BiggerPockets Real Estate Podcast - 312: Conquering Nightmare Rehabs While Working Full-Time with BRRRR Investor James Masotti

Episode Date: January 10, 2019

Excited about real estate investing and looking for a blueprint to follow? Well, you’re in luck! Today’s guest James Masotti is a well-rounded investor who’s piling up properties while working a full-time job. James shares how he consistently finds deals in a competitive market (it’s not through the MLS), how he funds these deals (it’s not with his money), and how he handles the common complications every investor faces. He also gives some great advice for acquiring properties already occupied by tenants, and explains how he keeps his partner and lenders happy even when things don’t go according to plan. He offers tips on planning for CapEx and dealing with the dark side of real estate investing, too.  Plus, you won’t want to miss his advice when it comes to building funnels to find deals, as well as just what to look for when interviewing real estate agents. James has a straightforward, no-nonsense approaching to succeeding in today’s market and provides tons of good content for how you can do the same! Download this episode today! In This Episode We Cover: Jame’s entrance into real estate investing while having a professional career Cash reserves and how he plans for CapEx How he finds and funds deals Dealing with tenant evictions Finding the lender you need What a debt cover ratio is Why he continuously builds funnels How to handle when things go wrong Analyzing and overcoming the dark side of real estate investing! And SO much more! Links from the Show BiggerPockets Forums BiggerPockets Webinar Be a Guest on the Podcast Biggerpockets Investor Deal Diaries BiggerPockets Meetup and Events BiggerPockets Marketplace BiggerPockets Podcast 308: From 0 to 400 Units in 3.5 Years with Sterling White BiggerPockets Podcast 297: Mastering the Decision-Making Process with Business (and World Series of Poker) Champion Annie Duke BiggerPockets Podcast 304: Using Incredible Strength of Mindset to Succeed Despite Overwhelming Obstacles With Nick Santonastasso The Blitzkrieg Rent Collection Plan for Landlords (Blog) What is CapEx in Multifamily Real Estate Investing (Blog) Biggerpockets Bookstore Books Mentioned in this Show The Book on Managing Rental Properties by Heather and Brandon Turner I Will Teach You To Be Rich by Ramit Sethi The Book on Estimating Rehab Costs by J. Scott The Richest Man in Babylon by George S. Clason Rich Dad Poor Dad by Robert Kiyosaki E-Myth by Michael E. Gerber Lifeonaire by Steve Cook Fire Round Questions How to create a deal in partnership? Late rent problems, let me know your strategy! What are the most important rules of thumb you use when analyzing properties? Tweetable Topics: “Real estate is very forgiving.” (Tweet This!) “When you’re looking to scale, you want to have reserves available.” (Tweet This!) “Don’t chase something that you’re not comfortable with because that’s when you get in trouble.” (Tweet This!) Connect with James Jame’s BiggerPockets Profile Jame’s LinkedIn Profile Jame’s Twitter Profile Jame’s Facebook Profile Jame’s Instagram Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 312. Again, you have to be flexible to kind of figure it out, right? And then what did you learn from it? So the mistakes are going to happen. And if you just sit there and, you know, analysis, paralysis, you're never going to get through it. But just trying to be able to say, you know what, okay, how do I get to the next step? How do I get to the next step? Rather than either shutting down or just thinking, well, now I can't get the 400 units.

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, everyone? This is Brandon Turner, host of the Bigger Pockets podcast here with today's awesome, incredible, handsome co-host. Mr. David.

How you doing, handsome, David? Thank you, Brandon. First time you've ever said anything nice about me, actually. You had this great look on your face that whole time. Quisical. Like, why is he saying this? Where's the insult going to come from? I know.

I'm actually doing super good. We put six houses under contract this week on the David Green team. Almost all people that are looking to house hack. So as everyone knows, the Bay Area is super expensive right now. So people come to me and say, David, I want to buy a house out here, but it's expensive. And we find ways to get them properties where they can rent out rooms, rent out parts of the home, bring their costs way down. and then when you factor in like the tax benefits and the principal pay down, they're pretty much living for free.

And I just want to say house hacking is a real legit thing. It's not just some concept that gets thrown around on bigger pockets. Like there's people living in really expensive areas. Getting homes are going to be appreciating a ton and not paying that much money when you do this right. It's pretty much exactly what I'm doing right now. It's amazing. So awesome. Awesome.

Yeah, I love it. All right. Well, let's get to today's show and introduce today's guest. Today we're talking with a guy who's all over the bigger pockets forums. his name's James Masadi or Masadi right and he yeah the hand thing he invests out in Delaware I live on the East Coast invest in Delaware works a full-time job we're going to talk about how he does that how does he do it while working a full-time job he's got some really good tips there and then he has a few horror stories we'll call them about real estate and things that

you can learn you know like you can learn from your own mistakes or you can learn from other people's I don't want to call them mistakes but they're their problems the horror things that they go through right because real estate's not always easy and James is really open and honest about the hard times as well as a good time. So you're going to love it how he uses private money, how he does deals with no money down. But he has a really good point about how no money doesn't mean broke. Listen for that. And again, that's today's show. You're going to love it. But before we bring in James, let's get to today's quick tip. All right. So today's quick tip is very, very short. I mentioned this a couple weeks ago. We have a spot on the show called deal spot on the website called deal diaries.

basically we want everybody who's a Bigger Pockets member, we would love you to start telling other people about your deals, right? Because it helps you stand out as somebody who's actually doing it. So if you've done a deal recently, go into your Bigger Pockets profile, and you can look for the section that says Deal Diaries. You can upload information about your deal. Just like James does today and telling us all about his deals, you can do the same thing without being on the show.

And, of course, if you want to be on the show at some point, if you've done a dozen deals or more, go to BiggerPockets.com slash guest. And maybe you'll get on the show as well. Managing properties can feel like a full-on circus. You're juggling vendors, tracking payments, chasing approvals across multiple properties, and maybe a few HOAs, all while trying to keep tenants happy and owners confident.

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at fundrise.com slash flagship. This is a paid advertisement. Now, let's bring in James against an interview because you guys are going to learn and grow a ton from James honesty. Let's get to it. All right, James, welcome to the Bigger Pockets podcast. How you doing? I'm doing great. How are you guys doing today. Pretty fantastic. So I got to point out something first before we get started. I discover that you live in like my town, like apparently. What's the town name?

Turner'sville. That's right. Yeah, I live in Turner'sville. I thought that was a joke. And then I asked you and you said, yeah. It's not a joke. Yeah. You know, we got a local bigger pockets meetup we've been doing this past year.

So if Brandon Turner ever wants to come out to Turner'sville, you know, that'd be pretty cool. That may have to happen someday. There you go. There's a lot of like Greensville and Green's. Greensland and green stuff, but that was my first Turner. I'm clearly more influential and famous than you are. But I'm glad you finally got your first little city. I mean, that's a big step for you, Brandon.

Congratulations. Thanks, man. I think you have to actually be Italian. Your last name has to end with a vowel to live here. Turnio. He's not good at that. Yeah, we had this problem with Santana St. Tastaso. Remember that, Brandon?

Yeah. Yeah, I started struggling. Yeah, I started with. Okay, so tell me how you see your last name. Masadi. Masadi. Okay. Do I say like Masadi? It's like the hand thing, right? Yes. It's one of those, everybody's like, oh, a lot of people kind of get it messed up.

They say Mazadi, like Maserati. And I'm like, no, it's Masadi like Maserati because everybody says the car name wrong. Oh, really? Yeah, it's a Maserati. You have world changing the way they pronounce the car as opposed to changing the way you pronounce your name. Exactly. That's a boss who right there. All right. All right. So we're here to talk about real estate investing, of course, today. So why don't we jump into that? And I like, how did you get into real estate? What was your like entrance into it and then walk us through that process of getting your first deal? Yeah.

So my entrance into real estate was I always felt like paying rent, was just throwing money away. So when I graduated college, I actually was looking for a place to live and decided, you know what? For what I'm paying for rent, I could just try and buy my own place. And so I came across a VA foreclosure back in 2008. So lots of stuff foreclosing back then. But the VA focus of that was a zero down for owner occupants. and the place was kind of a mess, basically moved in, bought that, and then over the next year and a half started fixing it up.

And then my company relocated me to California, and I started renting it out, and I'll have the same tenant for nine years now when she renewed this year. So that was kind of how I got started. And then back in 2015, I had a coworker start working with me. And he talked about real estate investing. That was kind of when I decided, you know what, I should probably get more active in doing this. And that's when I found bigger pockets and it's kind of been downhill from there. All right. Well, hopefully uphill.

