BiggerPockets Real Estate Podcast - 238: Becoming a Real Estate Millionaire on a Teacher’s Salary with Michael “Swanny” Swan

Episode Date: August 3, 2017

Is it possible to invest in real estate if you live in an expensive market—and earn a teacher’s salary? According to today’s guest, it’s not only possible, but it can be incredibly profitable! Today’s guest, Michael Swan, is a P.E. teacher who lives in San Diego but has used the valuable real estate concept known as “trading up” to acquire millions of dollars in real estate. You’ll learn why Michael liquidated his entire retirement plan to buy his first few deals, the truth about “luck” and real estate, and some fantastic tips for buying and managing properties—even from a distance. (And if you work a full-time job or make less than $100,000 per year, this show might just change your life!) In This Episode We Cover: Why Michael’s nickname is Swanny How he realized his financial ladder was leaning on the wrong building Tips for utilizing IRAs and penalties Whether purchasing 11 condos is a good idea or not The story of the 15-unit apartment complex How he went from $5k in cash flow to $24k Whether luck had to do with his great deals Tips for buying areas in with both cash flow and appreciation His formula for financial freedom (using multifamilies) A discussion on single families versus multifamilies How to find deals in your market Tips for seeking out the perfect property manager How many units he has now How to tackle big projects How he manages his work with his time as a teacher And SO much more! Links from the Show BiggerPockets Forums Zillow Craigslist Books Mentioned in this Show Rich Dad Poor Dad by Robert Kiyosaki Multi-Family Millions by David Lindahl Loopholes of Real Estate by Garrett Sutton The 7 Habits of Highly Effective by Stephen Covey Think and Grow Rich by Napoleon Hill The 10X Rule by Grant Cardone Fire Round Questions What strategies do you use to find the “right” property manager? Is a skunk in the yard my responsibility? Apartment bedrooms 2, 1 or studios Investing in San Diego Investing in rental income properties out of state Tweetable Topics: “Living in San Diego, if I am able to do it, anybody can do it.” (Tweet This!) “Luck is when preparation meets opportunity.” (Tweet This!) “Make sure you make connections with everybody.” (Tweet This!) “I don’t take advice from someone that has less than me.” (Tweet This!) Connect with Michael Michael’s BiggerPockets Profile Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast, show 238. And so I did a lot of research and reading as the best practices. I attended workshops. I read a lot of books on how you do this properly. So I had a lot of book smarts. And here's another thing that I follow by. I do not take advice from someone that has less than me. You're listening to Bigger Pockets Radio, simplifying real estate for investment.

large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online. What's going on, everybody? This is Scott Trench, guest host of the Bigger Pockets podcast here with my co-host, Mr. Brandon Turner. How's it going, Brandon? Man, I'm so good. How about you? I am doing great. Just bought another quadplex, and I've got to do a little bit of work on it and get it. it get one of the units rented out, but it should be pretty pretty straightforward. Nice. Yeah. It's kind of fun the last few times you've guessed hosted here.

You've been talking about this coming up, coming up. It's good to see you finally closed on it. You know, you're not just talk, Scott. You're not just talk. It was all talk for a while. Now it's, now it's come true. That's really happening. So cool. All right. What's the current vacancy on that? I mean, is it full? Is it empty? Three of them are rented out, 800, 800, 725. I'm going to try to rent out this new opening for 875 and we'll go, go from there. Think you can get that rent any higher? I think that the $875 is pretty reasonable.

I think it's maybe because you mentioned that. I'll try for $9.25. You should do it. I'm going to push you for that. Now, how about water sewer garbage? You paint it, they paint it. So right now, I'm paying for all of that stuff. The units are separately metered.

So, but I am going to start moving. The idea is over the course the next two years, raise the rents to $875 a piece and introduce a $75 fee to kind of cover some of those expenses because that's pretty, that's not unheard of in our area. that'll increase cash flow by $600. You multiply a $75 rent increase and $75 expense reduction times four units. $600 times $12 is $7,200 a year at a 10, let's say,

you're way lower than that, divided by a, I don't know, how about a seven cap? I don't know, what are you guys paying there? Let's say $7. That's an extra $102,000 in value you could add to that thing. Granted, it's a residential property, so it's not quite calculated that way, but close enough. I think it's a solid layup and I'll continue. hopefully it'll be a nice place to manage, get some great tenants in there and keep going with the portfolio, another one next year.

There you go. Very cool. Well, I think today's show was really cool, I think, for both of us because the guy whose story today is exactly what both of us are doing. Just he's a few years further along. Like, he bought a bunch of properties and just traded him up over time to more and more and more. Now he's gotten almost 100 units. It's awesome. Yep.

He had a great opportunity, went all in on it and reap the rewards and is just doing it in a really savvy, intelligent way. And he's, I mean, he's a teacher. He's not like, you know, he's not a nuclear scientist here of making, you know, you know, seven figures. I mean, this guy's like a teacher at a school in one of the most expensive markets in the country. Yet he's still able to do this. So you guys are going to about hear how he did that. And he's a busy active teacher that's doing this all on his side. Yeah, he has multiple jobs and he's got hobbies and all this stuff. So again, if you guys are struggling with like how to get started, if you're in an expensive market, this shows for you. If you're, you know, trying to figure out how do you scale up your business,

you're going to learn a ton here. So anyway, hang tight for that. But before we get to that, let's get to today's quick tip. All right, today's quick tip. Why don't you take today's quick tip, Scott Trench? All right. Well, today's quick tip is you can actually follow forum threads that you're interested in the Bigger Pockets forums.

So, for example, one of the topics we discussed later on today is what strategies do you use to find the right property manager? And that happens to be a forum topic right now. If you go to the bigger pockets and see that forum in your forum feed, you can click follow, and you'll get an email or a notification on bigger pockets every time that's updated. And that is a great idea. So when there's things that you're interested in hearing how more people do things, because let's be honest, right?

Real estate is not about this is how it's done. This is how it's done, right? It's so much perspective. And hey, this worked well for me. This didn't work for me. And so by following threads, you kind of stay up to date on what other people are doing over time. So love that feature. One of my favorites was one on LLCs.

I invest in LLC and you have people chiming in on both sides of that. It's one that I follow. Yep, very, very cool. All right, well, that is today's quick tip. Quick tip. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect and even improve your property's cash flow.

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So if you own investment property, this is a no-brainer. So visit costsegregation guys.com slash BP for your free proposal and find out how much you could save this tax season. To honor our listeners today, Scott Trench has prepared a spoken word five-minute poem. Go. Whoa. This was not in the description here.

All right. Maybe not. Maybe not. That is. Brandon, let's hear yours. You were going right after me, right? I don't, I, you know, I forgot. I forgot my spoken word poem, but I think we're just going to bring in the guest because

that's what people are here for. So let's just just. bring in our guest today. Michael Swanee Swan is a real estate investor who lives in San Diego, and he is fantastic. He's a teacher, and he's got nearly 100 units. In fact, by the time this episode airs, he should be up to over 100, I think is what he said. I think that's right. Anyway, so you guys are here right here, and without further ado, let's bring him in. All right, Michael, welcome to the show. How you doing? Hi, how are you guys doing? We are doing fantastic. How about you, Scott?

Yeah. I'm doing great. It's been another beautiful day here. here, just closed in a quadplex. Hey. Things are doing great. Congratulations. But you know what, Scott? We're not here to talk about you. It's always about you.

He's like, I don't even know what to do about that. We're here to talk about Michael or it's next to be called Swanee. Swanee. Swanee. So where did that nickname come from? Is that your last name? My last name is Swan. And so back in the sports days, everybody called me Swanee and seemed to seem to catch on.

All right. Well, Swanee, you did sports apparently, but I'm guessing after that you did something else. So let's talk about how you got into real estate investing. Where did that come from? Yeah. So in 2011, I'm a parochial school teacher. I also teach as an adjunct professor at Miramar College, a small little college here, community college in San Diego. And in 2011, most people that you see that are investing and want to change their life, they have some kind of economic crisis.

And so I kind of felt like I was going to lose $10,000 to $12,000. And as a parochial school teacher, I could not afford to lose $12,000. And so I realized that my financial ladder was leaning on the wrong building. I was depending on parochial schools, the state for my financial future. And I realized I needed to take control. And in San Diego, it was a perfect place to do so. and so we started to invest in little condos in San Diego and helped us to become financially free after trading them in through the power of the 1031 exchange.

Nice, nice. I want to talk about all that stuff. Yes. So I've got two quick questions here with that. First of all, what subject and grade do you teach? I teach kindergarten to eighth grade PE and I teach reading. I have a master's of education in the area of curriculum instruction in the area of reading. And I have a PE degree also.

