unit. He got his notice, so he left. And I was like, okay, now I got two empty units.
I got my tiny house in the back. What do I do now? And that’s what happened a couple months ago. I ended up just saying, you know what? I’m going to sell my tiny house and live in the entire space. Turn that back room into a bedroom with a walk-in closet as a kitchen and just live in the entire thing. So that’s kind of where I’m sitting at right now, but it definitely was a process. I think I learned from that eviction, I don’t really want to be a landlord, at least a landlord that lives on site because it was extremely awkward walking past them every day. You know what I’m talking about? It’s just like, ugh.

Tony:
That was actually my question, Elijah. Evictions are always tough, but it’s even tougher when it’s a house hack eviction. So knowing what you now know, is there anything you would’ve done differently on the front end, either tenant screening or anything? What lessons did you learn going through that process?

Elijah:
I got to say, I want to honestly say I was a little bit desperate to get tenants in. So I know that alone, no desperation would be great because I looked past a few things. They sent me their. They basically said they both didn’t have, it was a couple, they both didn’t have a job, but they had this large amount of money in their bank account and they showed me a screenshot. And later after looking, I’m like, that is the fakest screenshot I’ve ever seen in my entire life. I don’t know why I just let them slide into my house like that, but there was that. So I would probably want them to have a job. I think that that was my one thing. Why did I let people that don’t have a job and the screenshot of their money and their account didn’t look right?
Nothing really looked right, but I kind of let things slide by. So I would say the number one thing that I would’ve changed is just simply actually looking at the paperwork and not just letting the very first person that looks at my house take it. So yeah, that whole situation, I honestly would blame myself for that eviction because even their credit scores were extremely low. Everything I kind of let pass because I needed somebody to move in here and they were paying $2,100. So I was like, “Yeah, that sounds good to me.” I did no deposit and everything too. So I was like, “Just give me the 21 and we can call it.” You know what I mean? I did do a three-month lease though, so luckily it wasn’t a full year or anything. But yeah, I was like, I need that $2,100 because I renovated so much in here right before they moved in.
And yeah, I messed up, but you know what? It’s all right.

Ashley:
Coming up, Elijah is going to share what happened when things got hard and the honest lessons he took out of all of it. That’s right after this. Okay, welcome back. So we’re going to get into the parts of the story that usually don’t make it into the highlight reel because I think that’s truly where the real education is. So Elijah, you went through your eviction and told us what happened and what you would’ve done differently. So now let’s talk about the stressful, the expensive, and the emotionally draining part of this. For a rookie who has never been through one, what do they need to understand about evictions that nobody actually tells you upfront?

Elijah:
Yeah, I would definitely say even before being a landlord, I would look into it because I actually was looking into it while going through it. Now, I don’t know if this is the greatest thing to say, but I did use ChatGPT throughout it because I don’t know any lawyers. I even was looking up lawyers and they wanted a heavy penny before even getting started. So I basically just kind of looked up everything in the moment. I luckily figured it out and stuff and went down to the courthouse and left a thing on the door. There’s so many different, very specific steps that I learned along the way. You can’t just knock on the door, text them. I was definitely trying to stay level-headed and just honestly understanding where they’re coming from. They were telling me they’re going through things and I understand that, but I’m also like, I got bills to pay.
You know what I mean? We’re all about to be evicted if you guys don’t pay. You know what I mean? So it’s that serious. So yeah, I definitely had to learn along the way on what exactly legally happens at that point. And honestly, one thing I didn’t look into too much, but looking back, I should have looked into, was help for the landlord in that position. Because I know that there are things, especially here in Portland, Oregon, that they could have helped me out rather than me trying to kick them out and stuff like that, trying to get to it. So there’s probably more research I could have done in that moment. But yeah, I’ll just learn along the way and just try to keep my house because that was my main thing.

Ashley:
Yeah. Since COVID, there’s so many programs and organizations, well, at least in New York, not necessarily help the landlord, but will give financial assistance to the tenants. So I’m going through an eviction right now and things recently changed a little bit since the last eviction I did maybe two years ago, I think. So my attorney’s going over it with me. But basically for them to even get assistance, they have to be served. They have to get their court date, and they have to actually attend court and get the notice that they are being evicted before they can actually go and get financial aid. So what a lot of people are doing is taking advantage of the system by, okay, I’m not going to pay. Me as the landlord, I have to pay all the legal fees. They have no cost to them. And then they just go to the court date, get their thing, and then they get the financial aid, and then they pay their rent and then they get to stay.
So there are different programs out there. And I think the best thing you can do is educate your tenants on ones that actually are proactive before you have to actually go through the whole process. But that’s New York State specifically. I don’t know other states.