Uphill. Yeah, it depends on which way you're trying to get. Uphill would be a battle, downhill. Okay, that's true. Downhill easier. Yeah. If you said, like, man, it's all downhill from here. It sounds some, I don't know.

All right, we're going to keep going. All right. So you live in Turner'sville, New Jersey now. So you apparently moved away from California. You made it over to New Jersey at some point. I'm sorry. Yeah. No, when you marry a Jersey girl and she says, you're moving to New Jersey.

That's just the way it works. Yeah, that happens. All right. So you're in New Jersey and you still work full time at your job, I hear. I do, yep. Well, you can't invest in real estate and work full time of your job, so you're clearly wrong. No. Okay. Yeah, so I mean, I did actually, so I did make a change in employment back in February.

So it definitely was more challenging my past employer. You know, I was working five, six days a week, 14 hour days and the opposite direction of my market. So again, where I live in South Jersey, about half hour outside of Philly, I actually, all my rental properties are down to Wilmington, Delaware. So technically out of state, but it's only about a 40-minute drive from where I live. But where I was working at the time was an hour of the opposite direction. So it would take me like two hours. And after a 14-hour day, like I didn't want to be going to do that. So, you know, kind of made a transition. So I had a little more time and flexibility, you know, and that sort of a thing. Well, so I want to actually bring something up here. A lot of people look at, they want to get into real estate investing and they think that they need to quit their job or they just can't invest because they work too many hours.

But David and I actually both talk about this a lot. A person could find another job instead, like even if it paid way less, right? Even if it wasn't their ideal job, if you want to get into real estate investing and you're working 70, 80 hours a week because you got some crap job, it's okay to go find something that's more flexible. Exactly. Yeah, that's exactly what I did or something. Okay.

That's exactly what I did. So I took, you know, a decent paycheck. you know, pay cut, you know, I still make okay money and things like that, you know, to support life and whatnot. But I was very clear when I was going in there, you know, what I was looking for in my still professional life, but that I was doing this investing thing on the side and needed to be able to have flexibility to, you know, leave work early to come in, do this podcast today or go to a closing like I did last week and things along those lines. So yeah, that's crazy. Awesome. All right. So let's move into your first deal locally. So like in the, in, first of, how did you

find Wilmington, Delaware from New Jersey? Like, why did you choose that market? And then walk us through your first deal there. Yeah. So when I, again, was looking to buy my first place, I was working in Delaware County, which is actually in Pennsylvania. And, you know, and my parents lived in another county and it was kind of looking, you know, where locally and, again, just happen to find this house in Delaware. So then in 2015, when I was starting to look to invest, I was looking locally here in South Jersey. And the taxes here in Jersey are absolutely insane. Like out for my townhouse that I lived in and is one out of my rentals, I was paying about $1,200 a year for property taxes. My townhouse here in Jersey is $5,400 a year, you know, for taxes.

So trying to get things to cash flow and stuff like that was a pain. And then at that point in time, I wasn't really in a cash buying position. So trying to find flips on the MLS was difficult. And then my first one to call true investment was actually on the Bigger Pockets Marketplace. There was a deal listed from an agent with an off market kind of listing and ended up kind of going and walking it. and use my first private investor on that place. And it was kind of a disaster, but I learned so much during that project that was one of those. Again, never wished that first one on everybody, but I'm so happy I did it because it got me to where I am too.

Sure. So what made it a disaster? I mean, so you found the deal on Bigger Pockets or somebody had advertised on our marketplace. For those who don't know, there's a part of Bigger Pockets called the Bigger Pockets Marketplace. It's actually getting redone right now. And I think by the time this podcast airs, it'll have a whole new thing. It's like completely being redesigned. But anyway, it's a place people can go and post.

for properties that they have, properties that they want, properties that they, or, you know, potential partners or, you know, bank suggestions, whatever. So anyway, that's what we're talking about? So you went there, you got something. What went wrong on it? And what was it? And then what went wrong? Yeah.

It was a single family townhouse. Yeah, three bed, one bath. And basically, you know, it was by first time going and doing all that sort of stuff. And yeah, so I went in, you know, they were marketing it. You know, it only needs $12,000. They already had an appraisal done. But the person who was doing the renovations ran out of money. So they were trying to sell it fast.

and I walked it, you know, thought I knew what I was doing because I read Jay Scott's book, you know, and all that kind of fun stuff, but I never actually had a contractor walk it. Needless to say, I went from a $12,000 budget on there, and I was like, oh, this is going to be more than that. It's going to be like 18 or 20,000. Turned out to be 65,000. Oh, whoa. Yeah, we had to rebuild literally the whole back of the house. We literally had to take the whole backside of the house down. There was a secondary foundation supporting the back of the house that it started to cave in. So we had to take the wall off, support it. And then it rained for an entire month. So I had the whole back of my house tarped up with like plywood. They couldn't do

any electrical or anything. So I said just timeline, scope. It was my first experience with a contractor stealing from me. So again, it was just so many different little things in that deal. That was just, it was quite the learning experience. Wow. Yeah. So, okay, so I get this email from a guy the other day. And his guy says a similar story, actually, and I won't say as an am. And if you're listening, dude, I feel for you. But he basically says, look, I took all of my savings that was for my kids college education and I dumped it into a real estate deal. And my budget of $15,000 looks like, or maybe it was 30, now looks like more like 60. He's like, I feel like I lost my kids education. I just want to throw in a towel. I'm done. It was very, very similar story of this. And my answer to him, I'm curious of

what you would say to him being that you were in this exact position. I told him basically what we've said on the show here before is that the first deal, it matters in that you're gaining knowledge and experience. By the end of the day, it doesn't matter that much. Like one deal is not making you rich or making you poor typically. So don't throw in the towel, right? Like, take the lessons you learned. I mean, so that was the first piece of advice he gave him. The second piece of advice I gave him is, look, if you're like, he's having contractor problems. He's only spent like 17 grand so far. I said, maybe as a, I don't want to call it a punishment to yourself. And I think, David, you disagree with me on this point. But I said, maybe the way you, you say, okay, well, I screwed up. The way I'm going to

fix this is by spending every night and weekend doing all the things that I can do on the property to earn back that money that I just lost. So I'm going to go do the painting myself. I'm going to go, you know, do everything little that I can do to cut that budget from the 60 now that I'm thinking back down to 30. And then the third thing I told them was just hang in there again, because like, you know, if you take the knowledge, you take the experience, real estate's very forgiving, right, very forgiving. Like, you could go over 30 grand, 40 grand, 50 grand in your budget. And at some point in the future, that doesn't actually matter because the property will likely appreciate far more than that. Now, I mean, it still sucks to go over that you shouldn't go over it. But anyway, that was my

response to him. Do you have anything you want to add to that? We'll go James first, and then I'll ask David the same. Yeah, no, I mean, the biggest thing that I, at this point, my investing, I mean, we use private investors for pretty much everything, but we still have that cash reserve. And so I'm a big proponent. My business model is, you know, kind of the no money, you know, our investors fund, the acquisition and the refi-rehabs. And that was the case on that project. But again, that doesn't mean you don't have to come with anything. So for me, it's also about keeping in mind just what are your resources. So on that deal, right? I mean, I did have to take out a loan for my 401k to get it done. I did open up a zero interest credit card. Again, you have to be flexible

to kind of figure it out, right? And then what did you learn from it? So it's not so much again, like the mistakes are going to happen. And if you just sit there and, you know, analysis, paralysis, you're never going to get through it. But, you know, just trying to be able to say, you know what, okay, how do I get to the next step? How do I get to the next step? How do I get to the next step? Rather than either shutting down or just thinking, well, now I can't get the 400 units like Mr. Sterling did on this week's podcast. So, yeah. Yeah. Yeah. Crazy. Okay, David, what would you say in that same kind of situation? Well, you're going to make those mistakes.

So first off, if you beat yourself up because you go over budget and you think that means you're not good at this, that doesn't help you at all. It doesn't serve your purposes. So that's the first thing I'd say is like you should go in expecting to make mistakes so that you don't beat yourself up. You shouldn't be making that same mistake three, four, five, six times in a row. Then you might be, well, should I really be in a real estate investor? Because obviously there's something about you that is not adapting to the circumstances, right?