And I have a multiple subjects credential where I can teach in any kindergarten to eighth grade classroom. Plus, I teach at Miramar College reading and study skills for the entering college students. That's fantastic. Now, here's a problem. Here's a problem, Michael. Swanee. People who make, you know, teachers can't invest in real estate because you have to be rich to invest in real estate. So I'm going to shut the showdown right now.

Because this just can't happen, right? That's whatever, like, you have to be loaded rich, you know, to be able to invest in real estate. You know what? You know what? That's a big thing. When people reach out and talk to me at bigger pockets, they say, oh, I can't afford that. I can't do what you did. And I say, you know what?

I made 80,000 combined family, W-2 earned income living in San Diego, living in San Diego. And if I'm able to do it, anybody can do it. Yeah. That's awesome. So that's what I'm excited to dig into. So how did you do it? How did you get started? How did you buy that first place on that income? So when I did have that perceived, it didn't actually occur, but that perceived financial catastrophe, I guess, that I thought I was going to lose 12,000 income in one year. And as you know, I didn't make very much.

And I thought that was very difficult. I decided I have some friends in real estate, brokers that I went to high school with. And I went to their office and said, you know, what do you think about investing in? San Diego real estate in 2011. How about a little, you know, single family? And they said, you know what, Swanee, this is the best time ever in San Diego. You can cash flow on your properties. And so I said, really? Okay.

So what do you got for me? So he found me a little one bedroom, one bath condo for $135,000. We put, we put 20% down on this little condo, right? And it was cash flowing after all expenses, after reserve funds, everything, $333 a month. So I thought, that was pretty good. And so we only put 25% down. And so you're going to start to really go crazy here now. I decided that for each one of these little condos, I'm going to trade in these stupid IRAs,

stupid money that I was putting in these IRAs. And I was going to pay the stupid penalty, which was the 10% penalty for investing them in the first place. And so what I did was I just took out maybe 15, 20% more or 30% more and then what the down payment was on it. Right. And so we did them one little condo at a time. So I figured, okay, this real estate agent gives me small little one bedroom, one bath. The cash flows $333 a month. I think I can do better. So I just went a little bit east, maybe 20 minutes east.

of my house here in San Diego. I'm about 10 minutes away from La Jolla, if you know where that is in San Diego, California. Most people call it La Jala, if you don't know. It's La Jolla. And so I just said, I'm going to go about like 20 minutes southeast of where I live in another middle class neighborhood. And I was finding two-bedroom one baths for about the same price.

And I was finding three-bedroom, two baths for about the same price. And so those were cash flowing at not just. just $333 a month. Those were $500, $600 a month in San Diego. The people say you can't invest in San Diego. And so the people thought I was, there's something wrong with me. Why would you invest in real estate when it's so low? The market will never come back, they told me.

And I said, you know what? I'm doing it for cash flow. I want cash flow. My rules are it must cash flow. It can't lose money. Right? And so that's all I knew right there. I was just trying to get cash flow every month coming in. And it worked. So we had 10 condos we purchased over the course of 2011, 2012, from anywhere from 93,000 to 150,000, with 20 to 25% down payments.

Again, refinanced my house, took the money out for that too, arbitrage like the banks, trying to make more, you know, same with the, the, the, the iris cashed all those things in one at a time so i have no money in the stock market at this moment nothing in the stock market it is all in my properties okay so a couple questions on that first of all we've had people on the show before who've said condos are great and we've had some people who said never do condos they're horrible in fact Josh who's normally the host here of course but he's off galvancing across the west of the u.s yeah right now living the life living the life in his RV uh but josh is one that bought a lot of condos back back in the day, about condos and he hates them now.

He's like the anti-condo guy. So what has been your experience now that you've done this for a number of years now? Like, do you recommend condos? Do you say, stay away from them? Overall, what do you think? It is dependent on your area. Here in San Diego, you know, we were looking at single family, not condos. And we noticed that the condos at that time, after HOA fees,

we're making more per door cash flow than us. investing in a single family, which would have been more like, you know, there wouldn't have been a 93 to $152,000. It would have been a lot more and a lot more percent down, you know, that kind of thing. And so, and of course in San Diego, we are an anomaly, Californ West Coast. It's an anomaly. And so they appreciated it. So what happened was cash flow is coming in, cash flow is coming in,

$50,000 a year on these 10 condos doing great. And then it appreciated. And it appreciated vastly. We're talking they appreciated double what I purchased them for. Right. And so then I had to say, wait a second here. I've lived in San Diego since 78, 1978, and I know that they're starting to give loans to morons again.

They're starting to give loans to people, the people that don't have much money. And so they're lowering the credit. They're talking about, they're talking about, you know, Dodd-Frank, doing with Dodd-Frank. And for you to be able to afford these mortgages and these expensive homes, you are going to have to have enough money, right? You're going to have to have money, make enough money. And I know that something is not right. And this is going to happen again. It's going to happen again.

So that worried me quite a bit is that I had, you know, $1.6 million in equity now after, I'm going to two, three years of all. owning these condos that worried me a little bit, right? And it's a good problem. It's not a good problem they have, guys. It is a good problem. Again, San Diego is an anomaly, you know, West Coast an anomaly. So then I started to, you know, do more reading as a reading teacher. I decided to do more reading, research as to what do people do? What do the Trumps of the world do? What do they do when they have all this equity, what do they do with that equity? And then I found out about the power of the 1031 exchange. And I found out that you can trade in your property for something the same value or greater value and not pay any taxes. You will defer your taxes. I don't want to say tax

free. Don't ever say tax free. I will defer my taxes. Just like all the cash flow I was collecting on these properties, those depreciation, all that stuff, we are deferring our taxes. That's what's amazing about real estate. It's just amazing. So when you have bigger pockets, we love talking about formula terms, right? Formula. We like to talk about formula. So if you talk about a 1031 exchange, right? And when you add plus an emerging markets, plus the true multifamily, multi-family business model that equals amazing financial freedom. That equals amazing financial freedom. Because what I did was all I did, I'll just give you a typical example.

All right. I took in 2012, I bought a condo for $120,000, right? I sold it in 2015. on the sale, we cleared about $144,000. Remember, I only put down, I only put down like 20, 25% down in that little condo, right? And then, so we cleared out about $144,000. We had about $90,000 left on the loan, right? And then it was cash flowing about $450 a month, right?

So about for the year, cash flow is about $5,000 a year. That's pretty good, right? Sure. Right? You guys like that? That's pretty good. Yeah. So then what we did was,

We traded that single family condo. And, of course, with the condos, you're at the mercy of HOA fees, right? Yeah. So the HOA fees can go up. They rarely go down. I did have one that went dramatically down, believe it or not. But you're at the mercy of the HOAs also, and you can't really do much about that. So what we did is we traded it in for a 15 units apartment complex in Painesville, Ohio.

It's a little suburb. It's a little suburb about 30 to 40 minutes. east on Lake by Lake area from Cleveland. Okay. And that 144,000 went directly into that complex. And we saw the opportunity that that we could trade in that $5,000 cash flow for $20,000 to possibly, this is just amazing. I just get goosebumps for this to possibly 30,000, 30,000 cash flow, right? And we purchased that little 15 unit apartment complex for $590,000.

with 25% down. Remember, we only put down 25% in that little San Diego condo, right? Right? Okay. So that little condo cash flowed about $15,000 total over three years of ownership, right? Tax deferred with fix-up, maybe we put in about 40 grand, right? So we put in about 40 grand in that condo. Plus, it appreciated over 100% in three years.

So think about what that return, you know, 300. percent, 400 percent return over that time, right? And so that apartment complex now cash flow is about $24,000 for me, right? $24,000 in cash flows. That's what it is right now. And let's see, the cash flow is to rise, you know, to $30,000 a year. It's pretty soon. Right now it's at $24,000. It's going to rise to about, you know, 30,000, you know, pretty soon on that condo, right? That apartment complex. Now, if we would have done a straight sale, let's just, let's just, because people here, we really want to know, you know, what's the difference? If we would have done a straight sale on that little condo, on that 144,000,

we would have paid $50,000 in taxes. Yeah. Because, right, right? What do we have? We have our $28,000 for our taxes plus the recapture. You have to pay back 25% of your depreciation. It would have been about $50,000 for that one little condo. Right?

Does that make sense, guys? Yes. Yep. Sorry that I was reading that part right there. I wanted to make sure that I got it right for you, that I actually got it right for you exactly what happened. Right. So through the part of the 1031 exchange, I won one condo. You know, that's amazing, going from 5,000 cash flow to $24,000 cash flow right now.

That's fantastic. So there's so much here that I want to dive into because this is a fantastic story. It sounds like you've spotted a market opportunity in 2011. you basically sold the farm. You got rid of all of these. It sounds like a lifetime of accumulated assets in terms of equity in your home, 401K plans, retirement savings, all that stuff.

