The Science of Flipping - Episode 28: Flipping to Cash Flow | Real Estate Investing Podcast

Episode Date: March 14, 2014

document.addEventListener("DOMContentLoaded", function () { podlovePlayer("#player-5eb5ab322b42a", "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/post/484", "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/config/default/theme/default"); }); <p> document.addEventListener("DOMContentLoaded", function () { podlovePlayer("#player-5eb5ab322b485", {"title":"Real Estate Investing Podcast u2013 Episode 28: Flipping to Cash Flow","subtitle":null,"summary":null,"duration":"","poster":null,"chapters":"","transcripts":"","audio":[{"url":"http://thescienceofflipping.com/audio/Podcast-Episode-28-Flipping-to-Cash-Flow.mp3","mimeType":"audio/mpeg","title":"AUDIO/MPEG","size":0}]}, "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/config/default/theme/default"); }); <a href="http://thescienceofflipping.com/wp-content/uploads/2013/09/itunes-justin-colby.png"><img alt="itunes-justin-colby" src="https://thescienceofflipping.com/wp-content/uploads/2013/09/itunes-justin-colby-150x150.png" width="150" height="150" /></a></p> Justin interviews Matt Theriault of the very popular Epic Real Estate Investing Podcast. Justin has Matt on this call because Matt focuses on buy and hold properties and how to create incredible wealth by keeping a couple of your flips for yourself.  Matt is the cash flow expert, you don’t want to miss this. If you’re interested in learning more from Justin please go to www.thescienceofflipping.com.

Welcome to the Science of Flipping Podcast. I'm your host, Justin Colby. Welcome, welcome, welcome everybody to the Science of Flipping Podcast. I am your host, Justin Colby. Welcome back for another incredible week of the science of flipping. I can't believe we've already made it to podcast episode 28. It's gone by so fast, and I know all you loyal listeners out there continue to email me questions, which is great. If this is your first time listening to the podcast, be sure to get over to the website, thescienceofflipping.com, and download our free e-book, The 15 Most Costly Mistakes You Can Make as a Real Estate Investor in This Market. Now, I have a special guest on the line here today. Matt Theriault is in the house today. And I know that he and I both wish we had this free e-book when we first started.

We would have made more money quicker and made less mistakes. So be sure to get over to the website thescienceofflipping.com to download your free ebook. While you're there guys, I know I get a lot of emails from people who are basically asking me a bunch of questions and I am happy to answer all those questions. In fact, we have an ability to work together a lot of the times. So if you have an interest in working closer with myself and my team, feel free to get over to the website. And there is a coaching tab on that website. And go ahead and email my assistant at info at the science of flipping.com. Again, it's info at the science of flipping.com. And I'm happy to answer any and all your questions and see if there's a possibility of us working together. Again, our podcast here, guys, today is all about creating the systems in your business

so that you don't have to feel like you're doing everything. And like I said, I have a guest on the phone today, Matt Theriault. He is the king of the buy and hold model. And I brought him on to this podcast and I'll introduce you to him because I think he brings an incredible amount of knowledge about how to take the properties that you would potentially wholesale or even flip and turn that into an incredible rental portfolio. So I want to just get straight into it and say what's up to my friend Matt Theriault. How are you, sir?

Doing great, Justin. Thanks for having me. Happy to be here. Right on. Right on. Well, let's hear a little bit about your story. I know you and I were able to catch up and get to know each other pretty well, but I think all of my loyal listeners would love to hear a little bit more about who you are, what you do, and how you do what you do to make you such a great success today. So if you don't mind kind of introducing yourself and your history and how you got started, that'd be great.

Certainly. I'd be happy to. Yeah, when I got out of the Marine Corps, Justin, I spent the next 13, 14 years of my life in the music industry, living my dreams, pursuing my passion, and just partying at night and recording during the day. It was a great, great experience, a great life. In the last couple of years, we were generating about six figures a month. We've never really hit any pop type of success, but we did have a really good formula in place where we could sell 30,000, 40,000 records and make a significant profit.

