BiggerPockets Real Estate Podcast - 931: How to Build a Real Estate Portfolio from Scratch in 2024

Starting point is 00:00:00 This is the Bigger Puck's Podcast podcast show 931. What's going on, everyone? This is David Green, your host of the Bigger Pockets Trail State podcast. Join today by my good buddies, Dave Meyer and Rob Obis Solo. Excited to be here because many of our listeners have been asking us this one question that we're going to dive into today. They've been wondering how the three of us would start to invest if we were in their shoes. So that is what we're going to do today. We're basically the three of us are going to rewind to square one.

Starting point is 00:00:30 pretend that we do not have successful real estate portfolios and apply our current knowledge to the average situation and condition that Americans find themselves in today. Yeah, we're going to be doing this with some pretty stringent criteria here, and we're going to be starting from scratch on this episode, much like the board game life. So let's get into it. All right, to start the show, we all are going to be on the same page in the same position as aspiring real estate investors. So let me set the scene for everyone. We will have a salary. of $60,000 a year, which is the average salary in the United States. We will have $10,000 in our savings account.

Starting point is 00:01:07 No debt, but a car payment of $400 a month. We will be living with a partner and splitting rent with them. The rent is $1,500, so we'll each be paying $750. No kids, and we live in a tertiary market outside of a major metro with strong market fundamentals, often called an emerging market. The median home price in this market is $300,000, and our job is salary. so there is no overtime opportunities. We have a hybrid remote schedule, so we work in the office sometimes and from home sometimes. Rob, I know you hate starting off, so I'm going to start with

Starting point is 00:01:41 you. What's the first thing you're going to do? I know what you are going to say. So I'm going to change my answer here. And I'm going to say $10,000, in my opinion, doesn't really buy you much. I think there's several ways that you can get started in the world of real estate. But I think if that's all the padding you have, then getting into real estate out the gate might be a little bit risky because there's a little thing called CAPEX and maintenance that could destroy your life if all you had was $10,000 to sink into an investment. So yeah, I think if you're coming into this with $10,000, you might need to fortify the foundation, if you will. So I think the best way to really invest your $10,000 is education. And I don't necessarily mean high-ticket education. I don't

Starting point is 00:02:24 think you need to go and enroll in a big course or anything like that. What I mean by this, is I want you to go out and start networking peer to peer and getting education that way. And the best way to do that, there's a few ways. You can sign up for a BP Pro membership. Really, really cheap. That gets you access to our website. But even the free version of that, you get free access to forums where you can literally communicate with thousands of investors every single day. The second tier to this, if you do want to start investing a little bit of money, is you can, you know, 10,000 bucks gets you a couple tickets to some conferences, plane tickets, hotels. I think that's going to be the best way to invest, $10,000 is going around and going to different real estate conferences where you can

Starting point is 00:03:04 gather ideas and meet people. And then we can work on actually executing once we have a base education on what it is we actually are interested in doing. All right. Dave, I'm going to move to you shortly. Rob, before we do, I have one question for you. Are you cutting out the guac at Chipotle in preparation for your investing future? Well, hey, every little bit counts. And that's $3. So absolutely. Some people talk about it. Some people be about it. it. Rob is cutting out the guac. This is a serious man. He loves real estate. Hey, don't walk about it. Be about it. You know what I mean? Dave, moving to you. I'm not going to ask you about sandwiches because I don't want you to cry here on a podcast, but I am going to ask you, what's the first step that you would take towards investing. So the first thing I would do is try and figure out what type of deal I want to do first. Is it a house hack? Is it a short-term rental? And sort of get an idea of what that's going to cost.

Starting point is 00:03:58 So you would start with strategy, essentially. I would start with strategy. And the reason I would do that is because you need to assess sort of how close or far away you are from being able to purchase property. And as Rob said, $10,000 is probably not going to get you that far, particularly in this type of market. So if you were to buy the medium price home in this market of $300,000, that putting 5% down, you would need at least $15,000 just for the down payment.

Starting point is 00:04:27 and then you would probably need another $5,000 for closing costs. And then on top of that, you probably need at least another $5,000 for capex and repairs like Rob mentioned. So I think that little exercise is helpful in just seeing that right now, probably not super realistic for me in these conditions to buy a property on my own. So then I'm starting to think there's two different things that I could do. I can either figure out a way to save up another, let's say $15,000.