And then you put them into these condos during this market opportunity. You realize it's a ton of appreciation and now you're 1031 exchanging out of those properties into more cash flow, which is kind of the reverse of how most people think about it, right? Most people are like, oh, I want the cash flow first. And then once I get to a certain point,

then I'm going to go to that. So could we start at the beginning there? And could you walk me through what it was like to liquidate your lifetime savings in order to pursue this kind of this market opportunity you spotted in 2011? That's a great question. Remember, a lot of people that talk to me about, they're really scared like, that is too risky. And I tell them, the stock market to me is very risky. I can, whatever company is, I have no determination on if they make money,

and I feel like the stock market was much more risky. I went, at that time, I went through a 10-year period. I'm going to be 52 in August, but I went through a 10-year period where I was putting $6,000, I didn't make that much. I was putting $6,000 a year into those IRAs and into that myth that's not real to create financial freedom. And I was putting that money into that religiously every year, right? And it was the same value. I was trying to play like I was really good at this. And so I can take, I can do small cap and figure out my mutual fund and mid cap and large cap,

international. And I thought I knew what I was doing. I used to do the same thing. Used to do the same thing. Yeah. And so, of course, I basically, the value was the same 10 years. For 10 year period, the value was the same in 10 years. So who was making the money?

I wasn't making the money. Financial planners that made less than me. 60,000 is the average financial planner makes per year. And I'm trying to get advice from them to manage my money. And then of course I did the calculation. Have you guys done that before? If you have a million dollars at retirement, what is the financial, what are the financial planners tell you you can take per year and not outlive your money by 88?

Do you know how much that is? No. I always say six or seven percent. Is that what they say? No, no. 3.5 percent is what they say now. That's the safe withdrawal rate. but isn't, oh, yeah, yeah.

No, 3.5. So you don't, I'll live your money by 88, right? You take 3.5%. So if you have a million dollars, what is 3.5% of a million dollars, guys? 35 grand. Yeah, so I'm going to live in San Diego. I'm not to pay taxes on that for 35 grand, right? 35 grand.

And then, but then guess what the financial planner saying? Guess what? You'll be in a lower tax bracket. So it'll be okay then. Oh, I agree. Okay. Okay. So what you're telling me, what you're telling me?

is I'm going to be poor. I'm going to be below the poverty line in San Diego and everything will be okay. Yeah, you'll be in a lower tax bracket. You're good. Think about that. Think about that. Think about if you had $2 million, if you were a high wage earner and you had $2 million. Guess what that would be?

$70,000 and you have to pay taxes on that per year and then you're going to live your dreams. Now you're in a high tax bracket, right? What I'm trying to say is it's a myth. It wasn't. The government wants us to keep doing this. So it's a myth. Whereas in six years, I have, you know, it's going to be six million here this next month in total, total property. I'm going to have $2.5 million in equity net worth after six years of investing in real estate. Plus, plus $120,000 a year in tax deferred cash flow, soon to be $160,000 by October. So at the time you were making this decision to go into real estate, was it, was. Was it more a, hey, this is a really good time in the marketplace for me to pull all this money out? Or was it more, I don't like the fact that this is in, that my money is in these funds that are just not going to achieve a significant financial result? I think it was the perfect storm.

Great question again, Scott. I think it's the perfect storm, perfect storm because I had the financial, perceived financial catastrophe in my mind that was going, that could happen. And then I noticed that these properties here in San Diego, which haven't done. before our cash flowing pretty well for us to be able to buy these properties. And I was managing all 10 of those condos and learning how to do it the proper way. Of course, as a teacher, reading everything, I get my hands on on how you manage properties properly, how everything, vetting tenants, a whole nine yards. So I learned along the way how to do that properly. And it was a great, great time, obviously. So by vetting, by checking their credit, checking their past landlords,

doing due diligence, you know, when you own your property and you're managing it and you're learning along the way, you know, I would go and visit them at their previous addresses to see if they're really there. I would do all kinds of stuff just to make sure I'm getting a tenant that can pay the rent, although we cannot plan for everything. So you've got to make sure you have reserves for Murphy's Law because people will get divorced. You know, people will get sick. People will lose their jobs, right? So you have to have enough reserves to be able to take care of that. A lot of people have bigger pockets that call me, they don't have enough reserves. You know, I basically tell them, if you have a single family property, you need $10,000 in reserves and they almost choke and they don't believe me at all. But when Murphy's Law happens, when something happens, when a roof blows off, not in San Diego. But when something happens, when something happens, you need to have that money in reserves, right? Okay, so sorry, Scott, I went, I digressed again and went off into another area.

That's a great point. You know, you lose your shirt if you don't have the cash reserves and it comes back down to basic personal finance, having a strong personal financial position. Yes. So I want to go into like the transition. So first question I have is you bought all these condos at a great time in the market. And then you were able to double the value. you have those properties. What do you say to people who say,

Ah, Swanee, he just got lucky. Yeah. Another great, Brandon, that's a phenomenal question. I hear it all the time. I heard it all that you're, because remember they said I was crazy that I invested in the first place, right? And now they, now they're telling them I'm crazy like 1031 exchange to another market in the Midwest that in Cleveland area that, that, that you're never going to have appreciation. That was going to be my next questions. I want to go there.

You're never, and that's wrong. If you really study the multi-family business, business model. Appreciation is based on a whole different model than comp. So we'll go to that anyway. So they said I was crazy when I was buying. Now they say I'm crazy when I'm selling 1031 exchanging that property. So Brandon, to answer your question, you hear a lot of sayings. You hear a lot of close from people, but you know that luck is when preparation meets opportunity. We all know that that luck is when, especially when what we do here in real estate, it's when opportunity meets you being prepared. So me as a teacher, that was perfect also,

is that I love reading. I love learning about nonfiction specifically. I love learning about real things. And I love teaching people how to read about and understand, truly, deeply understand, nonfiction, you know, textbooks. It's supposed to be dry reading. I'm teaching them how to actively become engaged with reading boring textbooks. And so I was very excited about reading and learning about everything,

like I told you, about what do people do with a lot of equity? What do they do with a lot of equity their property? We either know, we refinance, we refinance or we 1031 exchange. Right? Those are our two choices instead of a straight sale because then we have to pay those taxes. I just spoke of earlier, right? So we defer our taxes. We defer our taxes. So that's basically when I tell them when it's lucky. Yes, I did get lucky in the way. that it appreciated vastly, but I've lived in San Diego since 1978. And I've seen this story. It's a repeated story.

It's a common story that's going to occur. And to be honest, I didn't think about appreciation when I first started. I thought about cash flow. Yeah, I love that. And this is something Scott here, Trench has been, you know, a big proponent of for a while, is like buy in areas. Like don't buy negative cash-line property, but buy in areas where they have the greatest chance of appreciation happening, you know.

So you'll at least get cash flow, but then you have a good chance of getting more than that. Is that a fair assessment? Yes. Scott, do you want to add that? Talk about that? No, that's exactly what I'm doing. I'm buying here in Denver because I think there's lots of cities around the country that have great potential. Denver is one of them.

And I feel like, hey, as long as I get cash flow, that's stable in 10, 20, 30 years, I'm going to look back and be glad I was here in this market over time. Yes. Yes. but I want you to make sure that you do a return on your equity. I mean, I want you to do a formula, you know, because I realized that I had 50,000 in cash flow come in, right? And I had $1.6 million in equity in all of my real estate. So basically I took the, you know, your cash flow divided by your equity.

I found out I was getting 3% return on my equity. Yep. That was not acceptable to me. That was not acceptable for me to get 3% return on my equity. And then, of course, people on bigger pocket. When I talk about this, they talk about other things like, yeah, but all these other factors and you're in San Diego. So, you know, the appreciation, I know it's up near its peak.

No, I tell them, I say my little three bedroom, one bath house in Merrimacet, like I said, 10 minutes from Mojolla is worth $500,000 right now. You walk outside the front door, get to the garage. It's a two-car garage, 1,040 square feet. And it's up to $500,000 now for this thing. you've got to think that, you know, the last time the real estate market went down, I told my wife, I said, you know what, I know we don't invest in real estate, but I think we should sell this because it was up at $500,000.

I think we should sell this because it's tax free. It's tax free. You know, I only had $152,000 on the loan. And I purchased it for $152, so it was less than that. And so I could, the loan was a lot less than that. So we could sell this and we could rent. We could rent for quite a while. And then when people come to their senses or this whole market, because it wasn't real,

it wasn't real, you know, stated only loans, all that stuff. It wasn't real. And so we could have bought two of the same size houses if we wanted to. But of course, traditional, the American dream, you got to buy your own house. Got to buy your own house. You got to have the American dream. You know what? This house could be a million dollars someday.