That was going really well. I didn't think I was ever going to do anything else. I thought I was on my way to being Puff Daddy. It was my ambition. Eventually, that formula that I had it started becoming less and less effective and we went from averaging 40,000 units that 30,000 units to 20,000 units and all that kind of happened relatively quickly within a six to eight month timeframe and I just kept on throwing more money

at the formula kept on throwing money at throwing money at it trying to get it to work again and it just didn't and to the point where i hit rock bottom i was ran out of money i filed bankruptcy i got divorced and there i was at age 34 bagging groceries for seven dollars an hour and after about uh about amonth-long pity party, and I was really good at the pity party too. Aren't we all? Yeah, you wanted to stay away from me at that moment. I brought you down with me. But there was one day where an unlikely source was actually the grocery store manager had come to me,

and he had said, you know, Matt, I noticed that you're down and I can't have you on the floor like this. With his attitude, what's wrong? What's going on with you? And I told him my whole story, the same story I just told you right now. And he called me up to his office and he says, okay, take a look at this. And he kind of pulled out a piece of paper and he started making these diagrams and everything. And he says, you know, I've been working at this grocery store for 28 years. I've got two years until my pension. I'm going to go ahead. I'm going to retire and have that full pension.

But along the way, I've been able to acquire all of these apartment buildings. And he said, I'm going to have the most amazing retirement. I'm only going to be 49 years old by the time I retire. And I get to live the rest of my life while I'm still young and vivacious and active and with complete financial freedom. And he said, if you want your money back and you don't know what to do, I'm going to recommend that you participate in the final frontier where the average person has a real shot at making wealth.

And he kind of said it like that. It was almost a sales pitch. I was waiting for the punchline to be hit over the head with the sales pitch, but nothing ever happened. He was just so energetic and enthusiastic about real estate and what it was going to do for him. At that point in my life, I didn't know what else I was going to do. That was the best option that anyone had ever given me in the last six months, or the alternative to entertainment.

So that night, I grabbed a bottle of wine and went home and just started Googling. I started Googling how to get rich, started Googling wealth, started Googling real estate, started Googling all this stuff, and finally decided that, okay, real estate, that's where it is. I've been able to find enough information that confirms what my grocery store manager told me. So I did what I thought the logical thing would be to do, was go and get a real estate license. And within 48 hours, I was in school to get my real estate license. And I did really well. I worked my butt off the first year. I got Rookie of the Year in my office.

And the following year, I did better. And the next year, I did better. And the next year, I got Rookie of the Year in my office, and the following year I did better, and the next year I did better, and the next year I did better. And I was making good money, but I certainly wasn't making my music industry money. And there was one pivotal day where it was a Saturday, and I had an appointment with a client, a very specific client, my favorite client, because he gave me repeat business over and over and over again. And, you know, you are a real estate agent at once, Justin. You know what it's like if you just have one client.

They keep continuing to give you business over and over again. You don't have to work too hard for it. Those are the kind of customers that we wanted. And we had an appointment set for him to come in and sign some paperwork. It was on a Saturday. I think it was around 11 o'clock. And I showed up in my suit and tie like I always did, and I had all the paperwork laid out on the paperwork. It was on a Saturday. I think it was around 11 o'clock. And I showed up in my suit and tie like I always did. And I had all the paperwork laid out on the desk. And I'm looking at my watch.

And he was five minutes late. And I looked again. He was 10 minutes late, 15 minutes late. He got there about 11, 11.20. He shows up in jeans and a T-shirt, signs all of his paperwork, and says, see ya, and took off to go enjoy the weekend. And I was just looking. I was like, wait a minute.

Something's not right here. I'm working my butt off. I'm in real estate. I'm supposed to be making all this money, but I'm working 70 to 80 hours a week. And this guy just comes and signs his papers and takes off. And I started really just analyzing and looking at the numbers and looking at the HUD statements of all the transactions I'd done for him. And I was like, no wonder this guy never, you know, tries to negotiate down my commission. I always get my 3%.

Sometimes I get 6% and sometimes 7% here and there. And no wonder this guy's making 25%, 30%, 35% every single time he does a deal with me. And I just started to think, wow, if real estate is where the money's at, if this is the final frontier, then I think I'm sitting on the wrong side of the desk. So I decided that day, I was like, okay, I'm done with the suit. I'm done with holding open house. I'm done with sitting around waiting for people making a whole lot more money than me to come and sign paperwork,

and me have to go process their paperwork and shuffle their paperwork. And it just hit me that I'm not a real estate investor. I'm not a business owner. I'm really just a customer service representative that helps people process their paperwork when they buy and sell houses. And that was a big epiphany for me. Sure. And I'm sure you can relate. Of course. So I, yeah. And as you know,

also, you know, becoming a real estate agent does absolutely nothing to prepare you to become a real estate investor. A lot of people think there's a lot of similarities, but they're very, very different. They're the world apart, actually. And so I made a large investment about a week later in my own real estate investing education and I was committed. It was a big chunk too and I was like, okay, I'm going to spend this. I got to do everything that they're going to tell me to do. That was the big conversation I had with myself. And so I did. And I did something that they called moving at the speed of instruction. And so we went there and they said, okay, start mailing here. And so I was just told

to do it. so I started mailing. Then go knock on these doors, and I went and knocked on those doors. I just started moving as they instructed me to do. And gosh, within 60 days, I had my first deal. I took a small single-family residence, turned it into a fourplex right here in Long Beach, California. And I had some partners on it, but I walked away with $22,000. And I was like, wow, that's pretty cool. That was good.