The second thing I would say is if you do go over. budget, which is going to happen, don't assume, like Brandon was saying, that you have to jump in there and make up the difference yourself. If you're a skilled laborer and you know this stuff really good and you don't really have any other options as far as making money, well, then yeah, that's a great decision for you, right? But let's say you're me when I'm working as a police officer and I know I could just go stack up overtime and I can get time and a half money, right? I might actually lose money taking my time out of being a police officer and going on to the job. And everyone's different, which is why we can't answer this question the same for every person, right?

my opportunities might not be the same as yours. You might be an insurance salesman who's super talented and you could go make 50 grand in a month because you really applied yourself and you would have saving 30 grand over two months was actually a bad call or you might be someone without those options. And so yeah, you got to go get your hands dirty. But look at it from that perspective. What's the best use of my time? And if you buy a deal and you go over budget and you lose money on it, that doesn't necessarily

mean it's a loss, right? Like I think I use Brandon's example all the time. The first house you flipped. Was it your first one, Brandon? that weird one that you never should have flipped. It was like very unusual, really big. Yeah, it was like my third. Yeah, exactly.

That was like my third, my third flip, basically. So you lost money on that deal, but what you learned on it enabled you to make money on your next 10, right? And if you made just 10 grand over the next 10 deals, that what you learned in that deal made you $100,000. So that's a win still. And you just have to kind of take that overall perspective. And I think the other big thing, too, my business partner and I were actually just

talking about this the other day. on the phone because this is only the first example of many like it that we've actually had in our investing in. And it goes back to the Annie Duke podcast where she talks about the, you know, the, you know, there's such a thing as making the right decision and just getting unlucky on the outcome versus, you know, taking a gamble and getting lucky and which one's actually better. And so, you know, it's also that kind of situation, you know, did you analyze it right? Did you make the right decision going in?

And you just had an unlucky set of circumstances and then how do you learn from that? So I think that's the other big takeaway, you know, that I'm trying to go. through even in our current state that we're at. That's really good. You mentioned a minute ago, James, that the deal you were buying, there was no money involved, but that doesn't necessarily mean you don't have any money. Can you maybe break down a little bit what the dichotomy is between no money investing and actually being broke? Yeah. So, I mean, the difference right with no money is you're trying to leverage your time and your skills in order to kind of be able to get more deals. But you have to be able to recognize that there's other things.

that are unanticipated, that can come up. And if you have no way to react and respond to those, that's when you kind of start getting into challenging situations. So we had one property that it ended up sitting vacant for a year. And we actually had to pay off the investor because the note came due. Right. So it's like that wasn't something that we were anticipating. And you have to kind of, but you know it could happen. So as you're looking to evaluate deals and analyze deals, how far do you stretch? How much risk are you willing to take? And a lot of times it's just that balance of, okay, yeah, we don't have any money into this, but what are the potential things that can happen and how do you make sure you do it in a reasonable and responsible way? Yeah, I love that.

You know, I make that point several times throughout that, you know, the very first book I wrote the book on Invest in Real Estate with no and low money down is that investing with no and low money down is not about having no money. Like most of the best investors I know don't use their own money when they put together a deal. Oftentimes they use none of their own money, right? Even the rehab stuff. But it doesn't mean they don't have money. So James, do you have a recommendation? I I mean, a rule of down that you follow on how much should somebody have in reserves when they buy a real estate? Like, call it a rental property. I know that a lot of debate there.

No, yeah. And I think, again, it depends on what you want to say. So if you asked me this question six months ago, it would have been a totally different answer because I thought we had way, we had plenty in reserves. And basically what ended up happening is we were going through a refi. It came in 25% lower than what we were expecting. Then we went into a flip where we ended up deciding to use bank. bank financing, so like, you know, conventional or a traditional construction loan. So we had to bring, you know, some money to the table as part of that. And then on this flip, our original budget was

120, which the bank was financing on the renovations, we're at 160 now. So it's like not only that I get hosed on my refy going right into this flip, but now coming out of that, I've got these. And then I had two rental properties go vacant, one of which was vandalized all throughout this process. So where I thought I had plenty of reserves, again, just series of, you know, the one thing after the next after the next has been piling up. So I would say when you're looking to scale, you know, especially if you want to scale quickly, you probably need to have reserves available significantly larger than what you think you really need. You know, if the bank tells you you only need five grand in the bank or something like that, what happens when you do have to go in

and replace a whole bunch of stuff because that could happen. Yeah. So James, let's take a step back here. Can you give us kind of an overall view of what you're investing in, how many units you have, what your strategy is and then we'll kind of break it down from there? Sure, yes. So right now I have 15 properties and then the flip that we have ongoing. We just got it listed. So right now, so the breakdown is basically five of those were kind of the Burr strategy. Seven are turnkey that we bought from other investors that were selling off their portfolio.

We have one that we did a commercial lease back on. And then the day after Christmas we're closing on, we're under contract to close on five more properties, including our first mix use and our first duplex, so that I'll add eight more units before the end of the year to get me up to 23. That's awesome. Okay. So I want to dive into those on a minute. But first of all, I'm wondering, how are you finding these deals?

I mean, like, they're kind of a variety. You've done a number of different things. You've got used at the commercial lease back. You've got the mixed use. You got like, what are you doing? They find these deals. Yeah. So the majority of them have actually come through.

I have, I'm a little biased, but I think one of the best agents out there, definitely, at least in my market. And so he's actually got a really interesting story. So he started out as a commercial appraiser and then became a residential agent and then got rid of his commercial appraisal license and then became a commercial broker. So he has a lot of connections with the overall investor community in the Wilmington area. And almost all the deals we've done have kind of been, you know, off market pocket listings and things like that that he's had other investors and other people bring to him. And he knows kind of my style. And so he brings it to me. And he says, can you do this? And I go, yeah. And so that's how we've gotten a lot. And so that's how we've gotten

a lot of them. We've done like one with a wholesaler. I think one was off the MLS. But yeah, so I mean, it's a little bit, one of the things we talk about at times, we don't really truly have like a funnel where we're doing marketing and all these different kind of things. And we have some things we're looking at when we eventually stabilize our business for how do we kind of bring in that funnel on that stable pipeline. But our growth has been, I call somewhat organic in that we've just been taking the deals as they come to us. Well, you do have a funnel, but you're not the one who put the funnel together. Like what you did was hijack that realtors funnel or your broker's funnel, right? And just plugged yourself right in, which is even better than having your own funnel if you

really think about it. And if you get two, three, four people with their own funnels and you're just jumping in at the very end of it when the deals come your way, well, that's your funnel that you kind of made. And I'll let Brandon jump in here because he's the funnel master. Like that should, that should be, we should come up with some nickname for him like hashtag funnel master. Yeah. He has to walk around always looking through like a measuring funnel. I got nothing. No, I will say this. I say this all the time and I'll say it again here,

that every real estate investor in the world has the same funnel. We all have the exact same funnel. You get leads, you analyze them somehow and people have different ways to do in it. They have different ways to get leads. So you get leads, you analyze them. You pursue them. So LAP and then sometimes you get success, which is the S, right? So LAPS, everyone follows that.

So your funnel, you might have numerous ways of getting leads. It sounds like you've got a variety ways, but a lot of it's centered around that broker who's helping you get it. Like David said, you just totally hijacked that, which is awesome. And then you run the numbers, I'm assuming, you figure out whether it's worth to do it. You go after some of them and sometimes they work out and sometimes they don't. How often do you get rejected when you make offers? Or are you pretty successful and you only go off the ones that you're sure you're going to get?

I mean, we're generally pretty successful, actually. So again, it's one of those we've been working with my broker now for three years. So he understands our business model and how we do things. So it's really like he'll bring it to me when he knows that there's going to be a fit and when the particular seller is in that right position, right, to sell on our terms. So where we've had stuff fallout, we had one we were under contract on earlier this year for five properties, but the seller hadn't seen the properties in five years. And like there was a squatter in one and all kinds of stuff.

So like we were originally under contract. We went back and asked for a $150,000 price adjustment, you know, on the portfolio. And they were like, we can't sell that cheap. And it's like, go look at your properties. Like you either need to put the money in or you're going to take that price hit. They're just not ready yet. And, you know, when the time comes and they are. hopefully we'll be able to step in and, you know, our offer's still good to buy those.

But, you know, that's when we seem to see things that or the investor isn't really necessarily in tune with what they want to do. Because we don't try and lowball people and get things cheap, right? I mean, we just, here's how our numbers work. And that's what the offer is. And we usually make it work. Yeah, I love that. How, how non-emotional that is, right?