And so they were saying, why would you want to get out? And so I go, you're okay, I'm not going to get out. And so I learned my life. lesson. I learned my lesson. So now I use that equity that went up to buy more and to create financial freedom. Will you kick yourself three years from now when that house, you know, or your, your condo, which was maybe worth 250, is now worth 400. Will you kick yourself? Will you still say, you know what? I made the best decision on the information I had. Okay. So, so again, let's do some, let's do some real soul searching here. Let's say we do have an opportunity for, for it to go up another 25

percent. Again, we're going to go over the peaks, the highest ever it's been, ever, ever, ever, it's been, right? And you need jobs, right? We need jobs. We need jobs to be able to afford this, or they're going to ease those standards, right? And then we're going to, we're going to have another, it's going to happen quicker if they ease those standards for lending. So I have a chance of going up 25%. I think I have a better chance of it going down 30, 40, 50 percent or more. And I can 1031, exchange this for what, everyone? Cash flow. Cash flow, not just cash flow, because we need to move now to the multifamily business model to see really, as I told you, 1031 exchange plus an emerging markets plus true multifamily properties, which is five units or more. Of course, I think we're like 10 units or more equals amazing financial freedom. That's where we need to talk about the difference between, you know, multi, true multi-family and single-family. Because single family, you're at the mercy of comps. And that, that scares me.

That scares me. Me too. Yeah. So I think that this is kind of touching on a, like a, it's not that complicated, but it's somewhat complicated concept that comes in with real estate investing and leverage. When you are leveraged to start with your investment, let's say you buy that $100,000 home with a $25,000 down payment and it goes up 10%. That's 10 grand.

That's, what, 40% return on your down payment. As you de-leverage, though, the property doubles to $200,000. Well, that same appreciation is much less impactful in your financial position, which is the problem you're running into the problem that I'm sorry. It's a good problem. This is the kind of problem that everybody that we want everyone to have at some point. You buy a place that has good prospects and things go well. You manage the property reasonably, you know, stay conservative.

But you have this property with a lot of equity and now it's time to make a decision. Do I want to accept that 3% return on my equity in terms of cash? flow or am I going to re-leverage and redeploy it more efficiently and assume more risk? You know, I am now taking on more debt and go into a new market or new property within the same market. And I think that that's a very, very intelligent way to go about it and a decision that most real estate investors will face at some point if they're in this for the long term. Yes. Now, I can go to Vegas.

You guys, we can go to Vegas and we can gamble with our money if we want to, right? We do. I do that sometimes. I go to Vegas and gamble. I don't want to gamble with this money. You got to, again, the song, you got to know when to hold, no way to fold them, no way to walk away, no way to run. And so you got to go with your guts sometimes and get education.

Again, preparation meets opportunity is what people say. Good luck. Preparation meets opportunity. You got to prepare yourself and make sure that you use that equity properly and know when to get out when not to get out. And, of course, moving. I wanted to get away from single family as soon as I possibly could do to the comp comps situation. And imagine, imagine, imagine, Brandon. If you had a hundred single family, you'd have 100 roofs. You'd have 100 mortgages. I mean, economy is a scale. You know, sooner or later, sooner or later, you want to be able to, you know, increase your economies of scale. So can we, can you talk about the comp issue for, and I totally agree. I would

The economy is a scale thing. But I want to go back to the comp thing because people listen to this night. I have no idea what you're talking about. What do you mean? You know, why our houses comp things and why our multifamily is not? Can you talk about that? Very good question. So, Brandon, you live where again?

I live in Podunk, Washington. You live in Washington. So your house is valued at approximately how much money? 200 and, well, I'll say 300,000. 300,000. Okay. So in your neighborhood, I want to make sure we explain comments from our problem. In your neighborhood, in your neighborhood, let's say,

say that four other houses are sold the same floor plan and guess what they only got 180,000 for that's that's what that's how much they're going for 180,000. But you point, guess what you put you put in granite countertops. Yours is so much nicer. How much is the value of your property if the other others sold for 180,000? Right about 180,000. Correct. So you're at you're at the mercy of comps, whereas the true multi-family business model does not work that way. My bank says that if I increase the NOI by $1, it's worth $10 more than I purchased it. That's the big primary difference. I have to control as to what my apartment complex is valued at.

I have the control. And NOI means what? That NOI means total money coming in, total money coming in, gross income, minus your expenses. Now here, listen carefully, not including your debt service, not including your debt service, your loan, not including fixed cap X expenses. So that means, that means if I decide to replace a toilet, if I decide to replace flooring, if I decide to replace flooring, if I decide to replace. If I decide to replace windows, those are fixed expenses, roofing. Those are fixed expenses, cabinets. Those are fixed expenses.

And guess what? They do not go against my expenses. So when you take over an apartment complex, like I told you about, that 15-unit apartment complex, and you should be taking over these apartment complexes for owners that are burnt out, for owners that are living on site, for owners that have not raised the rent in a long time and you're in a solid C class neighborhood, and they haven't raised the rents a long time. And this owner, this owner of this particular complex that I purchased for, that I told you about that with $144,000 down, that particular owner felt it disconcerting to have a laundry room,

she told me. She said, you know, I find it disconcerting to have a laundry room right next to my unit because I bought this property with my husband 15 years ago and my husband died. And so I decided to move into the complex and I decided I was going to run this property myself. And she's 80 some years old and she's ready to get out. And so she decided to make that laundry room. She decided to turn the hookups around into her unit because it was right next door because she found it disconcerting for people to walk by her units to do laundry. So she turned the hookups into her own units and she made them go out to do their own laundry. And then she had a little maintenance guy, turned that into a maintenance room. And they had a little maintenance guy that was rigging, rigging all the units instead of

replacing things like I told you, they were trying to fix the inside of toilets. They were trying to, and these are high-flesh toilets. Why would you want that if you're playing the water? And just all kinds of things that she was doing that she thought she's doing the right thing. Like on a single family, you would think it would be the right thing to do because you're not paying for water to just replace the inside of the toilets, right? No, no, no. I say do a high efficiency, low-flex. toilet for $300, including installation, because it doesn't go against my expenses. And the tenant thinks, oh, wow, you gave me a brand new toilet. That's great.

That's great. You gave me floor and you gave me all this stuff. That's great. That's how you do it. So just to kind of back into how we got here and summarize where we started. In 2011, you got into real estate by liquidating your kind of personal financial position and going in and seizing a market opportunity. You benefited tremendously from the form of appreciation.

and now you're taking out those gains because you're de-leverging and you're skeptical of continued success the way you've had it. And you're moving into Midwestern markets into commercial properties where you, and now it seems you believe that you can increase the value of these properties and increase cash flow by operating these very efficiently. Right. So my questions here are how are you finding these types of deals and why are you interested in these markets. Another great question. I advise everybody, everybody to make sure that anybody you meet

doesn't matter what they look like, what they talk like, what they act like, make sure you make connections with everybody. Because I was just teaching at a parochial school and I was talking to one of my colleagues and she said, you know what? I was born and raised in this little Euclid Ohio area and then we kind of moved out to mentor. And I'm kind of trying to revitalize the area. I'm buying little properties over there and she was telling me what she was buying them for. I was like, oh, that's very interesting. And of course, I already have my condos here in San Diego. And I said, that's very interesting.

And she goes, we moved out to mentor, the area, mentor Ohio. And the area changed a little bit. So we moved like 15 minutes east from there. And my mom and my stepdad, they do property management and they own some properties and they manage my properties. And so I said, you know what? why don't you give me their contact information and your little family realtors information. And I found out that I could get little condos in the Ucuitals.

I mean, not condos, a single family and duplexes in Uclet, Ohio for each door, maybe $30,000 all in after fix-up, after fix-up. Of course, you couldn't get loans for these. So I said, okay, I'll buy a little duplex. So I bought a little duplex, paid $60,000 all in with fix-up that rents for about $1,350 a month. And that was in 2014. And we've had in that little duplex, we've had zero vacancies since we bought it. And it's worked out very well for us, that little duplex. And then we bought little half duplexes in the same area and one single family.

And so they were cash flowing pretty well, you know, like $3,500 cash flow per month. But of course we paid cash, $240,000 cash for those properties. And we're like, we're going to run out of cash. So that's not, you know, and then I found out about the 1031 exchange. And I figured, you know what, if this little, if this little property management company can handle my little single family and they have over 60 single family, maybe they can handle a little eight unit, 10 unit, 12 unit, 15 unit. And there has been some growing pains, obviously, because it's a whole different model from single family business model to multi-family business model. So there has been some growing pains. But I've been, you know, grooming the property manager.

along the way. Cool. So let's talk about the property manager thing a little bit. So like do you have any recommendations on like how do you find that perfect property manager? You know, again, great question again. That's what you get in bigger pockets. That's what I get on bigger pockets.

People reaching out to me all the time wanting my property manager, wanting to know, you know, all these property managers are insufficient basically for what they're asking. And so then I asked them some questions. And I ask them one question would be like, what's the problem? Well, what's the problem with your property manager? If they tell me, if they tell me, well, you know what, there's a little thermocopular in the furnace or the whatever. And they're charging me $120 to replace the thermocular. I'm just like, I'm looking at it.