Starting point is 00:04:59 That might be easy for you. That might not. It's hard to say, given your situation. Or maybe the better option that I would probably do is try and partner with someone, whether that's on a house hack or on a single family rental or even on a flip, depending on your strategy. I would look to find an experienced investor where I can contribute some equity, maybe not even all 10,000, but maybe I can just put.

Starting point is 00:05:27 a little bit into this deal. Let's say I'll put five grand into it and I'm going to sort of shadow the experience investor and learn as much as I can from that investor, hopefully make a little bit of money on it. But really, to Rob's point, work on my education while I have probably a small piece, but at least I'm in a deal a little bit. I love that. Let me just add to that because oftentimes the answer is like, hey, go shadow someone and make them work by training you. In your scenario, you're saying, hey, I'll put a little bit of my money into this deal, which is pretty much everything for you in this scenario. That's skin in the game. The stakes are high. And so I think it's really, it shows a lot of good faith to be willing to do that if you're going

Starting point is 00:06:08 to go and partner with someone. All right. My first step would be to get my financial house in order. So I have a different take on real estate than some people. Like the Brandon Turner's of the world tend to say, you can't buy real estate. Be creative. Figure out a way to buy it. And for some people, that works. When I talk to the wealthy investors that I've met, the successful ones, they all have one thing in common, and it's capital. It takes money to invest in real estate, and real estate specifically requires more money than other investments do. Like your Apple stock doesn't have a roof that needs to be replaced. And if it does, it doesn't come from you as the investor. It comes from the funds of the company, and your dividends would just be less. But when you own the asset completely

Starting point is 00:06:47 yourself, like you mentioned earlier, you're going to be having to replace those pipes when there's a leak or that roof if there's a problem or that air conditioner when it goes out. So you really need to be in a financially solid position before you get super deep into real estate investing. And I know that everyone doesn't love hearing it, but it's the truth. And that's what we bring to you here. So the first thing that I'm going to do is get my financial house in order. I'm going to start with a budget. We're going to come up with a budget of what we're going to spend on food, gas, energy, entertainment, everything. We're going to have a plan. And then I'm going to download apps like Rocket Money. I believe Mint was one that was available before. I don't know if that one's still

Starting point is 00:07:22 around, but it's actually going to tell us how much money we are spending as a couple, because in this case, we're with a partner on our credit cards, and we're going to make sure that we're hitting that budget. So you earn the right to get into real estate investing, which we all like by starting by controlling your own expenses. And then I'm going to start looking for a job that pays more or opportunities at this job where I can make more. So if my boss says, hey, this is all we got for you. There's nothing more. Great. I got another 16 hours in a day. I'm going to go pick up a shift waiting tables. I'm going to go get my real estate license. I'm going to go look for an investor that's hiring someone to help with work. I'm going to do something to be financially productive during those

Starting point is 00:07:59 downtimes because we don't have kids right now to make more money and save more money. That will get that $10,000 that I have in the bank doubled and tripled much faster, at which case I'll feel more comfortable investing. Yeah, I think that I like that advice, David, and generally agree that trying to improve your financial situation won't just help with your first deal, but is going to pay dividends over the course of your investing career. We were on a show the three of us recently, and we were joking about how, because I have a full-time job, I am the most lendable out of the group. And I think that is something that people should consider is that if you're able to increase your salary or bring in just some more money that a lender can look at, that it's going to

Starting point is 00:08:45 help you throughout your entire investing career and it will set you up, even if that means taking a little bit longer before you get that next deal. So with that said, I guess, David, I mean, what would your, I mean, you're going to build up your financial fortress, if you will. What would be your first investment sort of once you did that? Are you going straight into real estate? Are you investing in, I don't know, equipment that might help you start a side hustle? Is that, is that where you're getting at? You might, you know, start something on the side here where you can make more money, what's your next move? Well, my first investment is going to be a race to a house hack.