And real estate is kind of an emotional thing. We get involved. But the more you can stick to your numbers of the, you know, this is just what it says. And, hey, we, you know, we found something in inspection. now our numbers this. It's just, it is what it is. This isn't an emotional game, right? And so many, especially new investors, this gets so, and I get it, but they get so involved

with it because they just want a deal and they get in motion. So anyway, yeah, I think that's, I think that's huge. So, okay, so let's move on, like, so you got, you got these properties. There's some residential in there, the commercial, well, you said the lease, the commercial lease back. Can you explain what that is? Yeah, so it was actually pretty interesting. So this particular deal was, they own their office.

building and then they owned four row homes behind it where it was. And the very first one connected to their office building, they had to expand. And so they actually converted it into office space. And so they were trying to market their office building with the other four units. But their office was, they were asking too much for it. It was too nice. We didn't need the space and things like that. But we wanted the other four.

And so basically as part of the negotiation, they're like, well, we're not, we haven't sold the other building. We need to stay there. So they signed a two year lease to stay in the unit. So, you know, immediately upon closing it, you know, we, we basically, signed a lease as part of the closing documents. And at the closing table, I got my security deposit. And every month, there's a check in the mail. So, that's awesome. Can you tell me, James, like you said you're getting most of these deals from a broker. Can you tell me what does your

average deal look like? And then from there, we'll break down, like how you're funding it, how you're finding it, that kind of stuff. Again, we've actually been getting like kind of a little bit bigger with each transaction. Our average deal has like an ARV of somewhere between 85 and 100, And so we're are basically our criteria is what my bank's criteria are, which is I need to pick it up for about 70% of the ARV because I can refinance up to 75%, but I've obviously got some holding costs and things like that that are packed in there. And then I got to be able to have a debt coverage of one two to one two five. And so you know, that's basically my criteria. It's like, hey, if they're offering it in a place where we seem we can negotiate to there, then we're generally pretty good. And then as far as how we're doing it, because they're all individual single families, so when we bring our investors in, it's just a straight, you know, single, mortgage and note with that private investor, there's no syndication or anything along those lines involved with how we're structuring the financing piece. Before we dig in, can you explain what the debt coverage ratio is that you just describe for people who don't know? Yeah, so basically there's the net operating income on the property, which basically says, here are your income, you know,

from the property, here's all of your projected expenses. Now, I've learned banks calculate it differently than the way I would calculate it. So it's hard sometimes to know exactly what they're putting in there. But you basically get to your net operating income. And then once they figure out what your debt obligation would be based on the rate and term and things along those lines. As long as your cash flow is coming in is 20 to 25% greater than that debt payment, then they would consider that you have enough cushion in there to generate your reserves and cash flow to support the property. Nice.

So a debt service coverage ratio also called DSCR of 1.2 would mean that you're generating 120% of what it costs to run the property basically, right? And that's a metric that banks look at because they want to know that you, you're going to have enough cash flow to pay them back. So very good point. Thank you for sharing that. Yeah. Yeah, very good.

And if people have questions about things like that, if you could, I just want to actually call this out here. If you're listening to this show right now, if you're listening, you're driving, whatever, like there's terms like that you don't know.

I mean, we're going to try to explain them on the show and we do try to pull those out. But oftentimes we just don't or we don't think about it or whatever. But there's this amazing website out there called biggerpockets. And it's totally free to go there and search for like DSCR or whatever, right? And like there's a little magnifying glass and navigation bar, jump in there.

Search for the terms there and they're right there. You can also go to the show notes anytime like, you know, if we're doing a show like biggerpockets. com slash show 312. You can go to the show notes and then right there you can, you know, we'll put links to articles about it. We kind of throw in those things as well. So again, don't like just go, oh, I don't know what that is. I'm going to turn, you know, turn off my brain.

Like use that as an opportunity to grow. So moving on. I want to go back. Actually, I should say moving on, but moving back. We're going back to the future. Am I right in assuming that you're. basically burying these? Like you're buying them with private money, these single-finding houses, then refinancing them later. Is that your strategy? Yeah, exactly. So again, some of them,

you know, have, they're vacant and they have work that needs to be done. So it's one of called the true burr. But we're kind of doing the same thing, even with what I would call these turnkey properties. So when I say turnkey, I'm not, we're not buying them from a turnkey company or something like that, but we're buying them with tenants already in place. And my commercial lender doesn't have a seasoning requirement. And they view the private loan as if it were a cash transaction. And so we can buy cash with our private lender's money. And then as soon as the deed is recorded, I can start the refinance process with them and cash our investors out if we need to. Can you tell us how you found a lender that would do something like that? I called probably 40 or so

different lenders. I've got, you know, I've been slowly building out a podium database of all these different, you know, insurance lenders or private lenders, the properties, building all kinds of different stuff. I'm a technology spreadsheet nerd. And really, just kind of, you know, every single credit union, local bank, basically anybody I could find that seemed like they had commercial lending. And I said, this is what I want. This is what I need. Can you do it? And the majority of them said, no, you can't get that. And I was like, yes, you can. I'm going to find it. And I just kept on calling and calling and calling until I found them. So you put together a system of systemizing different lenders in a CRM. Brandon, can we think of a name for what he's

doing here? He's taking a whole bunch of things and he's narrowing it down to get the answer he wants. What would we call that? I'll let you come up with Ed. I suppose to be a form of a funnel, right? But see, that's the answer, right? That's why I want to jump in with this. Because it's very often in any business endeavor or any life endeavor that you want a result that you can't get.

And then you get frustration, right? Frustrations interference with a desired goal. And oftentimes, we let frustration cause us to quit. Well, this was harder than I thought or it didn't come as easy as I thought. I can't find the lender that James has. It must be easy to be James. He's got this lender that will let him look at this transaction like it's cash, right? But you had to work to find that lender.

You had to find 40 different people and call all of them, right? You turned your frustration into a plan. You took action on that plan. You broke it down. You found the lender. Now it's kind of easy for you. You only had to do that one time and you can keep going back to that same well over and over. And that's really the secret to what makes somebody successful with this and doesn't is

this is a puzzle. you got to put together all these little pieces to make it work and everyone's puzzles different. So we can't give you the same answer to every person, but we can give you the same techniques that everybody uses to solve their puzzle. And Brandon is really, really good at articulating this and explaining it. If you guys aren't on the Bigger Pockets webinars, you need to jump on there because like every week he's going through different puzzles and how he solves them using these principles that we talk about. And I just want to encourage people when you get stuck and you're frustrated, put together the system, the funnel, get your answer. And then you're like, well, this is easy. Because you've done this several times, James.

You've got one funnel that led to finding the lender. You've got another funnel that led to finding private money. So now you have people to fund these deals. And you have a funnel where your broker, you've tapped into his and he's sending you deals. Those three things make your job easy. Now the deals just come to you. You fund them. You refinance them.

You're good. Yeah, except the funnel I got to figure out next is tenants because we've had a lot of vacancy problems. So that's as we've talked about systematizing and all that sort of stuff, the big focus going into next year is the tenant funnel, I guess he could say. Yeah, yeah, that's important. I mean, like, it is a funnel, right? Like, you have leads, you get as many leads as possible of potential people. We had a guy on the show years ago.

Maybe it wasn't a guy. I mean, maybe it wasn't the show. Maybe it was a blog post. I can't remember who it was. Anyway, what's that term like the World War I, the Blitzkrieg? Is that how you say it? Yeah, right? He called it the Blitzkrieg strategy for getting tenants.

And it was basically like, they go out there and they post on like 30 different places. and they put signs and yards and blah, blah, blah, right? And the whole idea was get them in the funnel. Then you're going to analyze the tenant. You're going to pursue some of them, and some of them are going to be successful, right? So it's all about getting more and more leads largely and finding ways to, you know, handle that. Anyway, my wife is like a pro at figuring that out. So anyway, if, you know, you got it.

You understand it. You get there. So let's talk about why you're having tenant problems. Okay. Most of the tenants that are coming in, you're probably inheriting them with the properties that you buy because you're getting it from a broker and he's getting it from someone who already owns it, right? So you're pinching off this great deal before it goes to the market, which is why you can find it. However, it comes with an inherent difficulty, right? Yeah. So some of the problems

have been from inherited ones, but a lot of them have also been from people that have been placed into them. So again, this kind of goes back to the, the any duke of kind of like, what are we doing wrong in this process? So as we're looking at, you know, tenants that are in place, one of the things that we learned twice now, we've gone and we've purchased properties and had tenants move out the month we bought the property. And so the first one, they claim that they gave their notice and all this kind of stuff, but nobody could find the paperwork and blah, blah, blah. And then the second one, it was actually a section eight tenant lost their voucher the month. And like the mailing went out from the housing authority the week we had closing. So I immediately had to start, you know, the five-day

letter and the eviction process for that. So you bring up an interesting point here. And I know this wasn't where we were going, but I want to stress this. People often look at Section 8. I hear it guaranteed income from the government, right? Yeah. But I've had several Section 8 tenants lose their voucher. You ask yourself, why would a tenant do something to screw up getting free money? Yeah, I don't understand it. They do, right? Like, I had one tenant who they had to have an inspection once a year. She would not let the inspectors in because she assumed that there were government agents coming to attack her. And so she lost her voucher. And like, that all, all of a sudden, now you have a tenant who just has zero chance of pain.