Elijah:
Yeah, it’s tough because it would be great if it was great for both parties, the tenant and the landlord. It’s tough. It’s a toughie. Eviction in general, it’s hard. We all go through hard times, but it does suck when one person has to pay the other person’s way, but hopefully everything goes good with it.

Tony:
I think another unique part of your story is that, I mean, obviously you had the eviction. You had the one tenant who was there for a while that seemed to work out well, and you also had family. How was that dynamic being basically a landlord to your sister? Was there any friction there? Is there anything that you can teach rookies about renting to family specifically?

Elijah:
Oh, that’s a really good question because that was actually something I learned a lot about before even buying my house, just family in general. I have a lot of family members that are always going in and out of housing and stuff like that. And I definitely needed to know about all that kind of stuff going into it. But yeah, luckily my sister, my older sister, she is the closest person I am in this world. She helped me out with many of my renovations here financially. Honestly, I would say she pretty much owns half of my house for the most part because she really helped me out a lot with every, even physically helped me out. She helped me renovate everything in this house almost. So luckily when she was here living in the house, things were okay. I think it’s just a little tough because her kids were young, really young at that point, so things would get broken a lot.
A window got broken, I had to pay $700 to fix it. So it’s kind of tough because there’s maybe a little bit of resentment there, but luckily me and my sister communicate really well. And so I was like, you know what? Could we work something out over here because I don’t got it to fix this thing or that thing. But I did learn a lot though. She definitely told me, “Hey, this stove needs to be replaced, or this fridge needs to be replaced,” or whatever the case may be. And I got on, I think I listened a little bit more to my sister because obviously a tenant is going to want better and nicer things in the house and whatnot. But my sister was open and honest about what needed to be done around here. And my sister actually paid me the full amount three months before even moving in.
So money-wise, it wasn’t bad or anything. Communication was there, everything was there. I would think the hardest part there was being so close, literally living in the backyard while she lived here. That was probably the hardest part because I like my alone time and her and her kids are very social. But outside of that, no, I would say everything was good, luckily. I’ve heard the horror stories online though of a family member moving in and they’ve just stopped paying rent or whatever the case may be. But yeah, luckily everything went really well.

Ashley:
Now, when you were landlording, did you use any kind of property management software or rent collection or tenant screening software? Any kind of software tools or apps?

Elijah:
That was something I learned quite literally the last two months of being a landlord. So that was actually, I’m really glad that you asked that because that is something I do want to talk on. My tenant I had for three years was amazing, seriously amazing. But the one thing that I messed up on was, since I didn’t use anything like that, like a management company or anything like that, it was very homey vibes, like friend vibes, and it was not very professional. I mean, he was paying his rent and everything like that, but when it came to the back ends of things, maybe he needs something done or whatever the case may be, it just wasn’t really professional filling. So at the very end of the last two months of being a landlord with him, I was like, “Hey, you know what? We’re going to start just going through email now,” and that kind of thing.
But actually, I guess the one thing I did use was Zillow for just the screenings, the background. So that was the one thing I did use. But with my first tenant, I was like, “Just send me a screenshot of your credit score and send me a picture of your pay stub.” That’s how I was with him. But yeah, I definitely learned, yeah, going forward, I need to spruce it up a little bit and use real. I was even looking at property management companies. They were just looking a little more expensive than I wanted to pay, especially because I’m here on site. Now, if I wasn’t living on site, I probably would have definitely looked into that. But there’s just that thing about being younger too. All the tenants I had were much older than me. So there was a respect thing that was going on then, which was weird, especially on top of that, not using a management company and being through text message.
Just professionally, I did not play that right at all. But I was learning throughout the way. And at the very end of it, when I was looking for more tenants after I renovated the back unit, I was like, “You know what? Let me go fully through an online thing so they can pay online, so they can get the screening done online and stuff like that.” But yeah, luckily there’s a lot of good ones out now for the low. We’re free too.

Ashley:
Now with the tenants and things like that, you’ve actually done something that most of our rookies that come on the podcast don’t do is their story ends very differently where they’re going on to buy more rentals or keeping their rental. But you actually have decided to no longer be a landlord. So you had mentioned briefly you moved back into the house and I believe you sold the tiny home. So walk us through that transition of actually reversing your decision.