Starting point is 00:09:19 If we're talking about a $300,000 median home and I could find some even less than that, I'm looking for the ugliest, biggest house that I could possibly find. I want to get something that already has four or five bedrooms that has space that I can add another bedroom to. This is my first deal. I want something that's been sitting on the market a while, terrible pictures, maybe has a tenant in it so other people aren't buying it. And I'm going to get that realtor and say, what do we got to do to get this house?

Starting point is 00:09:44 Do I have to wait for the seller to get the tenants kicked out? Is there an open unit that I can use a primary residence loan to buy it and then replace the tenant? Or is there something I can buy and rent by the room. When you're trying to get a foothold in real estate rent by the room is usually the first step and the easiest step to do. It's not sexy, which is why nobody likes to do it because no one likes roommates. That's my objection I hear all the time. Well, I don't like roommates. I get it.

Starting point is 00:10:08 I also don't like being broke. So which of the don't likes is worse? I'm going to deal with roommates for a period of time. So I'm going to find a big house, add some bedrooms to it. And if the average priced home is $300,000, I can get in with $9,000 down. I actually have enough right now with $10,000. I just don't have enough to do it and feel comfortable that I still have savings for life. So if I can get to $15,000, by working extra shifts and saving more money, I'm just going to go in there and I'm going to buy a house hack.

Starting point is 00:10:36 I'm going to live in a room with my partner and I'm going to rent out the other four rooms or five rooms to somebody else. And I'm going to start living for free. and now we're also going to be saving that $1,500 a month that we used to be spending on rent. Cool, yeah, that makes sense. House hack. I knew it. I knew it. That's a good one. I think that is a very, very strong answer or solution to anyone getting into it. I mean, I tell everybody, house hack should be everyone's first investment, but I also understand it's not everyone's cup of tea. Okay, we have to take a quick break, but stay with us. Now that we know the conditions we're working with and what our first step would be, what's next? What strategies would we use to grow our

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Starting point is 00:14:11 Yeah, it's so boring, I know, but house hacking is just the right answer. And I rarely give that sort of definitive advice. Most questions in real estate are like, it depends, it depends on your strategy and blah, blah, blah. But I think, honestly, house hacking is kind of a no-brainer if you're getting started, especially in the scenario that we've created here

Starting point is 00:14:34 where it's just you in a part. partner, you don't have kids, you would greatly benefit financially just from reducing your rent expenses rather than having to cash flow. And so there's a lot of benefits to it. So I just, I know that's boring, but we can end the podcast now. Let's make it a little less boring because there's different flavors of house hacking. We typically just say house hacking. House hacking is a principle. It is not an actual strategy. You can do like I said, rent by the room. That's a not a popular flavor. That's the broccoli flavor of house hacking. Then you've got something that's a little more sexy. You buy a fourplex. You live in a unit. You have your own. You rent out the other three.

Starting point is 00:15:13 That's a more enticing flavor, but it's just harder to find that kind of deal. We have the guacamole. Yeah, there you go. I have a little bit of guack to it, right? You've got the, have a basement that you live in and you rent out the rooms upstairs or rent out the house upstairs. You've got a house hacking with a short term rental component to it where you live in an ADU and rent out the house. Like there's different ways to do this. And some are more. sexy than others. I'm starting off with the least sexy one because that's the easiest way to get my foot in the door. But we should point that out that house hacking itself is a very generalized term and there's lots of different ways to make it happen. I'd like to point out a pre-house hacking

Starting point is 00:15:50 because in this scenario, you're probably living in some kind of apartment. I actually don't really think you need to buy a house to house hack. I think you could go and rent an apartment and then rent a room in that apartment. Great point. All I really want, yeah, all I really want from anyone that's doing the house hacking thing is try to get your monthly living expense as close to zero as possible. So if you're like, well, dang, I got $10,000, that's, you know, 9,000 of that is going to go towards a $300,000 house where the down payment's 3.5%. What about capex, you know, maintenance? That's still going to kill you if your AC goes out that first year, right? You're going to be in a really, really bad spot. So I'd even push people to think before that and say, hey, can I rent a two-bedroom

Starting point is 00:16:30 apartment where my roommate is covering a majority of that rent? And if you can get your rent down just close to zero, I think that jump starts your real estate career because pretty much at that point, you're saving your rent every single month, and that starts compounding pretty quickly too. There you go. Great point there. See how house hacking is like one of the only real estate investing strategies that pairs with financial independence, like principles of building wealth, as opposed to just ease.