So anyway, I'm not saying don't do Section 8. I actually kind of like Section 8, but it's not free guaranteed money. And it's funny because my contractor likes to say I define all of the odds and everything that he knows to be true with it. He's been investing himself for 15 years and in the construction business because every one of my projects has way more problems than he's ever seen. And then he's also going to the point, his only evictions have ever been on non-section 8 tenants.

So he's like trying to move all of his properties to join it gearing more towards Section 8. and I'm like, I've had bad experiences both ways. So I was like, so I just need to figure out how to get better people in regardless of what their circumstances are. And that's what we're trying to figure out how do we do that better job screening. And I'm actually just started rereading the book on managing rental properties just because I'm like, I remember so many good nuggets in there. I'm like, I need to go back and revisit and start actually like figuring out how we put these into a system and utilize them. Yeah, property management really is.

And thank you for that plug, by the way. But property management really is a system. You know, like it's a, it's a thing, it's a business, and it's hard. There are a lot, yeah, there's a ton of stuff. So, you know, if you want to learn that system, then great, learn that system. Otherwise, you need to find a property manager who's a rock star who knows that system, right? Like, David has a property manager that manages, like he has multiple ones, right? I mostly do it in house.

But the only reason I do it in house is because we were willing to take the pain needed to learn how to do that, where David was probably smarter and was just like, I'm just going to, you know, I outsource it from the beginning. Or lazier. That's usually what I hear you say about David, though, that he's smarter. Yeah. That sounds better than better. Yeah, I was with I'm better looking and more talented. Brandon's the guy that will spend three hours to put together an IKEA chair while we're in Hawaii.

And he could be watching a sunset. He's like, but I save $17 by doing it myself. That's pretty much it. And I, it's better. Yeah, it's also why he grows his beard longer, right? He does. Trim it as often. Exactly.

The more you work, you know, the more good you feel. feel about yourself. That's why I'm such a positive guy. All right. So moving on. Do you got something, David? I was going to move on to. Okay. Well, I'm going to suggest one thing that I do when I buy a property that I inherit a tenant, I assume, like I put it in my numbers that I'm going to have to evict that tenant and have a vacancy for three months. Like I almost always, now, I'm like an apartment complex. I don't do that because I don't assume I'm going to lose all of them. But I assume I'm going to lose a few of them and probably a larger percentage than I would normally, right? Because I just know that in transition those things happen.

There was this great Instagram discussion the other day. There was a, who is it that did it? Rameet Sati, who was an author, he wrote a book called I Can Teach You to Be Rich, I think. Anyway, he's like super anti-real estate. But anyway, he has this discussion on there about getting tickets while driving. He said, getting a speeding ticket is not an unexpected expense. Yes, it comes at unexpected times, but getting a speeding ticket is an expected thing. that you will go through. Now all these people were like, maybe you just shouldn't speed.

But his point was, like, there are a ton of things that just go wrong, right? So if you just plan for that in your budget, and I think the same thing applies to real estate in this way, like, and again, we're all learning this stuff all the time. And I'm kicking myself, I'm doing some stuff like rehabbing right now for the same thing. Like, they're not unexpected. They just come in unexpected times, right? So like things like evictions, like they are going to happen. So you just plan for them. That's why in the calculators that we have in bigger pockets, we have a spot for vacancy, a spot for CapEx, a spot for repairs, a spot for all that stuff. Because, yeah, they don't happen every month. You can't plan on them, but they do happen and see, you have to

plan for them and budget for them. And that's, but the thing too, right, is as you talk about the plan and budget for them, but on that note, right, so, you know, if you go on the forums, everybody talks about, you know, your standard, you know, percentages and things like that. So, you know, we use a lot of those standards. It was like, hey, our budget was going to be 10% vacancy, right? Well, I'm running a 30% vacancy this year between nonpaying tenants, trying to get them to eviction and then how vacancies replacing people. And then we're using a 20% cap-x slash repair number. And we know that when we walk these properties,

they obviously had some deferred things that we knew we're going to have to do. But we assumed we would have two or three or four years to accumulate cash flow to be able to do that. Well, I'm running this year, I think it's going to end up being like a 60% expense ratio because where I was, you know, not expense ratio, just on the rehab part of it.

Just because, again, we had four units turnover. That needed pretty significant work done. And again, it wasn't that we weren't budgeting for it. Yep. But this again goes back to the investing with no money. Again, if I had put all my money into all of this stuff, we'd be in a really, really tight spot right now with having to go and do all of these repairs that we need to have done. I love that you say that. I love that you're honest about that because I mean, that is the truth, right? Like,

I've felt the same thing. Like, a lot of times, my projections of properties are a whole lot better than what they actually are, especially the first year or two. Like, because there's always those things. And that's why, again,

it's okay to invest using other people's money, but you should not do it broke because you're in trouble. Now, that doesn't mean if you have no money, doesn't mean you can't do it. Just find a partner who has the money, the resources to be able to back up those things, right?

Like if you're like, well, I'm going to go down to the wire here. If this goes wrong, I'm not going to have money for dinner. Find a partner who can give you dinner. You know what I mean? Yeah. Anyway, all right. All right. So, very cool.

So I want to shift, but I want to talk one more thing before we get onto the deep dive. And that is working a full-time job because you do there. Do you have any tips or suggestions for those who are listening to the show that are like, I really want to, you know, invest in real estate? I want to do exactly what James is doing. But I'm working full-time. Any suggestions? Yeah.

So there's all the awesome exceptions of people that, you know, come on the podcast and they go crazy fast and all that sort of stuff. But I think it's a matter of being honest with kind of what your circumstances and your situation are, right? So again, you know, like we've talked about these systems and processes and funnels and all that sorts of stuff. When I bought my first deal off the Bigger Pockets marketplace back in February of 2016, I didn't have any of that in place. So the problem is I think a lot of times people kind of like, they see that end goal. And they're like, oh, I got to get there. I got to do this thing, and they don't take the time to kind of realize what steps it takes and kind of do it one at a time, step by step, and you'll grow and you'll learn all of that stuff as you go.

And so, again, one of the things that we learned this past year was we thought we could really start growing. So by the time we close on these ones after Christmas, we'll have acquired 11 of our 23 units just in the last six months. But one of the things that we learned was, again, with all these unexpected expenses and all that sort of stuff, we were like, hey, that's maybe too fast for where we need to be right now. And so we're actually, again, we're intentionally putting the brakes on, you know, going into the first part of 2019 to kind of level set and say, hey, we need to be in this for the long haul. We can't be short-sighted and just grow at any expense because you can't keep bleeding money and expect that you're going to be able to be okay. So we need to be able to learn from that, figure it out, okay, how do we maintain where we are? And so, again, thinking that you can go from zero to where I am now, I think is where people kind of get stuck and caught up and you just kind of have to take it one step at a time, one deal at a time. And you will, just naturally start to gain that momentum and grow to a point where you're comfortable. And then you'll be like, why did I think this was hard before? Yeah.

And it just starts to become easier. Momentum. That is like the perfect word to the sky. That's what it is. It's like moving a train, right? It takes all the energy. You're getting a spaceship launched off. Look at me, Brandon, analogy Turner today.

All right. So, anyway, I love your story. I love that stuff. Where are you headed? I know you say you're slowing down a little bit. Where do you see your next five, 10 years being? Yeah. So a lot of different things.

So we, we like kind of the model. we're doing. So we definitely view our investing as a business. So I'd say like there's also a difference there. Are you investing and you want it to be passive and that sort of a thing? Or do you view it as a scaling of business? So we do see that. And so we see a lot of opportunities kind of in ancillary, you know, kind of parts where, you know, as you scale vertically, makes them, you know, expand some horizontally. And then for us, too, it's also identifying some additional markets where we can kind of copy, I don't want to say franchise because we would still run it. But, you know, being able to diversify into other types of markets. We view Wilmington. Again, it was a market that was nearby.

