BiggerPockets Real Estate Podcast - 30: Conservative Real Estate Investing and Starting Out with Kenny Estes

Episode Date: August 8, 2013

Today on the BiggerPockets Podcast we want to share an interview with someone who runs his investment business in a unique but powerful way – and it’s sure to both inform and entertain you. On today’s episode, we sit down with real estate investor Kenny Estes and chat about investing in rural America, funding deals through private money, building a team, and “going big” with a bold exit strategy. Join us today for a really awesome interview and one of the highest caliber conversations we’ve ever had (and one of the largest debates as well!) Read the transcript to episode 30 with Kenny Estes here. In This Show, We Cover How Kenny started investing at 18 years old – while still in college. The early mistakes that Kenny is still digging out from The “Cab Driver Metric” in Real Estate Investing Why “no money down” is dangerous How to “stress test” a real estate deal How Kenny found his initial private investors The debate between “Invest Yourself” or “Invest with Others” Kenny’s real estate team – and how he built it Finding and dealing with contractors Kenny’s “bold” exit strategy plan Links from the Show The House Flipping Calculator Are Stocks Better than Real Estate? Post by Kenny Estes “Boring can be Sexy when Investing in Real Estate” post by Ben Leybovich Ultimate Beginner’s Guide to Real Estate Investing – Free eBook CashFlow Board Game Books Mentioned in the Show Rich Dad Poor Dad by Robert Kiyosaki Investing in Real Estate – Gary Eldred On China – Kissinger Tweetable Topics Be very cognizant of your risk threshold and do it very conservatively. (Tweet This!) Private investors are people you know. (Tweet This!) Invest simply, do it conservatively, do it for the long haul. (Tweet This!) Connect with Kenny Kenny’s BiggerPockets Profile Kenny’s Blog – PearTreeProperty.com/Blog Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast, show 30. 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. 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 Josh Dorkin, founder of Bigger Pockets, and your host, on the Bigger Pockets podcast, I am joined by my wonderful podcast co-host, Brandon Turner. You know him, the man, the myth. No, he's just a, no, not really a legend, but, uh, what's up? What's up,

Brandon? Hey, not much. What's up with you? Yeah, you know, doing all right, man, doing all right, excited about this, uh, this show we've got to come. I think, uh, I think we're going to blow some brains with this one. I, I believe so. So put on your thinking caps. Yes. I sit in your thinking chair. I have a thinking chair. Do you really? I do. It's like this awesome bright yellow, like old-fashioned, like 1800s chair that I sit in and think.

Is it in the corner and you wear this cone hat on it and face the wall? I don't wear the hat, but it is in the corner and I sit there and I think it's awesome. I'll put a picture or something on Twitter sometime. Yes. Get a picture of you in the thinking corner, the dunce cap on. Well, so we do have a great show. we're very excited about it and we're also very excited that this is show 30 the podcast continues to chug along and we continue to bring you guys some pretty cool guests so it's been

it's been pretty exciting to watch this the show grow um so thank you for every to everyone for listening we definitely appreciate it uh we're going to move on to today's quick tip the quick tip of today is bigger pockets whizzy wig you can now easily post photos you YouTube videos and format more easily your post on the Bigger Pockets forums, definitely jump in and check that out. We've totally rehashed how our posting system works, and we actually redesigned our blog Whizzywig as well to match that of the forums. We're going to start having contests on the site, things like before, after, transformations

and other cool stuff. So definitely come check it out, maybe test it out with a photo of your own of one of your properties or, you know, the ugliest house. in the neighborhood or I don't know anything like that. So jump on and give that a look. Cool. For today's show, we are talking with a guy named Kenny Estes. If you are not familiar with Kenny, he's a regular contributor on the Bigger Pockets blog.

He's got some sometimes controversial things to say. And in fact, we have a bit of a mini little debate in this episode to come. Josh was throwing chairs. I was angry. I'm angry. So Kenny started investing in real estate at 18 years old. Yes, now I'm throwing chairs. What 18 year old has some nerve to start investing at 18?

Yeah, weirdos. Jer. All right. So Kenny started investing at 18 years old, and he's got a bit of a different model than most investors. So you guys are definitely going to love the interview. And if you don't love it, you hate it. at least you listened and got some passion out of it. But Kenny is...

Either way, if you love it or hate it, come leave a comment on the show notes because, yeah, comments on the show notes are awesome. Come tell Kenny what you think and... Yeah, and he'll be there to answer your questions, too, or comments. So if you hate the show, tell them why you hate it. If you disagree with him,

tell them why. If you love Brandon and hate me, let us know that, or vice versa. If you think we chatter too much, feel free to leave that remark as well. people have left that and you know that's okay we don't mind we don't mind we don't mind where can hey josh where can they go to find that show notes page that's a great question uh they could go to bigger pockets dot com slash show 30 nice bigger pockets dot com slash show 30 all right can i finish

finish do it go all right kenny kenny's managing member of pear tree properties he runs a blog at per tree property dot com and as i said he's he's a contributor to the bigger pockets blogs There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties. These gaps surface only when filing claims. That's why investors work with NREG. They specialize exclusively in real estate investors, understanding portfolios, risk at scale, and cash flow protection. One claim can erase years of returns. If you own a rental property, don't assume you're covered. Have NREG review your insurance with someone who gets investing at NREG.com B-P-Pod. That's N-R-E-I-G.com slash B-Pod. Most investors spend all their time talking about their high-level returns. But that's not the number that actually matters. What actually matters is what you keep after taxes, and that's where multifamily real estate quietly stands out.

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Head to Costsegregation.com before April 15th. So without further chittacatta. All right, Kenny, welcome to the show, man. How's it going? Oh, it's pretty good. A longtime listener, first time caller. Is that so applicable in this day and age? I don't know.

Yes. That was like the whole Dr. Ruth thing, wasn't it back in the day? Yeah, and every sports talk radio you ever listened to. Not that I listen to them, but apparently that's a thing. I listen to Dr. Ruth either. I think I just aged myself there a little bit once again. Right. Yeah, I think so.

Well, no, cool. Cool. Well, welcome to the show, Kenny. Oh, thanks for having me, guys. Yeah, yeah. Yeah, I know. Well, listen, man, so tell us, what is, uh, What's your story? You're obviously a real estate guy. How'd you get started in the game?

Actually, I started about 10 years ago. I went to college in a little town called Kirksville, Missouri. Name the school as Truman State University. Yeah, I know Truman State. Yeah? I went to Wash in St. Louis. Oh, wash you? Okay. Yeah, nice. Yeah, not too far away. It's only about a three-hour driver or so. Yeah, yeah.

You two old college buddies done catching up? Can we get on with the show? Anyway, that was true. So my brother actually kind of worked out, I was, what, 18, I guess when I bought my first house. And the only reason that was, was my brother went to UCLA and got out-of-state tuition. And then my parents kind of felt guilty because they paid for his education. And I went there and schooling in Truman State isn't the most expensive thing in the world. So they were going to buy me a car. We got in there.

it turns out that you can buy literally a house for the price of a car. So at the age of 18, bought my first house, moved into it the next year. By the time I left college, I think I had five properties in the area. I hired a property manager and started my full-time career in finance, of all things. What did you do in finance? So I was a high-frequency market maker, which means, I wrote computer algorithms to trade the stock market all day. You don't have to be fancy, man.

Jeez. Sorry. That's cool. No, that's awesome. That's very, very, very, very good. So it was interesting, but, you know, you can only do that for so long. I was in that space for about, you know, about the same amount of time because I started before I went to college.

So I was in that space for about a decade. I worked in Chicago for six of those years, and then I actually moved to London for the last four years and I moved and so we kind of kept growing kind of putting more money and you know wrangling in some investors to buy some real estate over the years and about August, September, kind of looking at the various options on the table and we had kind of hit a critical mass where it was a viable option to take this kind of part-time hobby and really start focusing on it and growing it into a proper enterprise. So decided to do that. And It's been, wow, year.

That's scary. Time flies, doesn't it? I got married in there, so that probably breaks it up a little bit for me. Nice. Well, that's awesome. That's very cool. And I bet you a lot of the people listening are going to be as wild as I am by your getting out of college with five rental properties under your belts.