Starting point is 00:16:56 Like, I bought a property. It makes a whole bunch of money and it's passive income and I don't have to do anything and it just makes me rich while I go do what I want. In today's market, it's definitely not like that. is we're starting over with only $10,000 and a $60,000 salary. We don't have the luxury of ease. We're going to have to get our hands dirty here. So, Rob, how are you going to get your hands dirty? Well, there's a couple of things. I think getting into this world of real estate investing, especially with $10,000 because I don't want to make it seem like it's nothing, but it really is a

Starting point is 00:17:24 risky place to be to put all of it on the line. So when I'm looking in the world of like real estate investing, this is technically not real estate what I'm about to say. It's a little bit more hospitality, but I do think it's a good way to get your feet wet, as they say. They do say that, right? Your toes, dip your toes in the water. I mean, your toes are on your foot, David. Come on. So I would probably push someone towards co-hosting. And co-hosting is basically property management. There is a small difference here. Typically, property managers collect money on behalf of the landlord, and then they remit it. There's like licenses and, yeah, that gets a little bit more cumbersome with the paperwork. But a co-host on the short-term rental side is someone who actually has the login

Starting point is 00:18:07 info. They actually have access to a landlord's property. And they can list that property on different OTAs, online travel agencies like Airbnb, verbo.com, booking.com. And you can manage someone else's short-term rental property and basically give up your time. In exchange, you can charge a percentage on that monthly gross revenue that they're bringing in. And if they make $0 that month, you make $0.00. that month. But if they make $5,000 that month, let's say you're charging 20% management, which is pretty standard, you'd make $1,000. And that's super, super, super low risk versus other forms of the short-term rental side like arbitrage where if you make $0 one month, but you're still going to be on the hook for your monthly rent. So for me, I kind of like that idea because if you can

Starting point is 00:18:53 build up a co-hosting business, which again is not on the nose real estate, it's more hospitality. you can build up a bank account from there and eventually use that to parlay into actually purchasing a short-term rental property. Very, very nice. You're also going to get some experience in real estate that's going to gain some confidence. Dave, you see any, you want to poke any holes in that? No, I think it's a great idea. People should be looking for ways to both invest in their actual physical assets and in their income potential. So I'll just add one. Something I actually did myself was in to achieve the same outcome that Rob was just talking about, which is building up more assets with which you can invest. I personally, uh, I think like three or four years into

Starting point is 00:19:37 my investing career, decided to go back to graduate school. I chose a low cost state school with in state tuition. I invested probably about 10 grand, took on some loans, but it was probably the best ROI I've ever gotten on an investment in my life. It doesn't work for everyone. It depends what field you're in if you like what you're doing. But if you do like what you're doing, you should consider investing in education that could also increase your income potential. Now, you still need to learn a lot about real estate at the same time, but there are real big benefits to getting a salary or a larger salary and using that as sort of a financial foundation from which to invest so that you can order the guacamole at Chipotle and also buy

Starting point is 00:20:22 duplexes at the same time. It's actually refreshing to hear you say that because I do feel like the popular thing in the real estate community is like, don't go to college. It's a scam. They charge you 60,000 and you're still paying it off. But it's true. Like the ROI on that is great. It's led to you having a higher salary, which allows you to invest in more real estate. Totally. And like we've talked about college on a bunch of, I've, the Bigger Pockets Money show. And it's not always worth it. It really depends on the decree you're going after the school you pick. So, but I agree. Like, if you're in the right field, and you choose the right school, it can be great. If you're in the wrong field and you choose the wrong school, it could be terrible for your finances. So you just have to be thoughtful about it.

Starting point is 00:21:02 Totally, totally. All right, Dave. So you've bought your first property. We've all agreed it's going to be a house hack. Tell me what kind of house hack do you think you got? And what's your next step from there? If I could pick, I would look for not the rent by the room. I think it can really work.