It was convenient. The cash flow worked, but the appreciation isn't really there in some of our neighborhoods. So we've identified maybe some markets that have some better appreciation opportunities, even though they may not cash flow as well. But then there's also some up-and-coming cities where neighborhoods that we think have some really good cash flows now, but also opportunity. So it's kind of looking at how do we kind of start diversifying our portfolio in that regard? And then on the investor side, we've also talked about do you start to look at syndication, And we like kind of the debt fund option versus, you know, an equity option. And some of the things along those lines are kind of as you scale, how do you maintain flexibility?

And again, a lot there. And part of what we have to realize is, again, how specific in general do we want to be versus how much do we want to generalize? And some of that will be how things evolve, obviously, over the next six months and then a year. And we constantly have an annual strategy meeting where we're doing that five-year plan. And for the last three years, it's changed every single time. We sit down and do that based on what we've learned and what we decide we want to do. Yeah, that makes sense.

And when you say like you'd rather do the debt funding versus like equity, you're basically saying you'd rather pay interest on it rather than splitting the profits as like a partnership. Exactly. Yeah. So for us, it's just the way that our business model makes sense. You know, so we need to have a margin of cash flow pool basically coming in rather than paying out on the equity side. Makes sense to me. All right. Well, let's shift gears now and head over to the next part of our show. One of my favorite things that we do in every episode is the deal deep dive. Deep dive. When I bought my first rental, I thought collecting rent would be the hard part. Nope. The admin crushed me. Every night was receipts, tax forms, and checking who was late on rent.

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Zero guesswork. That's Dominion Financial. Check them out at biggerpockets.com slash dominion. Again, that's biggerpockets.com slash dominion. Now, let's get to the deal deep, deep dive deep. This is the part of the show where we dive deep, dive deep, dive deep into one particular deal, With our guest. So, James, you got a deal in mind, right?

Yes, I do. All right. So why do we start? We're just going to do quick, fire answer questions. Number one, what kind of property is it? It's a money pit. Okay. Cool.

I love that. All right. This was intended to be a burr, a single family row home. All right. All right. Number two, do you? How did you find it? So this one was actually came to me.

It was a wholesaler who reached out to a member on bigger pockets who doesn't invest in the city of Wilmington. A lot of local investors only invests in the county outside of it. And he knew I invested in that area. And so he forwarded it to me. And I reached out to the wholesaler. And funny story there was actually my contractor was doing a renovation on a property, two houses down. And he had already been talking with the owner about buying it.

And I basically had to go to my contractor and say, well, you either need to buy it now or I'm going to because otherwise this wholesaler is going to go and sell it to somebody else. So it actually all kind of came together pretty interestingly. Cool. All right. How much was it? So we ended up paying 27,000. 500 for that place. And how did you negotiate that price?

We ended up, we were already pretty close. So the seller was originally asking 30 and we offered 25 and we basically came back to him and we kind of showed them our scope of work and things that we thought we were going to do on the house. And from there, he basically said, you know, yeah, I get it, but I need to be able to get some more out of it. And so he was like, I'll meet you in the middle. All right.

How did you fund it? So we again used a private lender on the acquisition and the projected rehab. Numbers. All right. Do you remember, you say projected, so we'll get to that. So did you have a projection on how much you were going to put into it? I did. So we had originally projected that we were going to spend $29,000 on the rehab, and we ended up spending

$38,000. And then that was just on what, the original rehab part. And then after we did that, this is actually the property that then sat vacant for nine more months. and we had to cash out our investor before we were able to refinance it. And then after the tenant moved in, we had an additional $15,000 in expenses and repairs that we had on top of that. So all in, what is that, 38 plus another 15. So like 53,000 we ended up having to put into it.

I did my math quickly right there. Yeah. Can I ask what went wrong? What was a 15? Like, what happened? Yeah. So it was the roof. started to give way and have leaks that we couldn't find.

So we had to do multiple repairs to the roof. The furnace ended up going out, like in the middle of the winter that we had to replace. We knew it was older, but it had serviced fine. Like, we didn't think we're going to have issues that quickly with it. Then there was an old cast iron drain pipe on the one tub that, like, gave out and started leaking water that we had to then go replace the plumbing and do drywall and paintwork and stuff like that. We originally were planning to put the washer and dryer into the basement. But in Wilmington, they have a lot of narrow basements.

So you have to get these smaller 24-inch washer and dryers a lot of times. But we couldn't even get that to fit. So then we had to actually build a laundry cabinet off of the living room. So we had that additional expense of having to build that out and run electrical and things that we weren't expecting. And yeah, so that was some of the extra stuff. On the front side, it was the kitchen floor had actually buckled in. So we had to rip all of it out and redo all of the joists and everything actually underneath it, whereas we thought we were just putting tile in initially.

the electrical panel we knew had to be upgraded because it was an old fuse box, but when we went and redid it, they couldn't even put it where it was. They actually had to reroute it because it was too close to the water line to be current code. So it wasn't even just a swap out. We actually had to move it. So it was all these kind of things that, you know, older houses have very different things. Most of my properties are built between the 1880s and 1930s. So that's another thing when you hear a lot of these people on the bigger pockets.

They talk about these standard expenses and how they do things. A lot of that is, again, on these post-1950s, 60s homes. I know Brandon, a lot of your places up in Washington or older houses. So you probably understand some of this stuff that they have their own different types of challenges. They're fine as long as you don't touch them, but as soon as you touch them, you have to bring them up to code.

So interesting challenges there. Yeah, older houses, sorry, as I said, older houses definitely do have more expenses. You got to plan on that. Yeah. Once you had it all fixed up and the rehab was finally done, what'd you end up doing with it? So we finally got a tenant in. She's paying $10.50 a month right now. Those are good numbers.

I mean, like, even with all of that in there, even though all that sucks, you're still, you know, it's almost a 2% deal even after all of that. Yeah, it ended up appraising for less too. So that was the other part that then sucked. Then only do we put all this extra money into it. But where we thought it was going to appraise for about 95 or 100, it only ended up appraising for 85. And while it doesn't feel like it's a whole lot, like, you know, you kind of want to be able to pull out everything you can when you know you've already put more into it. So kind of getting hit on the refi side kind of wasn't a lot of fun either. Yeah.

I hear you. But, you know, like, again, hopefully this thing now, hopefully, again, hopefully you've taken care of a lot of that CAP-X that would have been spread over the next 10 years. You've just front-loaded a lot of that, which again, sucks in the beginning. Yeah. Right. We're hoping. And now we just got to hope the tenant gets current on her rents before we have to evictor in January. Yes, that would help.

So we've got that going, too. So like I said, this is the money pit. So it's, it's been entertaining, not in a fun way. Like I said earlier, real estate is very forgiving. It sucks that you're doing this. you're going to learn a ton of lessons. That's the last question. Like, what lessons did you learn from this deal?

Yeah, I mean, this is the one that really taught us that the numbers don't always make sense the way that you thought they're going to, right? And so it was really at that point that we started, again, we've got, you know, our Excel spreadsheet models and stuff like that that we do all these things with. And, you know, we're constantly retuning those and refining those. So it was like, hey, we need to tweak what we think these expenses are going to be and how we're going to project this. And even after that one, we've still made.

more changes to it. I think it's on like version five or six of how we've designed all the things and stuff like that at this point. But, uh, you know, that was really the first time where it was like, oh, hey. And you'd think we'd learn several times and we felt like we had, but it's, it's, yeah. There's a, there's a famous quote about Mike Tyson said, he said, everyone has a plan until they get punched in the mouth. I really like that quote a lot, right? Like, you can plan really, really well. That sounds about it. Yeah. Then at some point, you just, you're in the fight and you get punched them. And then your plan goes out the window sometimes. And it sucks. But yeah. But Yeah, everyone has a plan until they get punched in the mouth.

Sounds right. Well, there's something to be said for that because if you really believe it and you buy into that, you quit trying to figure everything out before you get in the fight. And instead, you start training for what you're going to do when you get punched in the mouth. Like you start trying to develop a mindset of, okay, when I'm punched in the mouth, how am I going to repeat this action over and over and over so that it's instinct instead of having oh, my God, I don't like how this feels, you know?

And it's almost like controlling your own emotions in a deal. Like, oh, God, that water leak just happens. This is going to be $12,000 and it feels like you just got punched in the mouth. Are you going to respond to it in this way or in that way? And that's what successful people concentrate on. They don't try to plan out the whole fight before they get into it. They practice what I'm going to do when A, B, or C happens. And then they have this confidence they can kind of flow.

Yeah. And again, so one of the big things we're doing, right, is trying to, again, figure out how do we better project these things and change how we budget and different things along those lines. And so we're constantly evolving. And I think that's one of the biggest things, again, that, you know, we, We've learned not only from this deal, but all of the challenging ones is there's that constant need to every, you know, challenge everything, question everything and evolve every day. So final question for you in this segment of the show. I appreciate you picking out a deal that did not go well. Me too.