Because I know when I was a senior in college, I was living with a guy, my roommate, now, we're totally into the whole idea of buying rental properties. And it just, it didn't make sense where we were looking for us. And, you know, to hear somebody come out of school with five properties, that's, that's awesome. Actually, interestingly enough, it turns out that I was buying those properties before 2007. And of course, at the time, the financing was, you know, free and clear. And you could pretty much get anybody to do to give you money. After the crash in 07, and actually the investments down there went a little bit south.

And I'm still, you know, not terrible, terrible, but I'm still doing a little bit to try to dig out of it. Fortunately, around that time, we started investing where we're investing now in the South Bend, Michigan, Mishawaka area. And there you're getting a lot higher cash flows, a lot higher returns.

So I kind of view my time investing in Missouri as a learning curve, right? When you first get into it, there's a lot of stuff to pick up, especially in your 18, know, you know, you think you know everything about it. It was nice to get in there, take my knocks early, and then really start applying the things I learned to building the enterprise when we moved into a different area. Yeah, that makes sense. Definitely. Definitely. So do you mind

actually if we touch on that real quick? What do you think went wrong in those early properties? You said you're still digging out of some of them. Was it just you didn't buy them for the right price or the cash flow wasn't there? What was going on there? Partly we were investing based on pro forma, which, you know, pro forma is you write down how much rent you get, you take a ballpark estimate on all of your expenses, and then, hey, that's how much you should be making. There was a little bit of disconnect between that and the reality of the cash flow. It did pretty well for a couple of years, but then after the downturn in the market, you know, the rents dropped a little bit as well, and, you know, we just didn't leave ourselves enough

room for error. Plus, we were, you know, leveraged out pretty much the gills at that point. So as the market goes down, when you start have to worry about things like refinancing, it becomes a lot harder. So the combination of, you know, and, you know, at the point we were expanding, probably too quickly. We were buying stuff up. We didn't really have an established track record, you know, just expanding, expanding, expanding. And at one point, it's like, well, okay, what we thought was actually going to happen. It didn't really happen. And now the market's down and it's going to be hard to refinance. And it's just a matter of, you know, sit on them, pay down the debt, kind of dig yourself out over the next few years. So what can, you know, the folks listening, what can they do to

avoid being in a situation like that? You know, you said maybe we bought too quickly. Is there a way that might help people identify. I'm buying a little too quickly. Maybe I'm growing too fast. Do you have any thoughts on that? Sure. And this kind of goes to a larger point that I try to make a lot

is that be very cognizant of your risk thresholds. When you're first starting out, especially if you don't have a lot of capital, from the fundamentals of investing, if you're starting out, you want to get out of your day job and you want to do this full time. You need to invest in a way that has a low risk threshold because you're not in a position where if things go sideways,

you're going to be able to absorb. If things go bad, you don't get the cash flow, you start having to feed it, anything like that, you're going to end up in a much worse situation to begin. In other words, don't flip houses if you're absolutely broke and have to do it on credit card. Yeah, exactly, right? Yeah.

I've been there. Or even buy, or you know. Is that why you had to go back to, you kind of left to me. You had to go back to work, right? Yeah. I thought you were working for me because you like it. No, the first time when I went to a bank, yeah, that was because I was flipping a house. It couldn't sell the market tanked and had to refinance it, but you can't get a refinance

without a job. So I went to work for a year back then. So anyway, yeah, that's cool. Yeah, be cognizant of your threshold. do it very, very conservatively. I think that in general, you know, you get gurus out there, you know, people advocating creative financing or no money down, you know, this is the best way to invest because there's no risk to your part. You know, in theory, it'll work out, but if anything goes wrong, you end up in a really, really tough spot very quickly. So build a savings, do it

conservatively. Don't overextend yourself. If you feel like, you know, you have to have X, Y, Z go in your favor. Don't count on that going in your favor. Count on it not going in your favor. If it still makes sense at that point, then go ahead and do the investment. That's awesome. And one thing, we came out recently with this calculator for house flippers. It's on, we'll link to it in the show notes at biggerpockets.com slash show 30.

But one thing that when we made this calculator, we made sure we put in there was, what if different things went wrong? Like, what if your holding time was 90 days? instead of 30 days or what if it was 270 days instead of 90 days because those things are they happen to people all the time like your timeline goes longer your budget doubles you know things happen so I always say you know if you double your budget and double your timeline and it still works out as a profit then it's probably a good deal to invest in because you just got to be conservative like that so anyway that was my quick little plug for the flip yeah in the in the finance industry they so in the finance industry they focus a lot on risk management as you might imagine that's called stress testing. Essentially, you know, find a bunch of outlier situations and are you going to file for bankruptcy if these happen? I mean, if you are, you probably shouldn't do investment.

Yeah, that's good advice. Well, I really want to go more, we want to talk more about like the whole no money down stuff. But before we do, let's talk a little bit more about you, just so people can get to know you a little bit. So what kind of investing after college, you got out of that area, you moved. And where are you at now did you say? And what kind of investing are you doing now? We're in South Bend, Mishawaka, and Indiana.

Okay. So when we first came here, we bought, I think it was a 32-unit apartment building. And then I had like one or two investors down in Missouri. South Bend geographically is a lot closer to Chicago, which is where I was working at the time. So after we bought the 32-un apartment building, we started realizing there was a bunch of single families in the area that had really high-cap rates. I mean, this is 0-8-09. The whole market was down. So at that point, we started expanding our investor pool and buying up a bunch of these properties.

In South Bend and in the United States in general, there wasn't a very strong lending market at that point in time, especially for our investors. So we actually bought everything and still own everything in cash. Every single single family home we have is cash. There's no financing whatsoever. Gotcha. Gotcha. Well, so let me ask you about that. I'm just curious how you went from scooping up these single families.

I know you talked to. You had the job and you were acquiring the single families and then you moved. Then you buy this. What did you say? It was a 32 unit. Yeah. This 32 unit. And that was, it sounds like, paid via outside investors, yeah?

That one was a family investment. It was after that, that we started doing the single families with outside investor money. So how did that transition happen, right? you know, you come to a point where you realize either A, you're tapped out on cash or B, you want to start to expand at a rate a little bit quicker, obviously, then you could personally afford. So I guess it's the same thing. How do you transition from doing it on your own to going out,

reaching out to other folks asking them for money? And what's that like? Honestly, luck. I mean, as terrible as that sounds and that's not what you want to hear. I happen to have a pretty good job. and I had one or two investors that got in early down in Missouri that had, I guess, respect for what I was doing or at least kind of were open to the idea of what I was doing. So once you get a couple and you start getting a track record, getting people to believe in you is a lot easier than if you're just starting out fresh.

For us, the reason we wanted to make the transition was just frankly economy is a scale. If you're doing one flip or one, you know, buying one buy and a hold at a time, two buying a hold at a time, you're paying retail on your labor, you're paying retail on your materials. So the theory at the time was if we pool some funds by a larger number of properties, then all of a sudden all of our fixing these distressed properties and managing them and, you know, renting them out becomes a lot easier and a lot cheaper. So we decided to go that route. And how did you get those first investors outside of your, well, I know you had

you said your family was the first investors, but then the next private investors, how did that happen? It was just, you know, coworkers, people that I knew from my day job. And that's really key right there. I mean, people think that private investors have to be some, like, mysterious club, like some other. You got to pay a network and pay for access to private investors, and there's all these sites offering that nonsense. I mean, you know, private investors are people you know. Honestly, I get solicited, for lack of a better words, for investment problems from a lot of people who are just starting out. And 99% of the time, I'm just like, I have no interest in this. It's a completely unknown entity.

I'm not going to do that. It is exactly what you said. If somebody knows you and knows you have a good work ethic and a good head on your shoulders, then that's when they're going to be able to give you money or be willing to give you money. Well, that's the same thing on bigger pockets, too. People will come on the forum's first time ever posting and say, I'm looking for $100,000. dollars. And, you know, besides flirting with being illegal there, but just the fact that they've never posted, they have no track record, they don't say anything, they're brand new at this,

and they're asking for hundreds of thousands of dollars is crazy. Now, when people, you know, establish themselves and participate and engage, I mean, I mean, myself, like six months ago, I needed some money and a guy on the site lent it to me for a property I bought. So, I mean, yeah, It's all about establishing a track record with the people you hang out with and building your reputation. So that's key. Rural, I have a hard time saying that word. Rural investing. Rural.