Starting point is 00:21:18 But if you can find a duplex or triplex, it's going to be less operational intensity. Like it's just a little bit easier, I think, to rent out multiple units. I know that sounds different because you have multiple tenants, but you have people living in separate spaces. I think it's just a little bit easier. So I would choose a duplex, a triplex, or a quadplex. And I would look for something that has some sort of value add upside.

Starting point is 00:21:47 And that is similar to what David said, where you might be looking for something that is underval. valued or needs ideally if you could find something that just needs a cosmetic upgrade, that to me is the perfect situation because those are skills and those are upgrades that most people can do themselves or learn to do themselves. Anyone can learn to paint. Most people can learn to put down luxury vinyl plank or, you know, laminant floors. And that's how you can really start to build some equity in the property.

Starting point is 00:22:20 And the key and the reason you want to build equity is because if you want to get to that next deal and you're earning 60 grand and not in your savings rate is hopefully positive but not great, you're going to need to find a way to build up in more cash to get into your next deal. And a good way to do that is through value add or forced depreciation. People call it different things. But if you could do that in your first house hack, then refinance in a few years, I think that's sort of the one to punch. You get more equity in your first deal and a great house hack. and then it gives you sort of a springboard to your second deal and hopefully subsequent ones after that. I have a small variation on that. I mean, maybe it's, I guess it could be the same thing. But yeah, I might consider just going right into the live and flip, which is kind of what you're alluding to a little bit, right, Dave?

Starting point is 00:23:06 Yes. Yeah, very similar idea. Yeah, and that's basically like this again, not everyone is going to be willing to house hack. Like, I think typically if you have a spouse, the spouse may not be down and I totally get that, right? And so for me, I would probably just, as much as I, I always have a lot of respect for investors that rent and buy an investment property versus buying their own home. But I do think that doing a live and flip where you can force equity and force appreciation is a really, really powerful move because, you know, you can get into that house super, super cheaply. And then as soon as you're able to save up money, you're able to put three and a half percent down on the next house and

Starting point is 00:23:44 turn that house into a rental. It's just a tried and true method. And, you know, And that's what I did for myself. And using those skills, the DIY skills, using my co-hosting skills that I built up when I first got started, that's how I was able to really pitch investors and people to actually invest in me whenever I'd skilled up to the next property. So, Dave, you're looking at, hey, I got to get some equity in addition to keeping my housing expenses low. Yeah. Otherwise, you're going to be waiting a long time to buy your second deal. I think if you could just buy the house hack and hold on to it for a while. That's actually what I did, but it's something I regret because I sort of just bought it, took the cash flow because I was young and needed the money. And I was like, this is great.

Starting point is 00:24:26 I'm making a couple hundred bucks a month. And then a couple years later, I was like, man, if I had done some more thinking and built some equity, I could have built my portfolio a lot faster. So I think you have to sort of strike the right balance there. It's a really good point. I love that while you are helping yourself right now by saving money, you're also thinking at the same time I'm going to be thinking about the next one. And if I can get equity, coming from this property, that could be the down payment and more for the next property. And you also made a really good point. That's another real estate principle worth repeating. Equity is easier to build than cash flow. Cash flow is very slow. It's very difficult and it's

Starting point is 00:25:00 outside of your control. Market rents are going to be what market rents are. And oftentimes expenses are outside of your control. Like can any of us prevent our insurance from doubling on our properties or property taxes from going up? You can't. But equity does tend to be something you have more control over. You can add additions to a property. You can improve its condition or you could buy it at a good rate. So I love that. That's how that snowball starts to get built. The reason I like the live-in flip and why it worked so well for me is because the equity that we built up, you know, what you're talking about here, allowed me to get a he lock, a home equity line of credit that I was then able to use to build new construction properties, whether it was my ADU or a tiny house, you know,

Starting point is 00:25:40 right outside the city. And that really unlocked a lot of things for me too. So it kind of kind of gives you this HELOC funding option for future projects that I think then you can use to really attack the real estate portfolio. All right. It is time for one last quick break. But when we come back, Rob walks us through exactly how he pitched a potential funding partner when he was getting started and why that approach still works today. Stick with us.