I'm like, that's what the problem is. That's not a problem. That's not a problem. That's okay, price. That's fine. Those are not big issues to worry about. or we have to replace a furnace. We have to replace a furnace.

And they want to charge $1,000, but I think they can get it for $800 somewhere else. And again, I say, you know, that, to me, that's not really an issue. That's not really an issue. Those are not the real issues. The real issues are, how do you keep your tenants in your, in your unit? What do you do for them? When they have a sign a new lease, do you wash their carpets for them?

Do you give them a new ceiling fan? Do you treat your great customers with like their royalty? Because once you get a good tenant in there, you want to keep them in there. You want to treat them like royalty. You don't want to treat them like a nuisance. And so some of the property managers, again, a lot of them in these small little communities, they started as rehab guys. They started as fixing up their own units during the last crash.

and then they kind of fell into it. They had their own properties and family, friends and that kind of thing. And they fell into the property management, just like landlords, accidental landlords. When they get houses, then they have to move because of a job and they rent things out. They kind of fell into it. So they don't know the best practices and how to do it, right? And so to answer their question that they need to make sure that they vet these people properly, the property management companies.

and create a relationship with them. And there's no easy answer. Brandon, I don't know about you. Scott, I don't know about you. There's no easy answer on single family because the big boys, they don't, I shouldn't say boys. The big outfits, the big outfits don't want to touch small little things like that. They want, you know, 50, 100 units minimum, the big outfits that are very professional, right?

And so most of these mom and pop property managers start. started in a different way. And so I don't have any easy answers for them except for asking those questions of how do you keep those great tenants in there and how do you get new tenants? So, so me, I'm kind of amped. As you can tell, I'm very amped. I'm a teacher. I teach all the time. I teach in the evening and then I do this. So the way I do it is with my property manager, here's what I do. And everybody on here will love this if you're doing single family. If you're doing multifamily, you'll love this. A lot of them don't like these little mom and pops. They don't like Craigslist. They like to do it.

do Zillow. They like to do a sign and they like to do Zillow, which goes out to hot pads and all that kind of stuff, right? What I do is I have eight, you're going to tell everybody obviously, but I have eight. I have eight ads with different pictures, different headings, depending on the clients that I want. And I press a button every two hours. If I have a vacancy, and guess what? My property manager gets the phone call. And so I do that every two hours with any of my vacancies, every two hours. And then when he complains, he said, I'm supposed to be doing the ads. I was like, well, you rent out the places and I won't be doing this. And so he basically gets those calls. He gets annoyed by the calls, but he rents them out.

We have incredible low vacancy in my apartment complexes and my single family there. So I have zero vacancies out of 85 front doors in this area in Cleveland I have right now. Zero vacancies out of eight. Knock on wood. I'm going to knock this time. Again, again. 85 front doors and zero vacancies. That's a strategy I've not heard before about you doing like as the owner,

you running ads and then just putting the phone number in for the property manager. That's kind of, it's kind of, and you know what I do. And just to let you know for Craigslist, I put on the very bottom of my Craigslist ads, I just scroll way down. And I put all the surrounding communities under,

I put medical, I put hospital, I put everything that they're known for. So that when somebody's searching, when somebody's searching and they're in a community is close, that may be a little bit more expensive. they'll say, oh, I can live in this community for a lot less. And so, again, that's why a property manager doesn't like those calls, but I don't care.

That's another good tip. I love that. I really like that a lot because it's totally true. Like the problem I have with property managers is exactly what you said. They like the one push button to Zillow because, like, they probably are using AppFolio to manage the software. And app folio has a nice plug that plugs or hot pads. And that's it. But like Craigslist, nah, you know, maybe they'll get around to it.

Maybe they won't. Or they'll do it once a week or maybe every month a month. Yes. I love the idea of being the ones that pushes. I'm totally stealing that idea. I love that. I'm telling you, every two hours, I'm not kidding. If I have vacancies, every two hours, it goes to the top.

You know that it goes to the top. And so I just press a button. So let's say it's all kind of like a little bit in the country. I have one ad that says, are you a little country? And then it'll have whatever, because maybe the country people, people that are more country like that. Or if it's more hip type of thing, maybe I'll use like some. slang in there to try to get some attention, some attention to, to, to do that or, you know,

just anything to draw attention. And the new pictures, of course, new pictures of, of, of what I have there. So that way it's a different different front picture that they see every time, every two hours. And you just, no property manager is going to treat your property the way you want it treated. And so when people call me about certain things, I let them know. If you're getting a thousand dollars rents, that property matters getting $100 a month. How hard are they going to work for $100? Come on. Yeah. Not very much. Yeah. Yeah. Yeah. Wow. I love that. If you want a short-term rental, here's something worth knowing. Not all landlord policies are built for your type of property. And with holiday bookings, chilly weather, and higher

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pay bills, and receive payments quickly and efficiently, without the usual bottlenecks. It syncs with platforms like QuickBooks, Zero, NetSuite, and Sage intact, so your accounting stays aligned. You can automate bulk payments across properties and HOAs, choose flexible payment methods like same-day ACH, international wires, card or check, and set custom roles in approval policies. There's even a dedicated bill inbox for each property to keep everything organized. Ready to simplify your workflow, book your free demo at bill.com slash bigger pockets, and get a $100 Amazon gift card. That's bill.com slash bigger pockets. So let's talk about like, do you said 85 units total now? Is that what you said? Yeah, I'm going to, I'm going to have a hundred. I'm going to have 109 in the next 30 days because

I'm trading in, here's the latest trade. It's my last one. I don't, I have no. I have no. I'll have no more rental properties in San Diego. I purchased a property, a two-bedroom one bath for $19,000 in 2011. And now I had a bidding war, of course, as soon as I put it on the markets, because I already had a property identified for my 1031 exchange. Like I said, if you have a 1031 exchange plus an emerging market, plus true multifamily property's amazing financial freedom, you know, in formula terms. So basically, we had a bidding war on the little condo.

I already had a 24 units already negotiated. Again, that's another piece of advice I would give you is make sure you have a property that you're negotiating on in contract before you do a 1031 exchange. Make sure that you have it just about under contract or under contract before you start to sell your property that you want a 1031 exchange. And so that one is 280,000. So the final, I listed it at 265 and then the final, the final, offer I accept it was $280,000, 17-day closing, appraisal. They're waiving the appraisal. Also,

the whole thing is. So we have a bidding situation here in San Diego. And so we're taking that $280,000. It won't be $280,000 because I have $80,000 left on the loan plus the closing costs and everything. We'll probably have $180,000 that we're putting into a 24 unit that will cash flow right out of the gate anywhere from $24 to $27,000 a year. But at that little condo, that little condo was only cash flowing about $5,000 a year. That's fantastic. Yeah. So I have a question about your kind of your thought process here. You mentioned earlier that yeah, that's not a problem if the water heater is $800 versus $1,000. You know, those aren't the type of problem. The problem is having tenants into the property. When you bought this first place,

the first, when you bought the first the first, the first units, were you thinking differently? Did you have a different view of these expenses? I'm sorry, Scott. Do you mean the little condo, the first little one-bedroom, one-bath condo purchased in San Diego? Yeah, when you first started. Yeah. Yeah. So again, again, I may be a little different because I'm a teacher.

And so I did a lot of research and reading as the best practices. I attended workshops. I read a lot of books on how you do this properly. So I had a lot of book smarts. And here's another thing that I follow by. I do not take advice from someone that has less than me. So like financial planners and things like that, I don't take advice from people that haven't gone down that road already because there's so many people on bigger pockets and in this,

and in this world that will tell you that doesn't work. You know, I rented out a place to somebody and da, da, da, da, or my, my, My cousin rents out, and it was awful and da-da-da, and they just didn't do it right. So you're going to go by somebody that didn't do it right, that was an accidental landlord, and you're going to go by what they're saying. So I may be a little bit different in that respect. So I took a little one-bedroom, one bath, learned about all the proper procedures and how you vet the tenants, how you make sure that you check their credit,

you make sure you check their past landlords, you do everything you possibly can to make sure you vet them to make sure they're a solid tenant for your property and a good fit in your in your complex. Yeah, that's how I did it basically. I don't know if that's answer your question, Scott. I guess my question is more, you know, now you have this big portfolio with 85 units. So a $200 expense is not a meaningful part of your cash flow or your situation, but was it at one time? And would you have thought, you know, I'm trying to help our listeners. Maybe are just getting started or just have one or two units.