But it took about eight or nine months before I found my next deal. And that was a long, painful experience. And then that's when I stumbled across the book Rich Dad, Poor Dad by Mr. Kiyosaki. I'm sure we've all read that at some point. Of course. And it was a life changer because I'd heard of things called, I'd heard of passive income,

but I never gave it a whole lot of thought of what that was until I just really started to look at my own life and what I was doing and whether I was generating active or passive income. And by applying the principles in there or matching up what I'd already known how to do through my education and just kind of shifting my mindset from this fixing and flipping idea to this buy and hold type idea to create residual income,

in three and a half years, I was out of the rat race. I was financially independent. I certainly wasn't wealthy. I wasn't, you know, living my dreams or anything like that. But I was in a position where I had options. I didn't have to get up and work if I didn't want to. And that's really where life started to, you know, catapult forward with great velocity is when you get to the point where you don't have to work.

Right. I would agree. Yeah. So, so at that point I had, um, I think I had about 40 units under my belt in like four or five different markets. And it was kind of cool because I had real estate agents working for me in those four or five markets. So I felt like I'd kind of arrived because I'd gotten to the other side of the desk. And, you know, and I'm sure you've experienced this too, Justin, when you start experiencing any sort of success. You know, there's no shortage of people that want to pick your brain. There's no shortage of people that want to take you out for coffee, that want to buy you lunch and find out how you do what you do.

And I just saw another opportunity to create another stream of passive income. So I have this real estate portfolio that's paying for my existence. So let me go create another stream of income. And I got into internet business and created a real estate investing course and created that. And then between those two things, they kind of fed each other. So, the more I taught real estate, the more real estate I actually went out and did. And the more that I did, the more stuff I had to teach. And those two things fueled each other for me. And right now I'm standing today, I have over 220 rental units

in six different markets in the United States. Wow. That's impressive. That's definitely impressive. I know you and I talked at length about kind of the hedge funds that come in and buy thousands of rental properties. But for any one man in business like yours, you've definitely knocked the ball out of the park. That's incredibly impressive, no doubt. Well, I appreciate you giving us a synopsis of how you got started and how you got here,

I guess, so to speak, but one of the things that I would like my listeners to know is simply how you were able to leverage the deals that you were finding and how that turned into building a portfolio that you have today with over 200 doors. Because I think that's important as most of my listeners tend to be wholesale flippers and or complete fix and flip flippers. That sounded funny. We tend to buy our own properties and or if it doesn't really fit our model, we'll wholesale them. So how have you been able to leverage your ability to find deals into the ability to really have an incredible rental portfolio? Well, in the beginning, whether you're fix and flipping or wholesaling or buy and holding, to find a deal, that process is almost identical. I did direct mail.

I didn't have a whole lot of money for the budgets that I hear people spend today. I really couldn't have fathomed spending that much money because I didn't know anybody that was doing that. I didn't have any evidence that that would work. I did what I only knew how to do. I knocked on doors and I networked. I created my whole business that way. I generated all my leads that way. And then I'd go to real estate investor clubs.

One of my favorite things to do at real estate investor clubs was when they have their needs and wants section where you get to stand up in front of the room and get the microphone, you get to tell the whole audience what you needed or wanted. And in the beginning, I started asking other investors if I could wholesale their properties. And that's really how it really got started for me after that first deal.

I picked myself back up and got the momentum going again. Is that wholesale other people's deal? But what I would do is I would, although I'd wholesale them, I would really leverage once they gave me permission, I leveraged that property that they gave me to wholesale. And I'd just create massive amounts of marketing material, like flyers. I'd put it on business cards. I was a big fan of 1-2-3 print, and I'd put them on business cards. I would go on Craigslist. I'd go on to all the online sites.