Say three times fast. No, you'll mock me. That's happening anyway. Yeah, yeah, yeah, it is. All right, rural, rural investing. You talk about that. I read it on your own personal blog earlier that you like to invest in non-s, city areas. Why is that? What can you tell us about kind of your strategy with that?

Right. One thing that might help inform that, I'm a massive numbers and data geek. You know, I love computers, computer programming, you know, metrics, data, all that stuff. I mean, I did it for a living for 10 years. Like, I just, it's kind of part of what I do. So one of the things when we were looking about where to invest is, you know, you look at a graph, right, of prices in urban markets versus prices in rural. markets. You can really see a bubble ending in 2007 in like a Chicago or Miami or an LA. But if you look at a, you know, a Missouri or an Indiana, it's pretty much straight the entire way. Like there's maybe a slight blip, but that's it. So for us, we want to build passive income so that we have a nice

and cushy retirement. If we don't want to have the stress of a bunch of volatility, invest in rural areas, you're going to have steady appreciation, you're going to have steady rent rates, and you're going to have a lot more certainty about what's coming in the future. Yeah. You know, Ben Labovich put a post today out called Boring Can Be Sexy when investing in Real Estate, and that was the whole idea of it was you don't have to invest in like the cool bubble markets of, I don't know, I don't want to name any names, but you know, you don't have to invest there. Oh, name names.

Certainly not Detroit. No, not. No, yeah. I had to throw my in Detroit. Yeah. Yeah. No, you know, I'm thinking like, not that there's anything wrong with Phoenix, but Phoenix is up and down all the time. You know, like they, they swing.

Some Florida swings, California. And a lot of people invest there, but you don't have to. You can invest in a boring area. Like, I mean, that sounds mean, but like, you know, you can invest where things are just solid. They're just straight and they move forward. So. Name names. Come on.

What's boring, Brandon? Oh, Lima, Ohio. That's what, that's what the post. South Bend, Indiana. Yeah, Milwaukee. Last week we talked to Don about Milwaukee. I mean, it's nobody ever, you know, they don't shoot movies in Milwaukee, and it's not like the hottest place in the world.

But I don't know, investing seems pretty solid in those areas. So, yeah. One thing about all this stuff is when you're buying real estate, you're buying anything, you need to look at yourself first and foremost as an investor. An investor, you know, is in the long haul. Who's the most successful investor in the world? It's the third richest person in the world. Warren Buffett, Buffett, right?

He is the most boring freaking investment you could possibly imagine. He literally just sends all of his time pouring over prospectuses and reading management profiles or manager profiles. Like there's nothing sexy about what he's doing. He just sits there, grinds it out, finds kind of fundamental things that he looks at and buys and holds forever. Like he doesn't get involved in the tech stuff. He doesn't get involved in anything he doesn't understand. He doesn't go chasing the shiny ball. It's just I know exactly what I'm going to do.

it's going to be really simple and I'm going to do it over and over and over again and I'm not going to go down some detours or into what the new hot commodity is. Yeah, and I think that is a danger for a lot of investors. Like we get bored. I know I get bored sometimes. Like I know what works. I know that buying these cash flow properties and I could just buy that for the rest of my life if it works. But it gets boring. It's like, I'm going to go, you know, flip this cool house here and turn it into a, you know, something different.

It's fun, but it's not intelligent necessarily. I think it's a whole ADD nation. I mean, we can't stay focused on anything. And, you know, and frankly, that's why we're in and out of bubbles every couple of years now. I mean, it's, you know, tech bubble in 2000, the housing bubble. You know, we're arguably in another housing bubble now. So it's just, you know, if people were to slow it down and say, listen, there's no need for, you know, those quick and potentially dangerous return. turns, you know, let me take my time. Let me do it the Buffett way. Let me do it the boring way, so to speak. I think it makes a lot more sense.

There's a, in finance, there's a, the cab driver metric, which is, you know, if your cab driver ever talks to you about any stock that they're considering buying, go out, go sell it. Just sell it immediately. You have no interest in that because it's so hyped. It's, you know, speculative fervor is so much into it. The pricing, almost guaranteed not to make sense. That's funny. I've never heard that before. That's really funny. Cool. Well, what about like cash flow and what, you know, what kind of properties are you buying here? Cash flow and stuff wise. We're looking for high cap rates. A cap rate is just a cash flow without financing. For us, it's the same thing. You know, 9 to 10% cash flow is pretty good for us. We also have a fair amount of equity in these properties because we do buy a lot of distrust properties and we fix them up.

So we add economic value. So the returns higher than 9 to 10 percent, but even if we never sell them, that's what we get. Yeah, that makes sense. So I like how you don't come out and say, you know, we're getting 30 percent, even though maybe you will get 30 percent when you go and sell those. I mean, you're talking as if you would never sell them. And I think that's a very, very smart way to look at this. Again, it just goes back to the conservative thing. You might get a lot better than that.

But even if that's all you ever did was rented these things out, you're sitting at 10%. That's awesome. Yeah, and I make an argument about that too about flipping, right? Kind of what we do, we kind of view it as long-term flipping. We value stuff based on rent. We want our return on a monthly basis. And we'll sell when the times, right? If the market goes up, hey, look at that.

It's an extra payday. But especially when you're talking about dealing with investors, if you start delivering or you start promising 20% and deliver in 10 and the market goes against you your reputation is trashed. You're never going to get any money again. Under deliver over promise, right? Or under promise over promise over deliver, that's the one.

Yeah, yeah, yeah, yeah. Well, so with those investors, I mean, what are you promising? You know, what would you tell a potential, you know, private investor, somebody you work with, somebody who you run into who's impressed with what you've got going on there? You know, hey, Kenny, I'm, I'm in,

interested in doing this. What would you, you know, what kind of information are you going to give them? I'll give them our historical returns. At this point, we've got four years worth of data that shows how much, you know, how much cash flow we're actually getting. Don't promise people any number because, A, it's going to ruin your reputation. And B, you might end up in problems with the SEC. Right? Let me, I have actually a funny story about that. When we were first kind of getting go in on this, we knew a guy who ran a real estate investment group. And he promised 12% return per year to all of his investors. So we didn't end it up, whatever we found it's apartment building. We didn't invest with them. We got all these, you know, emails and direct mailers and

solicitations and stuff from him just continually, continually, continually. And then all of a sudden, it just stopped. I didn't even notice it to about three months later. And then I go to look him up and he's in jail. because it was a Ponzi scheme. He started off with best intentions. This was before 2007. He was actually getting that 12% return. And then when things turned south,

he had made so many promises that he couldn't stop. So he started intermingling or commingling funds. He started taking money from a new investor to pay off an old investor and then it just snowballed completely out of control. Ponzi scheme, I think he's got 10 years in jail. Nice.

Nice. So the advice, I think, for people, who might be listening would be don't promise returns I mean don't guarantee don't make any promises on what what you're going to deliver you know you can show your historical returns historical or historic historic yeah way yeah your historic returns and and and ultimately you know just say this is what we've done in the past hopefully we get something close to that but you know no guarantees of course exactly you know that's different though for private

lenders, right? I mean, you got to, if you're going to borrow money from somebody like, you know, with a promissory note, you need to offer them an interest rate, right? I mean, how does that differ than what you're talking about? Yeah, you're absolutely right. For us, we view our investors as partners. You know, they participate in the upside just as much as we do. So it's a little bit different because it's not an established security, I guess, for a lack of better words, but yeah, you're right. When you take a loan, you need to give them an interest rate. But it's also not going to be in general, you know, 10, 15, 20%, whatever you might get on your personal investment. Otherwise, you wouldn't take the loan because you're going to lose money on that trade.