That's really cool. I was just going to say that. Yeah. That was cool. But even with everything going wrong, are you glad you bought it or do you wish you'd passed on it? I kind of wish my contractor had bought it. But we're actually talking about that the other day. But again, I think it's opened a lot.

I mean, like, so the investor that we had on that, again, he's still, you know, a really good friend. We chat about deals all the time. He still invests occasionally and things along those lines. So I think, again, going through those challenging experiences, so we've got a pretty lengthy detailed investment perspective that talks all about, you know, our market and what we do and how we do on our deals. And so, you know, we don't hide the challenges that we've had from our investors, right? I mean, they're very aware and clear on, you know, things haven't gone well and how we've

reacted and recovered. And to a certain extent, I think that actually has helped us bring. on more investors. Actually, we've had more interest in money than we've had deals available to keep that funnel balanced. And I think the fact that, because every investor's concerned is kind of like, well, this all looks great on paper, but what are you going to do when things go sideways, right? Everybody's learned about how they're going to lose their money. And I think the fact that we've been through those experiences and we actually have case studies that we don't hide behind, that we can show how we handle those kinds of situations actually has benefited us in being able to look at the future

and have a plan and the ability to grow and scale having been through those experiences. That's really good. I think people should just rewind the last minute of this and listen to it again because it's so good. When you're honest, when you're transparent, like people can feel that. They can read that. And then they are more likely, I believe, to give you money or invest with you or bring you deals or whatever when you can be transparent. So that was fantastic. So thank you, James, for sharing all that.

That was really a really good deep dive. Again, people oftentimes like, I mean, we love to share our wins and our awesome stories and brag about our great stuff. And reality, like, real estate's hard. You get punched in the mouth sometimes. And I really appreciate that. So, all right, moving on. Let's head over the next segment, which we lovingly call our fire round. Fire round.

It's time for the fire round. All right, let's get to the fire round. These are questions that come direct out of the bigger pockets. Forums. We're going to fire them right at you, James. You ready for this? Absolutely. All right, number one, what is a fair deal when splitting profits with a partner?

Well, how would you define fair deal? Yeah, I think, so when my partner and I did this, so my current business partner was one of my original private lenders on my first two deals. And so the kind of clear balance was I had some of the operational experience. By that point, I had three rental properties under my belt. And so I'd gone through, again, that first really terrible rehab where we went crazy over budget and all that sort of stuff and had the relationship with the contractors. And he had the money. He's also not local. He lives out of state as well further away than even I do.

So it's kind of a combination of like, okay, you know, you've got the money. you've got, you know, kind of some of the background. He also had kind of connections when we knew we were going to start raising money. He was kind of better suited given his background and things like that. And so it was like, hey, you handle those sides and then I'll handle this. And so I think it didn't necessarily have to be split that way, but it's being able to be clear on what do you bring to the table and then how do you leverage your skills as best as possible. And did you guys split things 50-50 then in that one? Yeah.

So it was kind of what to call an unequal capital contribution up front because, you know, But in the agreement, it was a 50-50 split thereafter. So all the equity and cash flows and things along those lines are split, even though. So a lot of people think like, oh, we have to contribute the same things. But it was known that, hey, throughout this partnership, I'm going to probably put in more day-to-day responsibilities interacting with their property managers and contractors and agents and all that sort of stuff. And, you know, he would have a little bit more of a back office. You know, we talk once a week. We review deals and finances.

So, you know, that was kind of how we viewed, you know, money and time being split differently. but then all the profits and things like that, 50-50. Okay, that sounds great. Next question. I'm having trouble finding a broker to bring me deals. Can anyone tell me what I should be doing differently? So on this one, I would take a look at, again, what is the person's experience, right? So one of the things I love about my agent and my broker, you know, again, is he had that appraisal experience.

He is himself an investor. So, again, he understood not just, I mean, there was a, Again, a forum post for somebody was like, you know, my agent won't do this or don't do won't do that. And it's like, okay, drop the agent. Like, not every agent is designed or geared to work with investors. Like, we have a different way of looking at things. We have a different set of needs. And so I think being able to know that up front, asking for referrals where you can, especially if you know somebody's doing things different than you.

So like, my agent, more than likely won't pick up somebody who's doing deal similar to me because, like, I'm kind of the first person he comes to with those type of deal. But he has plenty of other investors he work with that either investors. in different neighborhoods or have different criteria. And so being able to find where you have that ability to get that alignment as well, I think is pretty big. And you only know that by getting referrals or just interviewing enough people to say, how do you do this? How do you do that?

This is what I'm looking for. Does that fit for your model? And then you have to give it a trial run and see what happens. So it's kind of like a funnel. All right. It's crazy how that keeps coming up, you know? I know, crazy. Number three, I'm constantly running analysises on prospective properties.

How do you say that? Analices. Analysis. Analysis. Analysis. I'm going to say analysis syses on prospective properties. I know that there's several rules of thumb. I've seen sprinkled around the forums.

What are the most important rules of thumb you use when analyzing properties? Do you have any good rule of thumb? Good rules of thumb. I would say location is the first thing that matters. So there's nothing that you can do to get by in a bad location. You have to be comfortable. So like for me, those are actually the first two things when you're analyzing a deal. Like don't chase something that you're not comfortable with because that's when you're really going to start getting yourself into trouble.

Yep. Yep. Once you'll get past those, I would say Ben Labovich has a really good post that he had done. And he's linked to it a couple times and I haven't found the permalink. So if we can dig it up and put it in there. But it's basically this table that kind of covers like all the top cap X expenses, their average life. Yeah, yeah. And then it kind of basically says, okay, here's how much you need to save.

Because I think the thing that people get bogged down by is they use like these percentages. but again, generally speaking, like a roof cost, what a roof costs, whether it's a $600 house or a $6,000 house. I mean, maybe a little bigger, but I mean, generally speaking, like those costs don't change a whole lot. So being able to identify, okay, what makes sense for a rule of thumb? Like, you've got to understand, like, what I pay for property taxes in Delaware isn't nearly what people who are analyzing a deal in New Jersey need to look at, right?

And so being able to know what rules with them you can use and can't use, I think, is the important thing rather than just going on the forums and say, oh, well, everybody says use this for CAPEX and use this for this number and this for that number, the 50% rule. I found that there's too much nuance to really kind of use those. All right. Make sense. Make sense. All right. You know what? One of my funny random, I know this isn't my interview today, but I'll say it in my random rule of thumb when it comes to a neighborhood because you said that. A rule of thumb, this isn't like the 2% rule or anything like that. It's just a rule of thumb that I use. If I would feel comfortable with my wife jogging there

at night, then I'll buy in that neighborhood. That's just like a simple rule of thumb. I always think that. I'm like, what, if Heather went jogging there in the afternoon, like late evening, And like, would I feel okay with her? And if not, then I'm like, I don't want to buy there. And it's like a, it's like a silly rule of thumb, but that's how I feel comfortable if she'd be all right with it. So, anyway, people kind of come up with their own. So with that, let's move on to the final segment of the show.

This is our Famous Four. Let's get to the Famous Four. Number one, what is your favorite real estate related book? So I had to sit and I had to think a lot about this one just because I think, I don't know if I've read a whole lot of real estate books that weren't published by bigger pockets. Nice. So. Great answer. Best answer ever heard. Moving on. I know. They are really good resources. So, again, I think it tends to be, you know, where I'm at in certain things. So I already

mentioned, again, Jay Scott's book on estimating rehab costs was huge for me. You know, it's getting started. I'm stoked to see the republish coming out here soon. Yep. And then also, again, the book on managing rental properties. I mean, I know it. I don't mean to, you know, make Brandon's ego get bigger, but between you and Heather, did an amazing, amazing job. You know, just it blows my mind. I think it should be mandatory reading for every property manager to read that book because it blows my mind how clueless these people are. We're supposed to be professionals and representing how to do it.