Elijah:
Yes. This was definitely one of the biggest curve balls I’ve ever thrown at myself in life because I’m very much a planning type of person. So I have a 75-year life plan and it did involve a lot of real estate buying. And honestly, back in January when I was still renovating the back unit, I was like, “You know what? I don’t know why, but I don’t really like the idea of living my tiny house in the back with two tenants up here anymore.” It just seems like probably from everything I’ve gone through with the evictions and like I said, the unprofessionalism that I’ve started with, I think that after going through all that, I was like, “Is there any way that I can afford just living in here and not being a landlord anymore?That’d be amazing.” And having my whole backyard and my whole house to play around with.
And luckily, since I do have YouTube and I record my entire life, all parts of my life, I was like, “What if I just did that?” Because my main thing that people like to watch is renovations for some reason. They love to see me working. So I was like, “What if I just did a ginormous series on turning. Move my rental property into my own dream home. Because that was also another thing that I was going through. The renovations I did here were all, for the most part, DIY, and I would get a lot of hate for that. Like, oh, your tenant, da, da, da. They’re not going to like that, or it’s not up to code, or whatever the case may be. I’m over here just like, I’m just trying to make things work with what I have. And now that it’s my own home, I was like, you know what?
That seems kind of nice, not having to worry about if the tenant’s going to like it or not, because that was also something I dealt with. The tenant I had for many years, there was a lot of things that were not to his liking, and I felt almost like I had to uphold a certain thing for whatever the house. You know what I mean? Things had to look a certain way and not the way I wanted them to look. Simply like my kitchen floor is checkered tile. A lot of people aren’t into that. You know what I mean? My house is blue. A lot of people aren’t into that. And I was like, I hate having to make my own home fit what other people like. And so I’m like, you know what? Why don’t I just risk it all and just dive in and just live in my own house?
Because I quit my job about nine months ago when I was renovating the back unit with the tenant living up here in the front house. And that’s why it was a real risk because now I don’t have a job and I don’t have tenants, so I lost all my income. So I’m just going to jump into this YouTube thing, full force. So that’s kind of what I’m doing right now.

Ashley:
We have to go through this timeline of events. So you are working a hundred hours per week, then you buy your first property, and I assume at that point, once you get tenants in place, you cut back on those work hours because you now have rental income coming in.

Elijah:
Yeah, I went down to 60 hours. Yeah.

Ashley:
Okay. So then you cut back from there and then you decide to get rid of the cashflow, get rid of the rental income, and you no longer have tenants, you move back into the house, but now you quit your job and you’re going full scale into YouTube. And I think the thing that stands out to me is that real estate gave you the opportunity to be able to fulfill a passion of doing YouTube. And I think that’s something that’s missed out on is a lot of times people want to chase the thing that’s exciting for them with real estate like, oh, I want to do short-term rental because I would love that. I’d love to manage it, I’d love to design it, things like that. But sometimes if you just do what’s going to benefit you the most and has the most opportunity, even if it’s the boring thing or the hard thing, it’s going to free up time for you to work on those other passions.
If you were still working a hundred hours per week, you probably wouldn’t have had time to actually start a YouTube and to be a YouTube creator. Or then when you had the real estate, you were. And I think that’s such a missed opportunity cost of that people don’t factor in what real estate can do for you. Yes, everyone chases financial freedom. I don’t want to have to work at all anymore, but it also frees up time for you to pursue these other ventures. I think that is great that real estate gave you this opportunity.

Elijah:
Oh yeah. Yeah. Real estate is like, I preach it to everybody who will listen. Definitely buy a house, do the little house hacking thing to begin with and then maybe just go off and –

Ashley:
Dan, it doesn’t have to be forever.

Elijah:
It doesn’t have to be forever. Exactly. And I do want to say I’m playing with the idea of in the future, because I do have plans to really grow and grow and grow my channel and stuff and just my money and stuff like that. And I do want to own property, but I want it to kind of look a little different. I’m kind of imagining just like an apartment or a house in every big city and have it be like an Airbnb or something like that. And if I were to do something else, maybe like a huge apartment complex that I don’t. My main thing is I don’t ever want to live on site. I don’t ever want to do that house hacking thing with somebody else unless it’s super separate, you know what I mean? Because I’ve just learned like, yeah, that won’t work out.
But yeah, I definitely, I love real estate. I think it’s a great way to grow and stuff because all it is is just throwing your money into the basket and fix it up or whatever and live there, rent it out. I just love real estate so much. It’s so obtainable too. And it really sucks because people that I know and stuff and interact with, I guess my age group or whatever, a lot of people think it’s impossible to buy a house and I just don’t get that because it’s not. It’s so possible. If anything, it’s just a math equation. You know what I mean? And so I definitely do think that real estate is just such a great thing to have you climb the ranks or whatever. All right

Tony:
Guys, don’t go anywhere. We’re closing out with Elijah’s most honest takeaways for any rookie who’s thinking about house hacking and wants to go in with eyes wide open. We’ll be back in a minute. We’re back here with Elijah. I think one of the last questions I want to ask is just given the ups and downs of the real estate journey you’ve been on so far, do you consider this chapter of life a success?