Yeah. So let's talk about the way you have that set up. You said you view them as partners. Like, how exactly does that work? You mean they're basically like shareholders? Is that kind of what you're doing? We're an LLC, so they're members. Okay.

Yeah. But, yeah, so everybody puts money in. It all goes into the same LLC. You put your money in today. we essentially take three months to find a property, buy it, fix it up, and find a tenant. And then at that point, you just get a pro rata ownership in the LLC based on how much you put in. So if there's a million bucks in the fund, then you put $100,000 in there, you own 10%. So everybody participates in the upside.

They all participate equally in the cash flow, so it's just super symbols for everybody. And they get the advantage of having immediate diversification. because now if you've got 100 properties in 1 LLC, when you come in, you know you own 10% in all of these properties, so you don't have as much risky with any individual investment. Yeah. Yeah, it's a different setup than most people I think, and then anybody we've had on the podcast so far. Most people just offer, you know, a flat 12%, like, or whatever that is, on individual houses to lend the money as private money. So, yeah, it's definitely kind of a new concept to me, so I like it. Let's shift gears a little bit here.

I want to talk about something that stir up a little bit of a debate here. A few weeks ago. Yeah, stirroversy. You said a little while ago, essentially the phrase you said was individuals just starting out with little capital. And you said this earlier too, shouldn't buy real estate themselves. And you even did a post called, Is Stocks Better Than Real Estate? Where you kind of hinted that maybe stocks are actually better than real estate for new investors. So, I guess, can you elaborate on that a little bit?

And what do you mean? Sure. When you're just starting out, you don't have, well, start off, you don't have any economies of scale, right? You are going to be paying more for labor and materials than anybody who is an established investor, right? That's the first thing. Second thing, you don't have an established reputation in your area. So you have to put a lot of hours into going out, finding a property, fixing it up, managing it up, managing it because you, A, don't know what you're doing, and B, they're not coming through

your door. So a deal comes in, you're going to spend two to three times as much, or two to three times as much time as I would have to, to analyze that deal. So at that point, your actual return for your hour invested is quite a bit lower than somebody who is more established, economies of skill. Not to mention, just as you become more experience, you know what to avoid, what to watch out for, you know, just generally your returns tend to improve as you become more experienced. The other kind of leg of the argument is on the risk management side. We mentioned it a little bit before, but as a new investor with little capital, if you have, you know, 10 grand to invest, five grand to invest and you want to go and buy out, you know, a $200,000, $300 property,

that risk profile is completely outmatched to what your earning potential is or what you're able to absorb. you know, my argument would be you want to have a low risk investment, build your savings, put it in the stock market for a while, and then be able to put 20, 30 percent down and on investments so you don't have to worry if things go against you. Not to mention real estate, you know, still continuing on the risk management side, I think, it's a very low liquidity situation. If you have 10 to 20 grand and you, you know, lock it up into real estate, you, if anything goes wrong in your personal life, you have no way of accessing

that in any reasonable amount of time. That makes sense. Whereas if you put it in stocks, hey, I'll go sell a stock and, hey, move on with my life. But how do you... Oh, sorry, go ahead. Go ahead. Well, I'm wondering, how do you build experience then if you don't start? Like, how do you suggest people build experience then?

Yeah. Well, first off, build the savings. I would argue that you want to build your savings, then you want to invest with somebody who has some experience. You don't want to start out doing it yourself because there's a good. You're saying invests, are you saying invest with somebody like in their LLC, kind of like you've got your setup? Or are you saying, you know, give them your money like a private lender? Can you clarify on that?

Sure. I would argue that if you really want to get into real estate, find somebody who is already doing real estate, has an established track record, and find a way to invest along with them. Profit if they profit, don't if they don't. For one, that gets your foot in the door. You can have all these conversations with the person, learn, pick his brain, understand, what's going on on a day-to-day basis. Understand how much work is going to be involved with it. In addition, you get that economies of scale that this established investor brings to the

table. So even though he's probably going to take 5, 10, 15% of the total profit back out of it, you're probably going to come out ahead as far as your total returns because you're going to avoid a lot of the pitfalls which are going to wipe out your entire portfolio. Here's the problem that I see with that. What you're proposing is that somebody goes in and essentially acts as a mentee, that gets a piece of the action under somebody who's kind of mentoring them.

But I've been doing this for a long time, and maybe you can give examples of this actually working, but in almost nine years I've been running bigger pockets, I think it's extremely rare that I've seen any example where anybody would take a guy with no experience, no background, no nothing, and give them a piece of their business out of the blue, just to let them ride their coattails or maybe, you know, maybe even for a couple bucks, because they don't need it.

They don't need the headache, you know, unless, again, they're doing it with the cause and with the purpose of taking this person as a mentee. But if they got 50 grand to go halves in on the deal of something, then they might be be able to. Yeah, but Kenny's not talking about 50 grams. Yeah, I was actually. Oh, you were? Yeah, yeah, sorry.

So you're, yeah, save up to that point, right? Save up to that point in certain non-real estate assets. Like there's no rush to get into real estate. Real estate's a high risk investment. If you've only got 10 grand sitting around, you probably don't want to be in it, especially if you're going to be leveraging up. Grow some savings, set some aside, and then invest a reasonable amount of money with somebody who has an established track record.

Yeah, and so the thing I see with that, I mean, the debate is some guys will say if you have five or 10 grand, you should spend that on marketing. Well, I mean, the guru would say you should spend that on training. Well, Brandon, seriously. quote somebody better when you with your argument. No, but you know, like a lot of guys will say, well, if you have 10 grand, that's plenty to get into

direct mail marketing. And you should start your business because that 10, you can turn into 20, which you can turn into 40. I mean, essentially you're buying a business. I mean, what are your thoughts on that? So direct, so you're talking about wholesaling? Yeah, let's say wholesaling or, I mean, even flipping if you use the 10,000 to put as a down payment on your first flip. You know, like a hard money lender

would probably do a deal if you got a good enough one if you only had 10 grand. So on the wholesaling side of things, yeah, sure, but that's another job, right? At that point, you're not really in, well, you are in real estate in the sense you're looking at real estate, but you're not a real estate investor, right? You're kind of, wholesaling is a bit of a gray area for me. I would actually argue they're closer to a real estate agent than anything else because they are going out, finding properties.

Essentially, you're acting as a buyer's agent, right? And you're getting paid a commission on the back of that. It's another profession. It's another job. If you want that to be your job, let it be your job. Yeah. So you're making the distinction, and I think it is an important distinction. You know, flipping houses, wholesaling, those are jobs.

Those are, you're not buying investments and holding on to those investments. I tend to agree, I think, with you on that, you know, when you're investing, you're holding onto something, right? For, well, obviously, you're holding onto a flip when you flip a house, but, but. Hopefully not very long. Well, right. And, you know, I mean, you know, I used to be a stock trader. When I was trading stock, I didn't consider myself an investor.

I was a trader. I just traded. That was a job, right? Very different than when I have my long-term portfolio holds. That's where I'm investing. So, you know, I think we're in agreement on the actual definition here of what, you know, an investor is. There is a fuzzy area, but I think there is a fine line there. Yeah.

But the point I'm trying to make is if you got $5,000 grand out there, If you want to become a buy-and-hold investor right away, you know, if you follow, I mean, there's plenty of gurus out there that argue that what you should do is, you know, put no money down or use your five grand for the closing cost, do 100 to one leverage, 200 to one leverage, and buy your real estate and get the ball rolling. What I'm saying is that really the risk that you're incurring by doing that is just it's not worth what you're getting. Not to mention just the sheer number of hours that you have to put in to find one of these

properties. if you actually crunch it out with that much leverage what your hourly wages, I would argue that you probably make less than minimum wage. Yeah. I mean, yeah, I mean, it makes sense. And it depends on how long you hold it for, of course. But if you're put in a thousand hours to make $100 a month, how long does that take to actually make sense? Now, there is an educational factor there. Absolutely.

Where just like college, you don't make money going to college and you go for four years and spend $100,000. But there is an educational factor there. which makes sense. But a lot of people I talk to, they're kind of viewing real estate as kind of a, I don't know, maybe it's how the gurus are touting it, a get rich quick sort of scheme, right? Like no money down, and then all of a sudden money's running in the doors. You can do this 100,000 times, and you're making so much money, you don't have to worry about anything. And that's not really a realistic thing.