Well, based on research, based on research, you'd, definitely want to just check into what the prices are, obviously, in that respect. But when you're talking about $50, $100, $200 in that kind of thing, and then you have a property manager that saves you money in other ways in different aspects, maybe the property manager is taking $50 for that, charging a little bit more. Maybe the property manager is profiting $50 on that transaction. I'm not worried about, again, I'm not worried about little, little deals like that. I'm worried about, and I got months without my place rented. I'm worried about, you know, the big things in that respect. Because remember, if they're doing it for a hundred bucks a month, or my little,

my little, you know, half duplexes there in Euclid, if they're doing it for, the rent is like $800, they're getting, what, $75 a month? I mean, if they make a 50 bucks on a, on a, uh, furnace or something. You know what I mean? I think that's not, I don't want to sweat the big stuff unless you notice something really big happening. You know, my little mom and pop property manager, all he has rights to is to deposit my money for these apartment complexes into the bank. If he wants to bill me for something, then he sends me a bill and I'll pay him to bill. That's what I do for the smaller types of units for talking about. As I get bigger, I'm going to have all service. The bigger companies obviously doing these, the 24 unit that I have right now is starting

with a bigger company that does everything, pays all the bills, everything, mortgage, the whole nine yards in that respect, because that's where you want to move eventually as you get bigger. You don't want to have more work on your hands. You want to have less work on your hands as the property owner. Well, now that you've done both the smaller units, you know, the condos, the single families, now you're getting into the bigger ones. Do you recommend that people start? with the larger ones and just skip the smaller stuff. So it depends on how much money they have to start with. If you got 100,000, if you got 100,000 or more, and most people do, I mean,

the people that talk to me on bigger pockets, they got lots of money, they got lots of money. They make two times my W-2 earned income of 80,000 or more, and they say they don't have any money. They say they don't have any money. And I don't know if they're keeping up with the Jones is like, I go through like Dave Ramsey and go through their finances with them. And I say, really, you really need to have that $1,000 in car payments. Do you really need to have all those things, the country club and all that stuff?

Do you really need all that stuff right now? Because they tell them, like Dave Ramsey says, live like no one now, so you can live like no one later. And so if they have 100,000 or more, what I would do, what I would do is I would find someone that's been doing this for years upon years upon years, exactly what I'm talking about, multifamily. and I would join, invest where I can get more experience, invest with someone that's been doing it well first. Yep. Because my first, and you're probably going to ask me about it, my first two 1031 exchanges, the owners lied, the brokers lied. You know, they sold me a bill of goods that was not correct. And so those are the first two ones I'm going to want to sell.

So I have six apartment complexes. Four of them are working perfectly. the way that I've studied, researched, and two of them that I thought were yield plays, they did not turn out to be yield plays. Well, let's talk about that then. I mean, what is that about those two deals? Like, what should we look out for? I mean, I'm about to do a 1031 exchange into a larger property as well soon.

Yes. And what do you mean by larger? Explain to me larger. What's that mean? So I got an offer on my 24 unit. And I'm going to be selling that. I'll have a couple hundred thousand dollars to put into something larger. So I'm looking probably in the million dollar range, going to go buy something.

Good. So now remember, remember if you have a loan of a million or more. then you can get those those those those those those those those are pretty good but you have to have a million or more. Well, I got to partner with another few hundred grand to put in something. So, you know, we've got four or five hundred thousand dollars to put in something. So like I don't want to make a mistake on this big project. I don't want to be sold to very good.

What do I do? Like, what did you do wrong? Yeah. So again, again, I went to training. I went to education and I still got sick. And I still got, I still got duped. And so the first one that I traded, a 1031 exchange. I took $100,000 from a 1031 exchange and put this into this 10 unit, 10,000 square foot,

supposedly fully rented, supposedly fully rented apartment complex. I really thought that having five tenants in the same family renting five different units would have a community feel to it. But basically the owners put people in there that were not qualified. And so, as soon as we took over to property, there were a lot of problems, a lot of issues, and we had to do some evictions and get some people out and just a comedy of errors, comedy of errors that occurred, and it was not a yield play. It turned into an area that I wasn't really excited about. And so that'll be one of the first properties that I sell. So that was one situation. That was a mistake that I made. So how do you prevent that issue?

I think the only way you prevent that issue, because I did it through the school of hard knocks, obviously, and I tried to get as much education as I could. The only way you prevent that issue is to make sure that you get in a deal with someone that's already been successful, that's already done this that knows what pitfalls to look for when you're doing this. The brokers, as I said, the brokers lie, the owners lie. They're just trying to pat it to make sure it looks like the NOI is what it is, and it is not. And so what I do now, the ones that I really look for, I really prefer are the ones I told

you about that 15 unit. I only went a half a block down the road and I found out that they were charging $125 a month more for the same product or even to me it was a little inferior product. And so I knew that it didn't matter what she said, didn't matter what she said, or what the broker said, I knew that in the course of a two to three year period, I can raise. those rents up at least $100 and increase the NUI. Yield plays are a little bit more difficult to determine if it's a true yield play. The next one, the second one I made a mistake, do you have any questions about that one?

One question. Well, one I was going to say, I think you're hitting down on the head there, verify, don't believe necessarily what they say, you know, do your own homework. But what is a yield play? Can you define that? Yeah. A yield play is supposed to be right out of the box. As soon as you buy it, it's supposed to be cash flowing a certain amount per month

as advertised by what the financial set in which you've discovered in your financial due diligence of what you discovered. But people can hide. They can seriously, people can pad the books and they can hide that. You could have a lot of physical occupancy, 100% physical occupancy, but there could be people that weren't paying and the owner was just putting that towards that to make it look like they are paying. And so it's a very difficult thing to catch, to catch with that one.

The second one. And so we've been doing a lot of, we've owned that one now for approximately two years, the one I just talked about. And we've kind of stabilized that property. And it's doing better. It's doing better now. But I do want to sell it because to me, I feel like I'm spinning my wheels with that property. And I want to put my, my attention.

somewhere else, even if I break even or lose money that property. It's just they're all individual businesses, right? And so the second mistake that I made was I thought it was a terrific deal. It was an eight unit and a very nice area of Shaker Heights, Ohio. You've got to be very careful. Some of these areas have incredible high real estate taxes in those areas. And they're called commercial real estate taxes, not residential. So if you do an apartment complex, you have to look at the commercial real estate taxes. And so in Shaker Heights, this particular community, you know, you're talking 6% real estate taxes. And so that can really hurt you. And so I thought it was, again, I made a mistake of I thought those were residential tax rates because there is residential.

There is apartment complex. I thought that this would be residential because of people living there, residential. But no, those are commercial tax rates. And so that was a mistake that I made. Also, during the first year, the roof actually half of it blew off. Oh. The insurance. So we had 60 mile per hour winds there. And the roof, half of it blew off. And so we had a $5,000 deductible for the roof.

But then all those deductibles and those kind of things like people talk, oh, insurance will cover everything. Then they nickel and dime you, nickel and dime you. It ended up being about $12,000 out of our pocket by the time we were done, you know, because you first have to have the. immediate repair. Like right when it blows off, you're in the snow and the winter and you've got intrusion of water and whatever else you can think of, right? And so you've got to have the original repair. Then you have the work done. And if you don't do it right, right? If you don't do it right, you don't submit that right away, then you're paying that out of pocket. So again, as I said, it came out to be like, instead of $5,000 on pocket, it was like $12,000 out of pocket. And then, of course,

when we bought that property, again, the owner's Here's a fun one. And we're doing, we're going through the property. And I should have realized it during the property inspection. During the property inspection, we're going through the property inspection. And I'm feeling, I always coach the property inspections to make sure I know what I'm getting. I'm starting to smell this odor, this odor. I'm smelling this odor.

And it smells like sewage. You know, I asked the property manager, can you have your little guy here because I got to go in the crawl space? Can you have them go underneath this place and figure out what's this smell from? and so they had bleach bottles. They had bleach bottles in the crawl space around the sewer stacks. They had cracks in the sewer stacks and they had bleach bottles. So they were trying to mask the smell with bleach. Yeah.

And so I said, you know, we're not buying this until they fixed this. And so they did a delayed the sale, but they did actually fix that. So I should have realized right there that the owner was trying to hide something from me at that point. And there was more hidden. And so as soon as we bought the property, there were two. two or three out of eight of just vacancies just happened to come out. As soon as we took over the property, three of the units became vacant. Right.

And so you're like, oh, that's great. That's great. And we thought that would be a yield play also, a yield deal. But we didn't expect to have five out of eight rented when we took over the property. So those are some horror stories. And I don't know how you prevent everything. I was telling you there. But I do find the property manager, again, it was the owners where the property manager

of these places. I do find that people that have real property management companies, when I actually research these properties, it's easier to verify everything because the property management companies, especially the bigger ones, they have checks and balances. They have different people. They have one person leasing. They have one person doing collections. they have one person doing bookkeeping, they have another person doing this and another person doing that.

So they kind of keep the one person overseeing. So they keep the checks and balances in order. So that's a good way also is to have a takeover a property that's professionally managed. Yeah. That's a good tip I never really thought of before. I heard anybody else say. But when you're buying a property, if it's self-managed, you need to do much more due diligence and there's more risk than a property that's already being professionally managed simply because of the fudging of the numbers.