And then I would just have my, what you call it, I'd put the little specs of the property on there, of course, and then I'd just drive them to a website, a landing page. And then those leads would just come in, and I would just follow up on those leads, and I would start talking to people. And that's how it really started for me. And so once I got those deals, and I would start finding people with opportunity

and with deals and properties to sell, I'd put them under contract, very much the way we do in our wholesaling. We put it under contract and we're going to go out and find a buyer. But I was taught that when you get a property under contract, you want to do it in a way where you get it at, you want to get control of one of two things. You want to get control of the price or you want to get control of the terms. And I kind of defaulted to, I was a little bit afraid in the beginning to ask for such steep discounts. I just thought it was kind of insulting.

I had this belief system, like who in their right mind would sell me their house at 50%, 60% of fair market value. So I would offer them pretty close to what their house was worth, but I just started crafting really creative terms. So I'd give them an option. I'd say, you know, hey, I'll give you $1,000 a month for 10 years and then whatever's left over, I'll give you the balance then. Or I would give them, give me a 10-year loan amortized over 50 years at 7% interest. Or I would go, okay, so you want $100,000 for that?

I'll just divide it up into 300 payments. How does that sound? So I was getting like three completely different options, and I'd just make these terms that allowed me to cash flow that property. And people, I just found, maybe it was because my conviction or my belief was behind it, but they saw on paper that they were getting the price that they wanted. But I was getting the terms I wanted that allowed me to cash flow property. Now, would you put any money down when you would create these creative terms? Sometimes.

But this is the other big secret I found out, is that it was really easy to find private money if I had control of the deal first. So if I went out and created some terms and say I did have, I'd say I did give them 5 or 10% down, but I figured out based on the payments and the cash flow, say I was going to get, you know, a 25% cash on cash return. It was very easy for me to go and take that approved agreement and show it to a private money lender and say, loan me the 10% down and I'll pay you 10% interest

on that. So now I was kind of working arbitrage where I got a 25% return, I borrowed for the 10% so I was making 15% free and clear. And so that's where my whole strategy, okay, just get control of the contract or just get control of the deal. Get the property under contract, get the terms, and get those terms to be a really nice cash-on-cash return. And now I know what I can go out and shop to private lenders,

and that was friends, family, and fools, basically, is how I started. And I was able to give them a really favorable return. That return was recorded as a trust deed against the property. So they were secure. They were more secure than they were in the stock market or the bank. And I just kind of went through this educational process. And then at that point, once I got a handful of those private lenders on board,

what I did was I just made sure they got their money every single month and that they never had to call me. That was my big mission. And so when I did that, then I started to get referrals. Then they started to say, well, I have some more money. Do you want to do another deal? And I think this kind of snowballed. And so I just had this whole belief around, wow, all I've got to do is give them their money back. And they keep giving me more money or they give me their friends that have money. And that's how the whole thing has built. Now, it sounds like you really focused a lot on the sellers being creative, right? Which is, you know, when you and I, and especially i started back in the short sale

days where that really wasn't the option there was not going to be any creativity to the bank saying yeah sure i'll carry the note for you right not in those times um right so when you're being creative with a seller how are you coming up with your creative solutions or what would make you dictate what type of creative solutions, like a seller carry, you know, you mentioned 300 payments of a certain amount. What dictates what type of offer you're making

and how creative you get? Perfect. Okay, so I had a formula in my head. I had to meet a minimum cash on cash return. I called them my minimum deal standards. And so my minimum deal standards was 33%. That's what I was, I just wanted 33%. That meant no matter how much money I put into the deal, I would have 100% of my money back out within three years. And then after that would be 100% profit. So that was my mindset. And so once I would go and I would talk to the seller, we'd negotiate on the price.

Then I just had to come up with three different ways, give them three options. I used the three-option letter of intent as my primary tool. And I would give them those three different options of just three different ways to pay the price that they wanted. And what I found was because I was giving them three options, I think they kind of forgot that they had a fourth option to actually say no. So it kind of eliminated that fourth option. So they'd always pick one or they'd pick one and then they'd kind of counter one of the offers and we'd tweak it a little bit. Sure. And so that's how it came out.

It just kind of opened up negotiations and it opened up flexibility and people just kind of look at it where, wow, I didn't know you could do that. Can we do that? And I was like, sure, we can do that. And I would tell them how they were secure. I did a lot of education in the process when you're doing creative stuff like that. I'd explain to them, well, you're going to get this money right now. I'm going to make these payments. And you know what? If I don't make these payments, you're going to get this money right now. I'm going to make these payments. And you know what?