Yeah. Yeah, I think it's probably the exception, not the rule. I mean, I like to talk a lot about no money down stuff, and when I do, and you and I have talked about this before, but my idea is no money down doesn't mean no, equity down. Essentially, let's say there's a property worth $100,000 in a good market. If I were to get it for $50,000, my equity is, like, my down payment is the fact that I found a deal for 50% of what it's worth. So you could come in and buy it for 50,000 down, or I could buy it just for half price. And it's essentially the same thing, right? I mean, yeah, I can definitely see that argument.

Absolutely. There are deals like that, and you have been in the game long enough. You're going to be to recognize this stuff. As a new investor coming in at the gate, you know, dealing with maybe a buyer's agent and pretty much your only access is, you know, yellow letters or potentially MLS, the likelihood of you finding a 50% off deal like that. It's pretty slim. Yeah. That's definitely true.

Definitely true. Well, I think you can find them. I just think you may not know how to identify them. Yeah. And what to do with them if you do. And that's the challenge. Yeah. But, you know, I mean, again, we see case after case.

of people doing it. The issue I have with what you're doing, and I think what you're proposing is actually a very, very, very, you know, safe way to go. I still think you're going to have, you know, I mean, granted, you come in with 50 grand in your pocket, you know, and you've got something to offer. I'm going to argue that you're going to have as much of a challenge doing that and finding somebody who's going to take your money than you are. you know, being a new investor, finding somebody to finance you. I'll take their money. Yeah, I'll take their money.

You can come down every week and kind of just touch that along with it if you want to. Yeah. So I don't know. I understand, yeah, I get like what you're saying, Josh too, is, I guess I see both sides of that. Well, I mean, I feel like what Kenny's saying is you kind of have to jump in. There's that, I guess there's that learning period, right? And I think what you're advocating is you're going to learn while you've got your money invested with somebody. And I don't know.

For me, that's actually probably a lot scarier than learning while doing it on my own. Because you've got to put an immense amount of trust in that person. You have to know enough to know that the person you're giving your money to has got their crap together. I mean, you know, and how do you do that? And how do you determine that? you know, it's to me that just, that's a little scary because, again, I think a lot of investors come in and they, they wouldn't know their head from their backside. If you or a fraudster came in and said, hey, yeah, I got all these great deals and I can give you 12% returns. Give me your $50,000.

Well, that sounds good. Right? I mean. Yeah. And I think the trick there is you have to make sure that you invest with them don't allow them to invest for you. Right. You want to make sure they have skin in the game. So if you're, if you're investing with them and they take 50% ownership, then they're going to work hard and they're probably not going to be a fraudster because, well, it's pretty hard to fraud when they've got 50% of their own money in there because they're going to be hurt and themselves as well. Yeah. I got you. I just think you don't have enough information at that point. You're not educated enough in the game to give somebody your 50 grand. I think I really do think it's kind of a bad idea unless you have more. I think you've got to have a

base of knowledge before you start giving people money to invest in real estate. I really do. I think it's, I think, you know, even though you're advocating having somebody you have skin in the game, I still think that you're, you know, if you're coming in with totally green, that that could potentially go really bad for you. And I would argue that, so let's say you have 50 grand zero and understanding of real estate. So your two options at this point are to vet somebody who has, you know, minimum five years of experience. in real estate that you're going to be able to invest and they're going to have skin in the game or to go out and buy a house by yourself, the latter's a lot riskier than the former.

How do you vet them? Yeah, that's when you have to actually look at what their returns are. They need to have had investors in the past look through, see what they've historically done, right? How do you know how to read a historical numbers if you don't have the experience or background? These are the questions that I'm asking. I'm not trying to pick a fight with you. No, no, no, no, absolutely. I'm sitting here thinking like, hey, the average guy that I see on bigger pockets and on other websites and are around who are into, you know, are trying to learn real estate.

I mean, no offense. And I agree there are no stupid questions, but there's a lot of really green questions that these guys are asking. And if they come out and they say, and I ask them and everyone, every single one of us who's ever done this has asked them at some point. But, you know, when are you asking these questions now? if you're suddenly like, hey, I got my 50 grand, now I got to put it into somebody's investment. I'm trying to find that kind of fine line. I'm not trying to fight with you. I would say that, so you're talking about the skill set necessary to understand whether somebody's good or not. I would say to analyze a personal investment, you need to be proficient at things like looking at cash on cash returns,

understanding what cash flow is, looking at equity that you have built into it, probably even things like depreciation. That's high level, really simple real estate stuff. If you really want to get into a real estate investment, then you've got to understand how much it's going to take to get worked on or how you can do stress tests on your investment, things like that. These are all things you should really be doing before you make your first investment. And being able to understand whether somebody's historically performed well or not,

The skills necessary for that are less than what you need to properly vet a real estate investment. Because if you can do a cash flow analysis and you know all the stuff about real estate and you put in the hours, you're going to be able to understand whether somebody has actually made money and has had a good return over the last five years because it's literally going to be how much did you distribute on your investment. It's a lot simpler than going the other route. Yeah, that makes sense. And I mean, that also is where, I mean, sites like bigger pockets. this podcast come in handy is I mean this is where people can learn those things now I still lean more towards I think Josh's side of things where I say uh I'm a big fan I mean if you got 20

000 to invest this is going to sound really bad but I would rather have a person lose that $20,000 investing in real estate not go bankrupt but lose that $20,000 invest in real estate but learn how to invest in real estate than somebody to give that 20,000 to somebody else and not learn how to invest in real estate. Sure. Right? Because, I mean, I'd rather lose that 20, but gain the experience that will benefit me for the rest of my life than to simply just be a bystander.

Again, that's my personality. I like being active and I like being involved, but I don't know. And then it comes down to what type, what do you want to do, right? It's very possible slash likely, especially if you're listening to this podcast, that you are passionate about real estate and you want to be in it in the long haul. But it's also possible that what you really care about is creating a passive return for yourself. If you are that passionate about real estate that you want to learn everything about there and you want to become a real estate guru or a real estate investor in your own right, then absolutely it might

pay, it might be beneficial to pay $20,000 to gain that knowledge. It really all you care about is being able to retire at the age of 35 and you just want the passive income and you don't want to have to sustain that in the long run, then it probably makes more sense to take that whatever 20, 30, 50 grand and invest it with somebody else. And maybe you don't even want to get too involved into the day-to-day of the real estate. Yeah. And that makes sense. And that, like you said, comes down to kind of that fundamental question is, what do you really want? I think a lot of people, they want the financial freedom. They don't want to deal with tenants. Yet they deal with tenants because they think that's

the only way to get to the financial freedom. Yeah. But again, there's, I mean, there's hundreds of ways to invest in real estate and being a landlord or being a flipper or wholesaler. Those are just one of very many. I thought we just talked about being a flipper wasn't investing, Brandon. Are you not paying attention when I talk, man? I mean, come on. I'm talking investing in the philosophical sense of the word. There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties. These gaps surface only when filing claims. That's why investors work with NREG. They special

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Moving on a little bit, but still kind of tied in with this. Sure. We talked about being flipping landlording, things like that. You wrote a post recently, and you mentioned this phrase that you should plan on being a landlord, even if you're flipping. What do you mean by that? And that goes back to what you were talking about earlier, when you were talking about your flipping app.