I never thought of that before. Yes. And of course, if you know, if you know a half a block down the road that they're charging $125 more per month rent, it doesn't matter what they say. Doesn't matter what they say on their financials. You know that you're going to be able. And if the banks appraise it, like my bank appraises it at a certain value. And I know that I'm going to increase the NOI because I'm going to increase the rents $125 over the course of three years, a unit. That's exponential how much the value is. And of course, you got a few options, right? After year three, four, five, you take all that money out, refinance, all the money you invested, you refinance, and then what's your return from then on? If you took all the money out, you invested, what's your return from that? It's infinite. It's infinite, yeah. But sometimes you may not want to do that because it's an older property. So you may have ruse you have to replace, furnaces you have to replace, all those big cap-ex you may have to replace again. And so you may want to choose to 1031 exchange for a larger property without the money you've increased the value of the property.

Great. Great. So last question here before we move on to the fire round. How do you manage your time? Like while you're working a full-time job. Yeah, yeah. Teaching. That's what people tell me all the time.

You know, and I enjoy it. I mean, I really enjoy reading. I really enjoy learning. I'm a teacher, a lifelong learner. And I also play, you know, hockey a few times a week. and I'm a very active. I'm a very active type of person in general. And so people always tell me I don't have any time.

I don't have time to do this. Like, okay, I work 60 hours a week, if you're including grading papers and everything. I work 60 hours a week. And I also play hockey a few times a week. Enjoy time with my family. So if I'm able to do it with 60 hours a week, how come you can't do it with 40 hours a week? Yeah, that's good question. That's it.

That's it. I mean, this is fun for me. This is fun for me. This is just enjoyment for me. What I'm talking to you about right now, this is just enjoyment. I'm a teacher. There's a quote by Jim Rohn, who we talked about him last week on the podcast, but he says, like, if you truly want something, you'll find a way, if not, you'll find an excuse.

And I really like that. Correct, correct. Correct. Whatever the mind can conceive and believe it will achieve, you probably know who said that one. Napoleon Hill. If I know who said, correct. Whatever the mind can conceive and believe it will achieve. another one that I use with my students because I'm doing beginning college students first year.

And, you know, they don't know how to find topics, main ideas and details and paragraphs when they're reading. They don't even know what a topic is. And so I got to back up the truck. It's a lot of motivation. I tell them, if you change the way you look at things, the things you look at change right before your eyes. So it's our paradigms. It's the way we were brought up, you know. Albert Einstein said reality is merely an illusion.

Albeit it's a very persistent one. It's always in our face all the time. I got it in our face all the time. He didn't see it. That's cool. That's cool. I love it. I love all those quotes.

I'm a big quote, guys. I'm glad you are as well. You're a reader, I can tell. All right, well, let's shift gears here a little bit and jump over to the world famous fire round. It's time for the fire round. All right, let's get to the fire round. These questions are directly out of the bigger pockets forums, which of course our users can go hang out in, ask questions anytime day or night, 24-7 by going to biggerpockets.com slash forums.

Question number one, hey, BP community. I'm just curious about when you're purchasing an apartment building, what you look for in terms of bedrooms. I prefer two-bedroom units than a small percentage of one-bedrooms. Studios are not my favorite, a little more difficulty renting them. But what's your favorite? What do you like? Oh, man.

Depends on the area. It depends on the area and what sells in that area. It depends on if you're going for Section 8 complexes or if you're going for whatever you're strategy is with that complex. Two bedroom one baths are probably a sweet spot. Two bedroom two baths are probably a sweet spot for your generic. If you want to go generic wise, that's probably a sweet spot for that, I would say. It's nice to have a few mixture of one bedroom, one baths.

Three bedroom, two baths are good, although you're going to have a lot more fix-up when somebody moves out. And I've noticed that kids cause more damage. Families cause more damage than pets. A lot of people don't want to offer pets in their complex, but I charge $25 pet rent for a month. And so that increases the NOI right there. All right. Awesome.

I like it. So next question here is pretty relevant. I'm trying to get started in real estate investing, but I'm afraid that prices are too high again in Southern California, San Diego in particular. Should I wait for prices to drop? Yes. Yes, you should definitely wait for prices to drop. If I have three rules or two rules that I'll tell you about, number one, it must cash flow. Number two, it can't lose money.

You're buying at the peak now or close to the peak and you're not going to cash flow. Unless you want to go to somewhere, you want to go collect with a flak jacket. You're right. I think that's fair. I like it. All right. Nice question. I like this.

I've never thought about this before. Is a skunk in the yard my responsibility? The tenant thinks I'm responsible to pay to trap a skunk that's bothering them by hanging out, stinking up the yard and messing with our cat. Seems like a stretch to me. Yeah, but the wife says, Yeah, we're responsible. What do you think? I saw that one. I saw it like a bigger file. I thought that was really funny. Yeah, I have no idea.

So the skunk is hiding somewhere on their property. Yep. And it's stinking up the place. Again, earlier I told you, if this is a good tenant, you need to treat them like royalty. You need to get that skunk out of there. You need to take care of your tenant and give them everything they want because they are helping you to become financial. free. All right. I like it. I think it's a great answer. I'm wondering if I should stick with, so this person works a job that is not relevant to real estate investing, but once to get into real estate investing, and they're saying, I'm wondering if I should stick with my current restaurant manager job while I get

into small multi-unit investments, or would it be worthwhile to pursue a job in property management, another aspect of the business? Yeah, I think I, I think I saw that one too. I'm lurking on there all the time. So, yes, you need to keep your job. You need to make a lot of money, right? You need to stop. You need to stop investing in your 401k IRA. You need to take money and put it into your financial freedom account for your real estate. And do not quit your job because you will not get a loan.

You will not get a loan. You need a job. You need to replace all of your W-2 earned income, maybe double your W-2 after-taxie. X W to earned income, then quit your job. I love it. I think it's remarkable how people have this plan of like, oh, I'm going to get into real estate investing. I make like a 50K plus job, and I'm just going to go and quit and then go get to invest.

Banks are not going to lend to you if you don't have a job for the most part. So that's not really a very effective plan to begin going in there. So if you're going to change careers and understand it's going to be a two or three year window before you can get Unless you have a partner, unless you have a partner that has a good paying job, has a good paying job, and then you can partner with them and have them be on the loans. And that's fine.

That's a good thing to do. I mean, a lot of these properties, you know, I went in with my wife, my mom and my dad. They're on fixed income. And so when you put two different finances together and your assets together,

you can get more loans. Yep. Yep. That's true. Cool. All right. Well, let's wrap this thing up with our,

World Famous. Famous for. All right. These are the same four questions. We ask every guest every week and we're going to throw them at you right now. Number one. Swanee, what is your favorite real estate, specifically real estate related book? Okay.

And you're probably not going to be happy with me, but I got, just real estate, right? Just real estate. Yep. Yeah. So just real estate, my all time, I got two books, but my all time favorite for what I'm doing right now. I've read all of them. out there. I'm telling you. The one that I love the best is multi-family millions by David Lindahl.

Fantastic book. I follow a lot of that from that book. So if you read from that book, it's golden nuggets. You don't have to pay anything. A lot of times they'll say, oh, yeah, but they got bad ratings on their website and everything else. I don't care. I'm reading their book and I'm following the strategies that they're using to increase the NOI. So that one is amazing. And I have to add one more, which is loopholes of real estate. Loopholes of real estate by Garrett Sutton. Garrett Sutton. That's Robert Kiyosaki's personal advisor, tax advisor,

loopholes of real estate. That really helped me with the 1031 exchange because I 1031 exchange my way to financial freedom here and it's going to keep going down the line. That's awesome. So those are my two favorite real estate books. All right. Awesome.

What's your favorite business book? There are three that were really instrumental to me. First one was the seven habits of highly effective people. That was when I read, I'm old. I'm old. I'm going to be 52 in August. And so I read that a long time ago. And it's very important.

I try to teach my students that you need to be proactive. A lot of times people are blaming into the blame game and reactive and they're not proactive. You know, begin with the end in mind, your goals, you know, and then start with first things first. There's so many distractions. So that was a key book, which was the seven habits of highly effective people. And then I read Rich Dad, Poor Dad. You hear this all the time, though. But that's very important to be able to make your money work for you and not work for money.

That was very important lesson that I heard that I had there. Rich Dad, Poor Dad. And then I read like eight times, they can grow rich by Napoleon Hill. And I still just loved. I eat that thing up. I'm having a little trouble with the trans, the sexual mutation or whatever they have there in that part of the book. It is a part of the book that tells us that you've got to be like a physical stud and you've got to be having like this sexual tension all the time to really to really get all you want. You have to have like that sexual tension like, you know, that kind of thing.