Elijah:
Oh, a hundred percent. I would say this is probably the biggest, most pivotal point in my entire life. I mean, I’m just so grateful for my past self of going through those hundred-hour work weeks, going through, living in the back, because living in my tiny house wasn’t easy. You know what I mean? I had no heat, I had no cooling. I literally, it kind of felt like I lived outside essentially, even though it was a dream of mine to live in a tiny house. It was just a really long time, a year and a half. And I feel like I’ve just gone through so many hard things in these past three years, but so many great things too. So definitely, yeah, I would say it’s 100%. I don’t regret anything I’ve done. I’m just so happy with everything I’ve done. I’m just so grateful to be living where I am now and just in my own home and designing it the way that I want.
I would say I’m truly living my dream right now, which is kind of crazy to say, all thanks to my house, truly. Well,

Ashley:
That is amazing to hear. And I guess one last thing I want to ask you is, have you heard of the short-term rental loophole?

Elijah:
No. What is it?

Ashley:
Okay. So I’m going to have Tony educate you on this because you have talked about having Airbnbs and other cities, and you are hopefully going to be a high income earning creator that is going to be taxed heavily on this income and not have a ton of expenses as a creator. So I think that in the future, the best use of you to do real estate is to actually get a short-term rental and take advantage of the short-term rental loophole. So Tony, take it away.

Tony:
So the short-term rental tax loophole basically allows you to write off a big portion of your active income, so your creator income, against paper losses from your short-term rental. So if you buy a property, as long as the average stay duration is seven days or less, you can do what’s called a cost segregation study, which is like a fancy word for an engineering study where they’re able to take your depreciation and shrink it from the normal almost three decade timeline, and you can accelerate all that into your own. So basically you buy a house for whatever, a couple hundred thousand bucks, you spend a bunch of money on furniture and design and getting it ready, and you can recapture a lot of what you put into that deal as a paper loss in your tax return. And then that brings down your taxable income, which for a lot of folks can either greatly reduce or sometimes fully eliminate their tax bill.
So in a nutshell, that’s what the short-term rental tax bill is.

Elijah:
Okay. I need to do that. That actually sounds like perfectly, because I would just be in there. I’ll just go over maybe once every couple of weeks or months or something and then just rent it out for, you said seven days?

Tony:
Yeah, seven days or less, as long as that’s the average day duration.

Elijah:
Oh my God. That is amazing. Yeah.

Tony:
Change your life again right now. Elijah, there you go, man.

Ashley:
And then after you buy that first short-term rental, you’re going to come back on and let us know how much you saved in taxes. Yeah.

Elijah:
Give me three to five years. I got you. You know what I mean? Who knows? It might be even quicker than that, but yeah, that sounds good to me.

Ashley:
Well, Elijah, thank you so much for joining us today on Real Estate Rookie. Where can people reach out to you and find out more information?

Elijah:
On Instagram, I’m Elijah with two Ys_Ray, with three Ys. I’m also on YouTube. I believe it’s just Elijah Ray132. So I post about all sorts of things. Now I have five YouTube channels. It’s a lot, but I post daily everywhere. TikTok, Instagram. You can find me if you could look up Elijah Ray, I’m sure. But yeah, I really appreciate you guys having me on. Seriously, I’m glad that you guys caught me at this point in life, even though your guys’ podcast is about being a landlord in real estate and stuff, and I’m technically in there, but I’m also technically not because I have no tenants. I just love that now I can talk about it just looking back at the whole thing. It’s just so amazing. Yeah, and I appreciate you guys for even having the podcast. It’s so interesting.

Ashley:
Well, Elijah, thank you so much for joining us and for sharing your story. And I think it is super, super valuable to not only talk about people who continue to be landlords, but people who decide to change and pivot or maybe take on a different strategy. So thank you so much for taking the time to share your story. I’m Ashley, he’s Tony, and we’ll see you guys on the next episode of Real Estate Rookie.