It's an app, right? Yeah, not on an iPhone, but web app, yes. Okay, you're flipping web app where you need to be able to stress test it. How long, if you end up getting stuck with this thing for two years, right, how much is that going to hurt your situation? And all I'm saying is when that blog post was it's kind of another way to stress test. Buy it expecting to rent it out because that's the worst case scenario. If you're unable to sell it, if the market turns against you, anything like that, then you're going to, going to have to rent this thing out. And if you're not getting a return or you're losing

money every month on that, then you're going to be in a pretty tight spot. So one of the things to consider is how much will this rent for? Will I make money if I hold it? And only if that works as well as all your flipping numbers, then do it. So you're talking about multiple exit strategies. Yeah, exactly. Yeah, just give yourself in flexibility. Yeah. And that's, something that we definitely talk about a lot. And it's one of the chapters in the bigger pockets, It's our ultimate beginner's guide, which would be something that would be very helpful to all those people who might be wanting to give somebody $50,000 of their money to understand. But we wrote this, Brandon, I wrote this beginner's guide for real estate investors,

and it really covers all the fundamentals. But one of the things that we really wanted to stress in there was the multiple exit strategies. because, you know, it's something that I think most newer investors don't consider. And I'm glad that that's what you were talking about. Because, you know, if you can look at, you know, two, three, four different exit strategies, if you get in on a deal and the market turns on you or, you know, a flip takes longer or whatever happens, you know, you at least have different paths to save yourself. Exactly.

I've always had that same thing. thought of a I won't flip a house that I can't cash flow by renting out. I never really like put it as eloquently as you're posted. But yeah, it's the same thing. I got a duplex right now that I think I might sell it. I might rent it, but it doesn't really matter because either way I win. Because I set it up that way at the beginning. I made sure when I bought it that I would win no matter what decision I end up actually

making with it. So yeah, yeah, that's exactly right. And part of the audience for that post was people who just come off Google, course. Like I'm there's um real estate gurus are paid to sell right so they're going to make it make real estate investing sound as easy as possible and you're going to make a bunch of money really quick right that's how they're going to get excited that's how they're going to sell more books tapes board games or whatever right so if you're coming off of this you know this guru course or you just you know played cash flow for the first time last week and now you want to get into real estate investing

you're so optimistic that you don't take that step back and realize that actually this is at risk. There are things that can go wrong here and I actually have to account for those. So it's just kind of a quick sanity check there. Yeah, that's great. That's awesome. That's great. Yep, definitely. Well, let's get to the topic of raising private money.

I know we've talked about it a little bit, but I want to get more into it right now. the funding that you're you're currently using how how well let me let me circle back how are you funding all these deals today right i mean you talked about some private money uh you talked about some money of your own are you are you still uh self-financing deals are you still uh continuing to use that private money are you are you pooling what's what's your current strategy yeah our our approach is pretty simple right we have this one lc we raise funds every three months, right? So however much we get, that's how much we invest, that's how much we go out and buy. Fortunately, we have a good enough, we're in a good enough spot in the South Bend area that

up to this point we haven't had to worry about not finding enough deals. We've been capital restrained. So our investor pool is kind of organically growing, word of mouth, and now that I'm focused on a full-time doing things like bigger pockets and trying to get more of a brand recognition out there. But yes, we are still taking in outside investor money. We are still at the this point, investing with cash only. When we do invest, obviously we want to have skin in the game, so we put our own capital in as well so that all of our investors can sleep a little bit easier. Yeah. And how big is we, you're saying we, who's on your team and what does that look

like? There are, in South Bend, there's four, I guess, four-time employees. We have a bookkeeper. Actually, my father is actually quite heavily involved in the day-to-day. And then we have have a general contractor and a property manager. So myself, my father, and now the general contractor are all invested in the same fund as all the investors. So that way they know that, yeah, we actually care that this thing succeeds. And let me ask you on that.

How did you, you know, how did you get to that point, right? So one of the big questions people always have in trying to scale their businesses, who's that first guy? So, you know, you've got you. and then you were working with other partners, other money partners, when did you start to bring on these staff

and these employees and who is the first guy and why? It's a bit complicated in my situation because I actually hired the first property manager, which I guess is the answer to your question. We hired the first property manager in Missouri and we started investing in South Bend. We actually kind of set up another office, a satellite office, and had her train up the employees.

We were at about 40 houses when we got the first property manager. The number that I hear throwing around a lot is as a property manager, you start making money around 300 units of whatever. And I've heard this on a bunch of different geographic areas. So we're about break-even right now. We have about 170 units. And those are all owned by you and your folks. Yeah.

Gotcha. Gotcha. Okay, so you got the property manager. You know, when does the GC come in? How about the other players? Yeah, well, we get the... How does that actually work? The GC comes in because you're going to have to do rehabs on them.

We're buying distress properties, so you've got to find somebody to oversee the work unless you're going to be doing it yourself, which for most people, if it's a part-time gig, you don't want to be doing that. So as you go through that, you just kind of gradually increase how much, responsibility you give to your general contractor. For us, that process took about a year, a year

and a half where we went from, we use this guy for one flip to now this guy is working for us exclusively. And he has 30 to 50 guys underneath him. Wow. Got it. So yeah, that's what I'm wondering more about is the general contractor thing. I mean, if one, if I could say there's one thing that every investor seems to struggle with, it's the contractors. Yeah. I know that's the biggest thorn in my side. Do you have any advice for people? Like how did you, I mean, like you said, you started with one deal. I guess that's one way to start. But any other advice for us? Man, I wish I knew.

It is brutal. We found one general contractor. We've probably turned through 10 others that we've given goes at one point or the other, and it just didn't work out for various reasons. It's tough. Especially if you're kind of coming at it from the investor mindset, you know, connecting with a general contractor who's very much on the low-level I just wanted to get my hands dirty and get this stuff done.

Like there's a big, there's a communication gap in there, and just finding somebody who has a good work ethic, and is able to manage crews and knows everything about how it's, it's actually really hard individual to find. And it only goes back to the argument about it's one of those things that once you're established, it's easier to do than if you're just starting out. And I've got to tell you, that's kind of sad.

To me, it really is troubling and sad because, you know, we look at all, these various trades and maybe it's a symptom of things but but you know i i just think there's got to be you know listening to the show right now there's got to be a handful of of contractors and and you know the sad thing about it is many of those guys suck you know many of them just don't get it show up on time you know do do your job and do it well answer your phone little tiny things that if you did that, I mean, you'd get so much work, it would be crazy. It'd be stupid, you know? And I just, you know, the same applies for investors, of course, as well. But, you know, since we're balking and bitching

about contractors here, I mean, yeah, I can't tell you. I don't think I've worked with a single contractor, and I've worked with quite a few who I'd go out and refer to people. And I've yet to find somebody that I've been happy with, you know, for one reason or another, they don't show up. They're late. They don't return phone calls. You know, their work is a little bit sloppy. You name it. I mean, it's like, you know, get it right, guys. It's not that hard. Well, I think it goes back to the whole, if you've read the e-myth, the story of the e-myth is about, like, a lady who's a baker who bakes pies. And the guy telling the story, basically, through this whole book is, you may be good at baking pies,

but it doesn't mean you're good at running a pie baking business. And so the contractors are great at baking pies. They might be, but they're terrible at running a pie baking business. And just terrible at it. And I don't know how you find, yeah, I don't know how you find them that are good at both. I've owned probably three to 400 homes. And every six to nine months I go through this thing of, oh, I need to find a new contractor because I'm so dependent on this one guy. And in the 10 years since I've been doing this, I found two.

One in Missouri, one in Indiana, and that's it. Yeah, amazing. It's hard. So I guess when you find them, you just hang on to them and pay them well and treat them well. Exactly. Exactly. Well, what about your investors? Going back to that, I know we're jumping around a little bit, but investors accredited investors versus non-accredited. First of all, what is the difference for those who don't know? So an accredited investor is an individual. He was made $200 grand for the last two years and expects to make it going forward. Or a couple that made $300,000 and the same thing. Or they have a net worth of $1 million excluding their personal residence. Okay.

So this is more of an SEC regulation because you can't generally solicit to non-acredited investors. How do I phrase this? Though that is changing. As your invests, it is changed, hopefully, if the SEC ever sends down the guidelines on the Jobs Act, which passed last April. Yeah. And I heard they've made some changes in the past few, in the past few weeks, but still not everything's clear yet. Right. And the other thing is if you have a bunch of accredited investors, you don't, you have more leeway about when you have to register as an SEC company.