And I have a little trouble with that part of it. But it's an amazing. It's an amazing book with, you know, life-altering book if you really related to yourself and you get the main idea, which is whatever the mind, you know, can conceive and believe, it will achieve. And that means negative too. Do you think negative? You're going to have negative things happen.

So it is. Love it. All right. Next question. Trench. What are your hobbies? What do you do for fun besides hockey there? Yeah, that was what I was going to say.

Sorry. I told you earlier. I'm a hockey player and a baseball from when I was younger and even playing some football. But hockey, hockey, I play two times a week, play against the kids. I'm 52 years old. I'm getting a little slower, but still competing out there with them. And I love playing hockey. Coach my son in hockey.

He was a hockey goalie. Goleys are a little bit strange. But my son, Mikey, I want to make sure I give him a plus. here, my son Mikey and my wife Elizabeth Swan. Make sure I give them a plug on here. And so I love, I love hockey, love hockey, and they've bared with my hockey, obviously, all these years, my family. And then reading is very important, especially nonfiction areas that I can improve in my life and help others to, I can't really motivate them, but deep down inside for them to bring it out inside of them that they can do it.

You know, they can do it. So motivational types of books I read. What else? I can't think anything else except for, I really think this real estate is a hobby and a love and teaching, teaching, obviously. I'm a lifelong teacher. That's awesome. Is Mighty Ducks your favorite movie?

My favorite movie. If you're talking about a hockey movie, it has to be Slapshot. You guys are not very old. I've not seen it, but I love it. Slapshot with, yeah, you need to see Slapshot. You need to see that one. but that's one of my favorite hockey movies of all time. Mighty Ducks is, as I said, I'm older.

That one's more like my kid and that kind of thing. Mighty Ducks was my jam. Yeah, yeah, yeah. I grew up in Minnesota, so like it was like, it took place. Oh, yeah. One, two, and three, all of them. Yeah, big hockey. Yeah, I'm from Illinois.

I'm from Illinois region. So, so, yeah. You get it. You get it. All right. Number four. Last question of the famous four. Swanee, what do you think sets apart successful?

investors from all those who give up, they fail, or they never get started. I'm also a big Grant Cardone fan also. And, you know, basically I get from him that people have a lot of fear, you know, false evidence appearing real. They have a lot of fear. And if you prepare, if you base things on cash flow, if you base things on not losing money and you do it right, then. you're more than likely going to have success.

And so people that I've noticed, especially where I live, they're speculating. They're speculating that prices will continue to rise. To me, that's like the stock market. And so I don't like to do things based on just speculation. I mean, you can't get everything under your control. But I think that people are afraid because of what they've had in the past, their parents, what happened to their parents, their family, their relatives, their friends,

when they were getting these interest-only loans and stated-only loans and the loans came due and the lenders told them that they could just refinance, but it wasn't going to happen. And so they're really afraid. They're really afraid and they think the stock market is safer than what we are doing. That's true. I don't know if it's true, but it's true that people think that. Yeah. We'll see.

Yeah. All right. Where can you get out more about you? Oh, yeah. So I would just go to my bigger pockets profile. I got, believe or not, I got my phone number on there, guys. This is my cell number. Right here, my cell, they can call me.

And I know you guys have said, watch out. Watch out your phone's going to blow off the hook. You know, we are definitely starting to think we already have one close friends that are partners with us on our latest 21 unit. And we are going to do more partnering and look into the, indication too because of the more experience we have with this and the more that we make it work, I can help to make other people financially free also with the same concept. I love it. I love it.

Well, Michael, it's been a ton of fun. Thank you so much for your story. I love the story of just going from one property to two to ten to bigger and up to 100 now. So just that trading up concept is so powerful. So well done. I got to put my goals out here for everybody. All right. My goals right now are to have 750,000 in cash flow.

My goals are to have over 50, $5 million in real estate. And my goals are to have over $15 million in net worth. Those are my goals, my current goals. And the hard thing about it is the deadline is a lot of people have deadlines, but I see that these deadlines are taking a little bit longer. And my deadline to get where I am right now took a little bit longer than I thought. So just to be 10 years would be a good goal. All right.

All right. We're holding to it. We're going to have you back here in 10 years. All right, Michael. Thank you so much. This is a lot of fun and we'll see you around. You guys are awesome. Thank you for what you do.

I thank you. Thank you. Bye-bye. All right, big things for our guest, Mike, Michael Swanee Swanee Swan. That's a long name. Is our guest today on the Bigger Pockets podcast. That was pretty awesome, huh? What do you think, Scott?

I thought it was great. I thought this was something, you know, we got from the story of how a teacher who had managed a strong personal financial position doing all the things your quote unquote should do while you're with your money. And then said, nope, that's not for me. Liquidated everything and pounced on a market opportunity and has been reaping the rewards ever since. It's been hustling and self-educating, doing it everything right, looking for new opportunities and building up the cash flow and the equity. And you know one thing we didn't talk about in the show and I probably should have mentioned it then. but I'll say it now, is like he didn't just jump into the stuff like, you know, I think real estate sounds like a good idea. I think I'll buy a couple properties. You know, it was like he, like you said,

he self-studied. He was very meticulous. You can tell in his research and he's, when he was talking about managing tenants, he doesn't just throw in tenants. Like he researched, what's the best way to manage them? You know, so like if you want to succeed to something like learn, you know, like do what, do what Swanee did, figure the stuff out, learn and you're going to do awesome. And you don't have to take all that action all at once. You can just, hey, get started with the baby step and scale up as the time goes on. There you go. There you go.

Well, thank you, Scott Trench for being a wonderful host today. This was a lot of fun. And congrats on your fourplex. Am I the host or are you, though? You are the host today. Yeah, you are the guest host today. We kind of go back and forth. So thank you for being a good guest host.

It's pretty similar. Pretty much. Well, thank you for being my co-host. Anytime, Scott Trench. Well, thank you, everyone, for listening. And you guys have a fantastic week. Happy investing for Bigger Pockets podcast. This is Scott Trench and Brandon Turner.

Signing off. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing online.

It's time. It's time for. It's time for. The random five. All right, we got one last segment of the show here that we like to throw into the end here called our random six. Random six. I think we have a sound effects there somewhere. It used to be the random five, whatever.

All right. So these questions are just random questions to get to know you a little bit better here. Swanee, number one. What's your favorite card game? Favorite card game would have to be spades. All right. I have not played that in a long, long time, but I did one. All right.

Next one. What, would you work for the FBI or NASA? Yeah, I'm not so much of a sci-fi guy. So I think of NASA more sci-fi. So I would say FBI. Nice. All right. Next one.

TV show. What are you watching? My favorite TV show? Sure. Oh, God. I love Ray Donovan. If you ever seen on Showtime, Ray Donovan. I love those gangster.

I love those gangster type of movies, yeah. All right, cool. Did any of your childhood friends' acquaintances become famous? Any of my childhood friends become famous. So if we're talking famous on, all I can think of, the most famous person, there's a couple of famous people that I knew, knew of, and played against. And David Wells, pitcher, he pitched against me. Chris Chilio's played in San Diego at the San Diego Ice Arena.

He was a professional ice hockey player. Real famous wise. I'd say those count. Yeah, yeah, yeah, yeah. We'll call it those professional athletes. Didn't really know them, but played against them or stuff like that. I count it. All right.

If you were in prison for the next 20 years, you got sent to prison for 20 years, I like to give that number. And then you had the opportunity to escape in year one. Would you take the chance to escape? Okay. Let's say 50-50 chance. You guys are very interesting. Yes. You got a 50-50 chance of success.

And if you get it, you're free. Okay. So I'm going to jail for 20 years. Yeah, but if you don't get it, then you're stuck there for life. We're going to say that. It's a risk. Oh, for life. For life.

It's 20 years, but if you get caught on your escape, you have to stay for life. But if you get out, you get out 20 years. Did you sacrifice? Do you take that gamble? Or you just get another few years, but you're interested in once you're escaped. Wow, wow. I'm kind of a goody-to-shoes, so as long as I wasn't getting abused too badly, I'd probably stay. All right.

All right, trench. Last question. What is one very surprising fact about you that no one knows? A surprising fact about me that nobody knows? I don't know. I want a very few people know. Very few people know. Very few people know.

Well, a basic feature, physical feature that I've never seen anybody else have, and I'm going to have to show you here, is there's an actual, I have an actual muscle right here. Oh, you do. So look at your wrist. Look at your wrist, guys. And then do this. And then, and you're going to see a little muscle here that, you know, I thought it was a tumor or something when I was a kid. I was like, Doc, what's the matter with me? And he said, just, it's just a muscle that no other else has.

Well, if you guys. want to see that and go check out the YouTube video version of this. If you're listening to to this podcast, you go see Swanee's weirdness on his hand. All right, thank you. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico content. And editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our

free newsletter, please visit www.biggerpockets.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.