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Starting point is 00:29:01 Stop letting outdated lending practices hold you back. That's hostfinancial.com, where your property's potential meets unlimited financing. Welcome back to the Bigger Pockets Real Estate podcast. Let's pick up where we left off. So what are you going to do for your next option? You've got your first property, Rob. What kind of property did you get? What's your next step?

Starting point is 00:29:20 Well, my next step here is I'm just trying to build a little bit of experience and a little bit of like know-how in this space. But 100%, I mean, regardless, we started with $10,000. So it's not like no matter how hard I work, it's not like I'm getting to like $100,000 overnight, right? So what I'm trying to do is just build my skills, build my experience, and my confidence to then go out and find a partner that will then fund the next rental property that I buy. In my case, it's a short-term rental, but I mean, it could be a long-term rental.

Starting point is 00:29:53 I think it gets a little tough, right? Because when you're bringing in private money partners, typically they're in it for the cash flow. So I would go and I would raise money from a private money partner and use that to acquire my next short-term rental. That way I can get out of the co-hosting space and actually get into ownership where I have all four benefits of real estate ranging from cash flow, tax benefits, depreciation and appreciation, or debt pay down and depreciation, sorry. So flesh that out for me a little bit more. Like what kind of a split do you think you're going to offer your partner? Who are you going to look for? How are you going to pitch it to him? Okay. So you don't really have too much of a leg to stand on because you don't have a lot of

Starting point is 00:30:28 experience in this scenario. So here's the exact thing that I pitched that I think is super fair. In this point of my career, I regret it a little bit, but I don't think I could have done it any other way. So what I told partners going into this was I will find it, I will run it, I will manage it, as long as you fund it. So you fund it, I find it, I run it. That's kind of the arrangement. And what I would say is I'm going to do a 50-50 partnership on equity and on cash flow on the entire property. However, because you're the one that's putting up all the risk, I will take zero cash flow from this deal until your investment is paid back. Once your investment is paid back, I will then start taking distributions 50-50 with you. I think that's a really fair deal.

Starting point is 00:31:18 It kind of keeps you broke for a little while. It doesn't solve the cash flow problem, but it does build a little bit of confidence. And it puts the onus on you to perform super well for that investor, because the better you perform, the faster you'll get paid. That's a great point. I love it. I especially love that you're willing to take zero. cash flow. They basically get a preferred return of 100% until they get paid back. That's a tough deal to beat. Yeah. Well, you know, like I said, these days, I'm like, well, should I have done that? But it gave me my start and it helped me format like the types of structures that I would go on to deal. Well, that's the scenario. We're talking about getting started. I think this is a perfect

Starting point is 00:31:53 mentality, Robin. I think it's a smart structure. And honestly, if in your first deal, if you just break even, you're probably going to be happy and learn something. And I know it's tempting and desirable to have 100% ownership or something or get all of the upside in your first deal. But if you're in this scenario where you only have $10,000 and you aren't able to get a property on your own and have full ownership, you need to just be realistic with yourself and realize that anything that's going to improve your financial situation is going to help you in the long run, even if it's not a home run or a grand slam right off the bat. Yeah, I mean, the more you do this, the more you partner with people, the more of a rock star you can be and actually have results, the easier it will be to continue

Starting point is 00:32:39 doing that with other people. And you start building up references and rapport. And if you can treat one investor really, really right, you know, it kind of leads to more opportunities down the line, too. I think a lot of people get hung up on, well, that's not fair. That's not fair to me. It should be 50-50. Everyone has their own definition of fairness. The best advice I offer there is that market determines what's fair. What's a fair price for your house? It's what the market's willing to pay. The reality of life is that nothing is actually ever going to be fair. And when you're a new person, you're going to give up a lot more than an experienced person can. And as you become an experienced person, you may come back to that same person you partnered with before with the deal that's better for you and not as good for them.