So if you have all accredited investors, then you can have $2 billion under management and nobody is going to bat an eye. If you have half our non-accredited investors and you have 50 million under management, you're probably going to run into some problems. And so what do you do? What do we do? Yeah, do accredited or non-accredited? the people we first started out with it was pre-existing relationship most of them were accredited

now it's all accredited all new investors are accredited you know and the funny thing about that whole thing you know to go off on a slight tangent here you know we talked about having you know some guy who's got 50 grand to loan out who doesn't know their head from their backside well you know just because you're accredited

doesn't mean you know your head from your backside either and you know interestingly the SEC just makes the assumption that that's the case. I mean, I've got a friend out here in town who's a former football player, and he now trains football players how to manage their money. And the reason he does it is because so many football players lose their shirts because they don't know how to invest, they don't know what to do. Money doesn't really mean anything.

So I just think the rules are so arbitrary, and just these numbers are just meaningless. A dentist who's making a good business isn't necessarily going to know how to invest any better than grandma who's been studying the charts for 30 years, 40 years. And actually, interesting on that, the argument I've heard about why they accredited and invest rules are in place is not so much that they know what they're doing, but that they're not going to get hurt if it goes against them. And the thresholds, and don't quote me on the year, because I'm strangely enough, terrible with remembering numbers, but I believe those. thresholds were actually set in the 1970s. And they weren't tied to any appreciation or anything like that. So back in the 70s, if you were making $200 a year and you had a million dollar net where that's, you know, you're going to be okay.

But now, I mean, there's, I know a lot of people who are, you know, making that $200,000 level and if an investment goes bad, they're pretty much hosed, right? Yeah, yeah. So somebody who's listening, who's got a fairly established real estate business going on, Where would they go and find accredited investors outside of their own pool of friends and family? Yeah, that's a good question. Honestly, that's what I'm trying to figure out right now. Nice.

Because right now our investor pool is entirely word of mouth. Yeah. You know, things like Bigger Pockets, getting my voice out there, I'm certainly getting a lot more interest from potential investors who kind of are approaching me. Nothing's really solidified at this point. I guess just get your name out there, do some branding, and have a strong track record. Have a strong track record and don't be shy about telling people what your track record is. That's at least how we're approaching it, but who knows if that's going to work out in the long run. Yeah, yeah.

I've got a feeling that potentially after this show you might have more accredited folks getting in touch, but that's just a feeling I've got. Yeah, and obviously like the beauty is you're not pitching anything here. you're obviously helping to share good information. And even though we had a little mini debate back a little while ago, I mean, it's very interesting what your strategy is and your theories, because I think you're one of the more reserved folks that we've interviewed so far. And I appreciate that as somebody who's highly risk-averse.

So what would you say then going forward is your exit strategy? you know, what's the end game? How do you, you know, do you just kind of continue to build that portfolio, Warren Buffett style? Do you sell your business at some point? How does it move forward? Yeah, so part of the reason we're so conservative is because we're super aggressive about where we want to go with it. Our exit strategy is to form a REIT and go public. That is bold. So to form a REIT, it's a two-step process. A REIT is a real estate investment trust. I think is what it is. So to form a reet, you have to have at least 100 investors.

That's the first thing. No investor can have more than like 15%, I want to say. Once you form a reet, then you have shareholders, you have board of directors, your regulatory scrutiny increases quite a bit. To go public, the bare, bare minimum of assets under control you have to have is about $100 million. But once you do go public, so let's say hypothetically we're getting 10% returns for our investors every year.

If the market stayed exactly where it was today, the average public REITs yield is between 3 and 5%. So if we were to get the same pricing, and we were getting 10% before we went public, in theory, it would double the value of our portfolio effectively overnight. Does that make sense? Repeat that and explain it in child talk

so that Brandon could understand. I saw his eyes light up. I was waiting for that. You know what? I have got it myself. So clarify for all of us. Let's think about this way, right? We'll flip it around and just look at the distributions. If you've got a $50 a year distribution, right?

And in the public market, that's worth whatever, $1,000, right? Because if you look at a 5% return, then if a 5% return and you're getting $50 out of it, that's the equivalent of the share being worth a thousand bucks. So that makes sense? For a share, okay. For that, for that cash flow. Okay, okay, you're doing 5% return on $1,000 is $50. Yes, exactly.

Right? Yes. So now, if there's $100 worth of cash flow. So you multiply the, you've doubled your value, yes. Yes, that's it. So for us, we're coming in. We have a, effectively per share.

But how do you up it to $100 in cash flow? That's what our returns are. If we come in with an established track record of 10% per year and the market's 5%. Then it's the same situation. Okay, I fully understand that. Maybe it was just how you were saying it. I honestly, honestly,

had no idea what the hell you were talking about. Now I get it. And it's obvious. That is like the most naive, simple way to look at it possible. Like between now and we reach that point, the market's going to be completely different. I have no idea what the public reach are going to be.

I'm assuming everything stays the same. When you go public, you're going to have to get underwriters involved and investment banks, and you're going to be paying seven figures at least to get onto an exchange. So that's going to move some of your values. This is just like pie in the sky, back of the envelope. This is a possibility, and that's where we want to get to.

We might get there and realize that, hey, you know, it's actually not as good as the good of an idea as we thought and we'll just stay at that size. That's a possibility. Gotcha, gotcha, gotcha. All right. Well, listen, we're running, starting to run on a little bit, and I think, you know, some people's brains might have been busted.

I know, I know mine might be. But why do we jump into our fire round, our, you know, our famous, famous fire. Sure, yeah. They must fire around here. And I think Brandon wanted to kick this thing off. I do. Brandon. All right.

So again, these all come from the forums. I just pulled them all this morning from the last like 24 hours from the forum. So first of all, if you had to leave your area right now and invest elsewhere, where would you go? It's funny. We're trying to figure that out right now. Because we do. I'll take that as a non-answer. We want to, for our particular type of investing, we want to have a pocket.

between 100,000 and 250,000, and we want cap rates to generally be, the fair market value cap rate to be about 8%. We haven't really found the, ooh, this is the spot we want to go, but we're looking. Okay. Okay. Do you ever structure rent-to-own leases for your tenants? So there's, it's one of those weirdly divine termers, everybody has a different way. I kind of know it is land contracts. It's a similar concept. I don't do it because I have an ethical issue with it. So you're effectively charging somebody rent, or at least in a land contract situation,

you're charging somebody rent, and then you're expecting it to pay property taxes and upkeep the property. So from a tenant's point of view, on a monthly basis, they're paying significantly more than they would be if they were just renting. So the actual return on their investment versus just saving that money and buying it in two years

is actually a lot worse. not to mention there are so many unscrupulous people that you know don't put the deed in the name of the tenant they just don't pay the mortgage the house gets foreclosed under somebody who is doing a rent to own like I just don't want to touch it I think it hurts the tenants it's taking advantage people who um might not have analyzed it from a purely returned point of view okay fair enough fair enough definitely All right. So when you, if you have a tenant who sucks and they either leave or you have to evict them or you kick them out or whatever the deal is, at what dollar point does it make sense to go after them? Like, you know, if they owe you $1,000 versus $10,000, where do you go after them and sue them or try to garnish wages, whatever? Yeah, sure, totally. Any amount of owed balance, we get a judgment. So we actually go to court and get the judgment. We go through the process of trying to garnish their wages. They owe us about more. than a grand. As far as handing them over to collection agencies, we're in a relatively rural area,

so our balances don't get massive. And there's just not a lot of interest. Like, if you guys know any good collection agents who specialize in tenant balances, send them my way because I would love to find somebody to track down some of our former tenants. Yeah, I've never had success with that either. I mean, garnishing, I've collected maybe a couple bucks, but really nothing more than that. Yeah. All right. So what do you do if you have 12 showings of a rental property and still no takers? Drop the price. Good answer. There you go. All right. What if you had $100 a month for marketing? Like you were looking for property and you had $100 a month. That's it. How would you spend it? Looking to buy property. Yeah, so you're looking to buy a property and you're, you got

$100 a month. I mean, this is kind of going back to the starting out. He wouldn't. He would save it $50,000 in the minute. Hypothetically though, if you had 100, what would you do? What's most important? So for buying property, the one thing that has had the most success for us is we have our little maintenance or not maintenance, our contractor crews. Obviously they have their trucks that are company cars or whatever. We just paint on the side of them in big old letters.