They have no idea. They think their job is just to collect money and give it to me. And then everything else that's like, well, I don't know what they do about that. And it's like, no, like, go read this book. You'll understand all of it. And again, that's been huge. So here's an idea. Brandon, you come up with a test that someone has to pass and they have to read your book to be able to pass it. And then you give them the Brandon Turner certified property manager designation. And then all the rest of us can know, oh, you're one of the BT certified PMs. I could definitely use you. That's actually great idea. Remove all of the guesswork out of finding a good PM. We've actually, we've actually toyed with the idea of that on bigger pockets is maybe doing something like that. We'll see what the next year or so has in store for that actually. But I really actually, actually, like, that idea. Not like the Brandon Turner approval, but could we have, you know, bigger pocket certified or something. That could be very cool. So all right. It could be. Number two, David. What is your favorite business book? This one, I think I'm going to go with Richest Man in Babylon by George's Clayson. It's just so many really good nuggets. I think that kind of tie in, you know, just FI principles, investing and just, you know, how to live life well and kind of look at all these different niche bluepines.

and stuff like that. Yeah, they'd really dive in, but at the surface, I feel like, I mean, as old as that book was, it really encapsulates just so many of the core basic fundamentals. Yep. You know why that book is so good? I mean, people mention the same similar books over and over on the show, right? People mention Riches Man of Babylon, Rich Dad, Poor Dad, the E-Mith, right? Even, like, lately, I've had several people recommend one of my favorite books,

Life and Air. What these books all have in common is they are stories. They're actually sort of like half-fiction books, but, you know, like, there's stories that teach us, right? because humans we learn from story. I always find that so fascinating, that the same books come up or and over, and they're almost always these stories.

So anyway, very cool. All right, number three. Number three, what are some of your hobbies? So I like to board game a little bit. Nice. My board game shelf behind me. We actually are getting together with a group of bigger pockets, people, I think, in a couple of weeks

and playing some board games, that'll be cool. What's your favorite board game? My favorite board game, Twilight Imperium 3. That is such a good answer That was so specific too Yeah It is So yeah

It's it is Sorry It's one of those games I love getting to the table Like if you've ever played risk It's like risk on steroids So this game could take like Six to 10 hours to play

Depending on how many people you have And it's like this epic Galactic Battle of Space Races and politics And it's fantastic Clearly superior to Twilight Imperium 2 But maintaining the same Original nostalgia of Twilight Imperium The original

And they just came out with Twilight Imperium 4 also. Oh, wow. We did have a review of that. Have you guys ever seen Parks and Rec? The show, Parks and Recreation? They actually came out with that board game. Did they really? Like, yeah.

It was all a Kickstarter. Somebody actually did a Kickstarter of the, I forget what is, I forget the name of the game. Yeah, he made this like a huge, absurd game, like board game in one of the seasons. Anyway, one of my favorite shows. Anyway, keep going. But the, no, this is the other thing is. my daughter will turn two months old in like a week and a half. So spending time with her and my wife has also become, I mean, always spending time with my wife was always a priority.

But having my daughter around now has been pretty awesome. Two months old. So you're sleeping a ton right now. No, dude, she sleeps like crazy. Like it's awesome. Like, yeah. I mean, starting like Thanksgiving week, she started sleeping like six, eight hours a night. We just like, I like, I know I'm not supposed to knock on wood, but I'm knocking on the table because like I, she's been fantastic.

We're so lucky. Well, my daughter slept really well, too, until about three months. And then it all went downhill from there. Thanks, Brandon. I'm going to blame you if that happens now. All right. For those who can't see if you're not watching this on YouTube, James literally has an entire background full of board games behind his head.

Yeah, there's like 100 of them at least. Yeah, it's like legit, like, I don't know what you would call this. Like a nerd cornucopia going on up board games back there. I don't know. I'll have to, maybe I'll take a picture and put it on. my my Instagram or there you know what I don't see monopoly anywhere back there either no you won't see that oh man that's my game that's my board game all right what do you think sets apart successful real estate investors from those who give up they fail or they never get started again I was obviously

thinking a little bit about this one and kind of came up with with two pieces so one for me was you know the fear of responsibility and a lack of honesty and so kind of the fear of the responsibility is again it's, you know, that taking action. And again, just everybody always hears about the, oh, you know, when you're become a landlord, you're going to fix toilets at 2 o'clock in the morning. And so it's that like, how do I actually react and respond when things don't go well? And again, the lack of honesty is a lack of honesty with yourself, with your partners, again, about who you are, where you are and all of that kind of stuff. Because, again, I think the people that don't understand they're in a tough spot.

Again, do I want to be putting the brakes on and not be buying more properties? Like, no. Like, I was like, all gung-hobe. I wanted to like, buy more, buy more. It's going to be awesome. We'll just get past it. But again, it's just one of those like, okay, you know what? Something's not right here. We've got to figure it out. And being able to take that step back instead of keeping the gas down, I know a lot of people probably got in trouble, you know, in that, you know, back 08, 09 and all that other fun stuff.

And it's kind of one of those like, all right, we know we want to be in this for the long haul. So we got to be honest about where we are and what we need to do to make sure we are still doing this in two years, five years, 10 years, whatever. All right. That's a great answer. Thanks, James. That's very good advice. Tell us, where can people find out more about you? The bigger pockets forums are a great spot.

If you're going to reach out and connect, though, please leave a message. I always like knowing why people reach out. It kind of drives me crazy. They just want to connect and I never get like a message and saying, hey, here's what. That's a great tip. Annoying or whatever. And so always leave that message. And then other than that, I'm on LinkedIn.

And then I'm on Facebook, but don't do a whole lot. Twitter casually there. And then I just started up on Instagram. So I'm going to start trying to be a little more active on Instagram with pictures of our properties and what's going on and stuff like that. What's your Instagram handle? It's just James. James Masadi 1313 or James dot Masadi 1313.

I sent it over to me. Again, I just started it like a week or so ago. It's I can send it over to you guys. We will link to it in the show notes as well, BiggerPockets.com slash show 312. And we will link to it there. But very cool. I was going to say one thing real quick.

For those who don't know what you're talking about, when you said you can find me on Bigger Pockets, people are like, wait a second. Like this is a podcast, right? So Bigger Pockets is a social network. It's like Facebook, Twitter, less cat videos, less politics, more real estate, right? So you have a profile on bigger pockets. If you are listening to this and you're like, wait, I don't have a profile.

Guess what? It doesn't cost anything. It's free. Go set up your profile. Then you can send colleague requests to people and you become colleagues, kind of like a friend, right? You can also follow people, kind of like on Twitter you can follow. You can have private message conversations, which is huge, right? You can upload your, like in your profile now, you can put deals that you've done.

Like there's a deal diary section, upload your deals. Then people can see what you've done. And all these things, this is part of the social network of bigger pockets. So if you are just a, you know, a podcast listener, I would encourage you and implore you to join James and like tens of thousands of other people every day on the forums and in the social network. Yeah. And it's huge. I mean, I think it's awesome. Critically important to have your profile be updated.

I mean, I have my deals in mind. I have an explanation of mine. I have the video in there because, again, it's what, you know, when you start seeing and following people who are posting regularly on the forums and contributing, you know, you want to be. be able to kind of go out and find more out about them, you know, their market, how they do things. And, you know, there's a number of investors that I've reached out to and had fantastic conversations via private message. So, like, the forums are, you know, just like the tip of the iceberg. You know, when you get into the relationships that you build and being able to do private messages, there was, there was a post that got a thread that got a couple hundred follows

a couple a while ago of like, like, where are all the bigger pockets members and things like that? And there were so many of them from a lot of these guys that have, you know, 5,000 to more posts. And they're like, yeah, we've been here a lot. We get a little sick and tired sometimes of asking a lot of the newbie questions because you can find those in the search bar, you know, but we're still here and we're still interacting with each other. But we tend to do it again in, you know, those private forums and things like that where we're having conversations with ourselves.

And I think the new goal book with like the mastermind thing, I mean, it's kind of like those are like almost like self-grown within those people. So it's like there's generations of bigger pockets users that have come in at different stages. And like you kind of get to know each other from seeing those, put their posts and and reaching out and sharing stories. And I think that's such a resource that people don't realize when they come in and they only do a couple posts and then they get out. They're not only experiencing such a small part of what the forums have to offer. It's so true.

So true. Well, dude, this was fantastic. Thank you so much for joining us today. Man, it's been great to hear your story, your journey, the struggles, the wins, the everything. Like, you're very open, real honest guys. So, you know, thank you. Absolutely. Thanks for having me on.

It's been a lot of fun. And hopefully people can learn from some of the experiences we've been through. and understand that, you know, when you have those hardships, there is a way forward. Yeah, you need to make a board game detailing the way you put your business together. It would probably be really complicated with lots of rules and take hours to play. All right. Well, thank you, James. This was a great interview today.

I think we got a lot of good information. I appreciate you having on here. Hopefully we can check back with you in a couple years and see how things are going. Awesome. That being said, this is David Green for Brandon Mike Tyson 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.

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