Starting point is 00:33:17 But that's market value. Because if they say no, you could find somebody else that would be willing to do that with you once you've got three or four properties that you're working on. So don't assume that when we're starting from scratch here, the way we put a deal together is the way we're always going to put that deal together. It's going to evolve just like the price of homes evolve, just like the rent that you collect on a home evolves, just like your expenses are going to evolve. It's always going to change. And so you're always asking yourself the same question, well, what's market value right now? Let me add one thing. It doesn't have to be, because if some people might hear this and say, well, I really need the money, I think there's other ways you can work that out. You can say, hey, you get 75 percent, you investor get

Starting point is 00:33:54 75 percent of the cash flow. I get 25. And then once your investment is paid back, we waterfall it, meaning we change the splits to 50-50. So I think that part's always flexible. You just have to feel it out. One of the biggest mistakes I ever made was I didn't have that much experience. I pitched my father-in-law's brother, so I guess my uncle-in-law. And I gave him horrible terms because I was like, all right, I know what I'm doing. You get 20% of the profits.

Starting point is 00:34:19 I get 80%. And then he was like, whoa, bud, you're a nobody. You don't have any experience. This is a horrible deal for me. And it really, I was like, oh, okay. Yeah, maybe I need to feel. learn how to feel out investors a little bit more. So I think you'll know once you kind of get into those conversations with partners. Rob, that's awesome. I was just going to say something similar to that.

Starting point is 00:34:37 It's like, like David said, people want fair. Well, think about what your partner wants. Is it fair for them to get an equal deal with someone who is inexperienced in real estate? Right. Kind of have to think about, like as the partner, they can invest that money in a lot of different ways. They can invest it with you. They can invest it with a more experienced. experienced operator, they can invest it in the stock market. And to be perfectly candid, if it is your first deal, you are by far the riskiest option out there. And so the only way to attract an investor is to give them sort of an unfair deal in their favor to compensate for that risk. And to David's point, that is market value. Your market value when you are a brand new

Starting point is 00:35:21 investor is low. And that's fine. That's just how it goes. But you just kind of have to be realistic about that. Totally. Yeah. Yeah. Hey, I was a risky, I was a risky boy. It would have worked out, but I totally, that's 100% correct. What about you, David? What would you do? What would your plan be? Mine is what I call the sneaky rental. The sneaky rental is a strategy that I like because it's covert and tactical. I'm just kidding. Basically, it takes advantage of the financing of real estate, which is one of the most important parts. So the difference between putting 20% down on a property or 25% down and 3% down are astronomically different. I mean, you can literally buy seven times as much real estate putting 3% down instead of 20 to 25%. It's a good way to put it.

Starting point is 00:36:08 Right. So I'm going to take advantage of that, which means I have to buy a primary residence, which means I'm going to be buying a new house every single year, which means I'm always going to be house hacking and I have no problem with a boring, repeatable, predictable, systematic approach to how I'm going to build wealth. I'm going to buy that house. I'm going to rent out the rooms. Next year, I'm going to do like Dave said. I'm going to try to buy a triplex or a fourplex. If I can get one, I'm going to get one. If I can't, I'm going to buy another big house and I'm going to rent the rooms out again. Now I've got two houses that I'm renting rooms out on. I'm going to get some software that makes that easier for me to do. I'm going to learn how to be a

Starting point is 00:36:41 landlord, the old-fashioned way and handle this stuff myself. And then next year, I'm going to do the same thing again. You could get conventional loans with 3% down, which are usually better than FHA options at 3.5% down because on an FHA loan, you're going to pay the MIP, which is like PMI and FHA loan forever. It doesn't matter what your equity is in the property, but on a conventional loan, it's going to drop off when you hit that 80% loan to value ratio. So I just have to make sure every year I can save up another 3%. Now, if I'm not having a housing payment, like you mentioned, Rob, and I'm keeping my budget

Starting point is 00:37:13 in control, I can probably save up more than 3% every single year, which means I can always buy another house if I'm willing to be uncomfortable. I'm always moving into a new property. No one likes moving and no one likes roommates. Get over it. that's what it takes when I got nothing and I got 10 grand in the bank and I need to move forward. Now, in 10 years, I'm going to have 10 properties. My goal is to buying the best locations I can and add as much equity as I can to every single deal.

Starting point is 00:37:38 Just like you said, Dave, I'm kind of adding all of this together here with my strategy. That's the benefit of going last. You get to take everybody else's great ideas and working in the years. No, it's good, though, because, you know, in your strategy, how many houses do you have at the end of five years? Yeah, I've got five houses. And I've got equity in each one. If I have a hundred grand in every house, even 50 grand in every house, I've got a quarter million dollars of equity.