We buy houses and a phone number. That has, because they're actually doing work. People can see the quality of what's coming out of it. They know you're going to manage a property well, everything like that. We get more calls from that than anything else. Okay. And I'm going to ask you, so is this like this is like a pickup truck with like a stenciled we buy houses? Or is this like, you know, with the brush?

Yeah, you know, did you brush we buy houses like, you know, somebody might do on a cardboard, you know, sign on the corner? It's stenciled. And it's on the back, right? So it's like the actual pickup part of the truck, the hauler bit. Okay, so it's professionally posted on there versus like, you know, you had me thinking you literally just like wrote with a brush, we buy houses. That's right. I was getting a little nervous about. Yeah, actually, we found a five-year-old to do it just so it looked really, really amateur.

Yes, that's awesome. Well, yeah, well, that's the thing, though. I mean, because, you know, some of these really amateurish signs tend to be effective. That's, you know, and so I was curious. And I don't know that because we stenciled it's any more effective. I mean, the people who are calling that number, they just want the F out, right? I don't think they really care the quality of the sign. Yes.

Yes, I'm glad you said F. So we didn't have to bleep you. All right. So do you pay off personal debt first or start investing in real estate? That's a hard question. We didn't say it was going to be a fire around. It depends on the person, honestly. I think this goes back to a earlier conversation.

about, you know, is it worth your time to start investing right away? Should you build the nest egg first and go into it? If you are passionate about real estate and you want this to become a career and you have a moderate amount of debt, then it might make sense to go straight into real estate. If you really are just trying to build passive income, then you really then you need to compare kind of what your returns you'd expect on the real estate are versus what your interest rate on your credit card, whatever your personal debt is. And if there's a If your credit card is charging you 5% per year and you're able to make 10% in real estate, then it probably makes sense to do the real estate and then just pay off the debt over time.

Cool. Do you rent a Section 8 tenants? We do. Yep. And you're okay with that? You recommend that? It's a bit more red tape, but they're very good at paying because it's the government. Right? So you don't have to worry about collecting. You have lower turnover, all those things. Gotcha. Gotcha. All right.

Last question. If somebody comes to you and is desperate to sell their house, the guy that you referred to earlier who wants to get the F out, as I quote you. But they have no equity. Is there anything you can do? Are they underwater or they have no equity? Let's say no equity, I think. Yeah, yeah, just no equity.

Like nothing, yeah. Just even, right? Yeah. Okay. So in that situation, I mean, they'd have to pay the closing fees, right? and they'd have to get out there? Is that? Yeah, so they can't really sell it

because they can't really afford it, let's say. They can't afford their, yeah, exactly, they pay the 6%. They can't cover any of that stuff. Okay. Yeah, look, you can go to the lender and you can try to organize a short sale. I mean, that's certainly a possibility.

We've tried that a couple of times in the past. And, you know, back in 0809, yeah, you could really get them to do it. Marker's turning around a bit. That option is becoming less and less valuable. You can do some owner financing to help them out a little bit, But one thing that we try to do is figure out what we're good at and just do that a lot.

To go back what we're talking about being very stupid or not stupid, but simple investors. So when you start doing owner financing, then you start needing to do credit checks and you become a lender. And that's not our core competency. So we just don't do that. Gotcha. Cool. Fair enough. Fair enough.

All right. Let's move on to the last part of the show, our famous. Famous for Seriously I love to hang in there That was Kenny Yes There you go

All right Kenny Famous For what is Your favorite real estate book The book that got me into real estate investing Was the granddad Rich Dad, Poor Dad I reread actually last week

Just because why not And there's no substance in it whatsoever It's really just saying the same thing over and over again, which is invest in stuff, right? So it didn't really stand up to the test of time. As far as books that are really informed my investing and had a lot of substance and content, investing in real estate by Gary Eldred was very, very good. Okay. Okay. There you go. Nice. What about your favorite non-real estate book? Any business books that you think would be helpful to the listeners? Oh, business books.

the e-myth revisited was pretty good. Again, that was very high level and it doesn't give you a lot of detail about the actual day-a-day of what you need to do. Kind of related, and I'm finding it, it's not really a business book, but the last book I finished was On China

by Henry Kissinger. And it's whatever since the 50s, whenever he started dealing with China, tracking through how the landscape has changed and how their approaches have changed. But the bit that really, struck me and I actually wrote a recent blog post on it was how China has managed to stay one country while there's been all this upheaval all over the rest of the world and it's there's a lot

of takeaways that you can apply to your investing strategy and how to build something that's really going to last. Would that have something to do with the guns that they point at the heads of their citizens or the tanks perhaps that they plow you know plowing people's houses down? It certainly doesn't help. But I'm talking more like, you know, in 2000 BC, it was a country when we were still on the height of the Egyptian pharaohs, right? And it's still the same country. So that's, there's something going on there. Absolutely.

Absolutely. Cool. What about hobbies? Yeah, hobbies. I read that you were an Iron Man something. Wasn't that right? I did an Iron Man in Cosimo, Mexico back in 2011. That is a triathlon, right?

It is a triathlon. It's a two and a half mile swim. it's a 112 mile bike ride and a full marathon at the end. Again, showing off. Wow, wow, wow. Hey, I bike, you know, four miles every couple days. That's kind of cool. Wow.

I never run more than five minutes before I started training for that. And a year later, I was there. So it's not as hard as everybody. It's just time-consuming, really. Gotcha. Okay, okay. Last question then for the day. what do you believe sets apart the investors who succeed from those who don't?

First and, well, it's it all, it's discipline, right? You find out what you're good at and do it, right? Focus on it. Don't get distracted by the shiny balls. We talked earlier at the very beginning about shiny balls. Like, you know, like the shiny ball that's bouncing in front of you, and then you act like a squirrel and you go chase after it. Shiny objects, yeah, I got you.

I just, you know, you know, you still have a journey. I thought I'd add some maturity. Some fourth grade humor. But yeah, and then, you know, we started with the whole thing about Warren Buffett, right? Invest simply, do it conservatively, do it for the long haul, and you'll be, you'll be all right. Cool. Nice. Good.

All right. Well, listen, Kenny, that was great. Lots of, lots of interesting stuff. one of our few mini debates, I'd say. I think, listen, I think there's a lot of viewpoints and my goal is to get as many out as possible. You know, there's no one way to do it. The only way I believe that you shouldn't do it is, you know, you shouldn't rush in and you shouldn't listen to the people who can tell you that you're going to make millions overnight.

That's absolute nonsense. And I do like your philosophy on risk aversion and things like that. So it's great. But listen, thank you so much for being on the show. Hopefully, we don't leave too many people scratching their heads on the REIT. And we'll look forward to seeing you on the Bigger Pockets blog and around the site. All right. Well, thanks for having me, guys.

All right, guys, that was Kenny Estes. Hopefully you enjoyed the show as much as we enjoyed bringing it. to you. Definitely a lot of interesting discussions there. And as we said early in the show, if you've got any questions, be sure to or comments, be sure to leave them in the show notes at BiggerPockets.com slash show 30.

Otherwise, I want to thank you guys again for engaging in being a part of the podcast, being a part of the Bigger Pockets community. If you don't have a membership, jump on. It's BiggerPockets.com. Sign up today and get involved. definitely follow us on Facebook at facebook.com slash bigger pockets and our YouTube channel you know it's not getting enough love guys I mean we are putting out some really cool interviews Brandon is putting out some awesome videos and uh they are they're awesome Brandon they're awesome

thank you thank you yeah and if you guys want more of those you have to subscribe if you do not subscribe if we don't get people doing that you know we think you guys don't care and then we don't we don't spend the time to put out the content so if you like the videos subscribe you know hit that little thumbs up button next to the videos and let us know that you guys are interested in these videos that we're doing the channels youtube.com slash bigger pockets that's about it jump on iTunes leave us a review leave us a rating and uh you know we'll we'll see around at the next show thank you so much for being my co-host brandon you are welcome Thank you for being my host.

I am your host. All right, guys. We'll see you at the next one. I'm Josh Dorkin. I'm out of here. 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,

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