Starting point is 00:37:58 I started with $10,000 to my name. And I'm just going to keep going. For 10 years, I'm going to do this. And then I'm going to reevaluate. And you know what? That 10 year rule of you can't keep getting more properties, that only applies to investment properties. You could get a loan on a conventional loan with more than 10 finance properties if it's a primary.

Starting point is 00:38:15 So what I keep telling people is you got to buy a primary every single year. Before you do a short term rental, before you do a burr, before you do long distance investing, before you do any of the sexy stuff we talk about on this podcast. Get a primary residence. Get it in the best neighborhood you can. Get the best deal you can. Add as much equity as you possibly can. Do the boring thing. Eat that broccoli first. And I'm going to start off behind all the other investors and I'm going to pass all of them up, just like the tortoise in the race, because I'm going to keep taking action every single year. It's a great strategy. I want to just like, I know it may not sound a lot for a lot of people. I just want to make sure, like five houses is a lot if you're doing this, this method. because in 10 years you have 10, and 20 you have 20, and 30 you have 30. That's like you will be a multi-millionaire by the time you retire if you actually execute this strategy.

Starting point is 00:39:04 So I really don't want people to think, oh, one a year. That's just like your foundation. You're just doing that as like the base, but you can do so much auxiliary real estate on top of that. And it starts to just snowball so quickly. Well, I'm probably going to hit a point if I'm doing rent by the room where I've got seven houses and then I've got four tenants in every house. That's 28 tenants. That's crazy.

Starting point is 00:39:24 I don't want to keep doing that. So I'm going to take the four that have the most equity with the lease cash flow, calculate the return on equity, and I'm going to sell in 1031 those into that big, bad, short-term rental that I really wanted to get. Now I've got one property instead of four to manage that eliminated, you know, 20 of my tenants or whatever the case was. And then I'm going to make sure that, like Dave said, I keep buying and building equity on every single future deal so that when I do feel overwhelmed,

Starting point is 00:39:49 I just take all those little houses and I 1031 them into a hotel and then I keep buying more houses in the future. Yeah, totally. I'd love to toss out an idea for scaling here. And again, I don't really love selling real estate, but I do think it could work in this scenario. There is that rule where if you lived in the property for two out of the last five years, you can sell it, I believe, without capital gains taxes. You could do that for whatever properties you want to within that five year period and use that money to then actually. start in acquiring more aggressive types of properties. Maybe it's bigger triplexes, quadplexes. Maybe you use those funds to actually execute a burr or rehab. But I think that's where you can start getting a little bit experimental with your equity. Wonderful. But the key is you always got to have more equity because equity creates options. Yep. And a lot of fears people have, what am I going to do when I have all these houses? What am I going to do when I'm stuck? If you have equity, you have options and you can move it around. I think that's so true that equity is extremely

Starting point is 00:40:45 flexible and gives you the best liquidity options to take advantage of future opportunities because none of us really know what they're going to be. But if you have liquid equity, you're always sort of in a ready state to take advantage of whatever comes up. There you have it, folks. Rob, Dave and I figuring out how we would start from scratch, $60,000 salary, $400 car payment, $10 grand in the bank, just a little baby bird trying to figure out how to fly. This is how we would soar like Eagles. Let us know in the comments what you would do if you think that there's a strategy that we missed. And if you're listening to this where you listen to podcast, please subscribe to this show. If you're enjoying it, we would appreciate it a ton. Anything you guys want to add

Starting point is 00:41:30 before we get out of here? I'm just going to say there are definitely other more aggressive strategies out there. You could go right into flips and do like hard money lenders that will loan 100%. I think there's a lot of ways to do that. You can do wholesaling. I just think that everything we talked about is the most practical and a conservative but really amazing way to get started in real estate. So I'll leave it with that. This is practical. I think anybody could do this. All righty. I'll let you guys get out of here. This is David Green for Dave's Start with Sandwiches Meyer and Rob drop it like it's guacobas solo. Signing off. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls,

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BiggerPockets Real Estate Podcast - 931: How to Build a Real Estate Portfolio from Scratch in 2024

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