If I don't make these payments, you get to foreclose on me, keep all that money, and go sell it all over again. And when they heard that, they're like, wow, okay, so my worst case scenario is I just foreclose and I sell it all over again. And I get to keep everything I made? Once I explained to them how that worked and how that's why the banks loan you money and that's why the banks don't buy real estate because they want that power. And then I just got really good and efficient explaining that to sellers and they just started to see the light. And that's how it happened. Yeah. Well, and you have specifically a three-option option agreement, correct?

So you basically lay them out in one document and you review them and give them the option of three. And they always forget the fourth option, which is no. Right, right. Which is great. And so all of my listeners, obviously, if that's something you're interested in, make sure to get, you know, email me and we can put you together with Matt and line that all up for you. So, well, that's great. I mean, that's, you know, one of the main questions everyone always figures that they're going to ask is, you know, how do you find the money?

And you've reviewed kind of how you find the money is, is the money is pretty nominal because it's a small percent of the acquisition price. You're carrying the rest. The seller is carrying the rest. And then you need to hit a certain rate of return on your money so that you're carrying the rest, the seller is carrying the rest, and then you need to hit a certain rate of return on your money so that you're going to be free and clear and that you're a friend, family, or a fool, I guess is what you said, right? Yeah, I learned that from a friend in business school. That's what they taught them. They always said that's who your first investor in business is going to be.

It's going to be a friend, family, or a fool, and it just kind of stuck with me. Sure. And so, you know, you get everyone's happy. That's all going to be a win-win. Now, how quickly do you get them, your private investor, out of the deal? Do you specifically overpay them to get their money out as quick as possible so that way they'll do another one? How do you usually treat your private money in regards to that? Sure. In the beginning, I'm very clear with my private lenders. And I've done a lot of partnering with retirement accounts as well, people's retirement accounts. And I let them

know this is a long-term investment. I'm not a fix and flipper. You're not going to get your money back in six months. It's not even going to be liquid because by the time you ask me for the money, you've got to give me at least a year to give you your money back. I don't know where it's going to be. I'm going to have to do some management of my finances. I might have to sell a few things to pay this off, to pay that off, to ship some things around. And I don't know, I can't guarantee you how long it's going to take, but I know I can do it almost every time within a year for sure. I really only need three or four months, but I just like to over-promise, under-promise, over-deliver. It was very much setting their expectations up front, saying, okay, this is the situation.

It's buy and hold. This money that you have right here, it's sitting in the mutual fund. You only got 2% last year, and you got 1% the year before that. How would you like to have 6% and have it 100% secured by real estate? And they didn't know that they could do that. So I'd help them self-direct their retirement accounts. I had that relationship set up. And the money just kind of, it just kept on going as long as I kept my word. As long as I kept doing what I said I was going to do. It was really, really easy. And a lot of people just don't believe it, but it really is that easy.

And I think the real key was, the first key was to have the deal first, and so I knew exactly what I was going to be able to pay them on their money. And then the second key was to actually do it. And then it's just been, I've never had a need for money ever when it comes to a real estate deal because of that. Well, that's fantastic. Now, the next question is you said you give your investors 10%, correct? It depends. It depends on what I was getting on the deal. Okay. You know what I mean? So if I had a, if I had a 25% cash on cash return based on the down payment, then yeah, I could, I could pay them 10, 12% with no problem.

Sure. Now what would be the question? The reason why I asked that question is because it was going to lead into this question, including your return and your investors return, what type of numbers, and I think you've mentioned this, but it's going to qualify a home to be a good investment home for your portfolio? Super. Okay, so the rent, my first rule of thumb, you've heard of the 1% rule where the gross rent should be no less than 1% of the purchase price of the home. And that was pretty difficult to do here in Los Angeles. And when I was wholesaling properties for other people,

I was wholesaling for people that were selling stuff out of state, turnkey operations that were selling stuff out of state. And what I found was once I ventured outside of my California borders was that 1% rule was fairly easy to hit right off the multiple listing service all through the Midwest and all through the South. And with just a little bit of marketing and digging, I could hit a 2% rule. So that was kind of my first brawner was getting the gross rent to be 2% of the purchase price. The second part was, and this kind of was kind of, you know, indicative of the economy is that as long as I could buy below replacement costs, that was my second rule. And, uh, so that, that, that was my, those are my two, uh, basic, uh, I don't call it litmus test.

Okay. The basic evaluation. And if it, those, if it meets those two, then I'll go ahead and I'll investigate and dig deeper and see if it's a good deal for me or not. Sure, sure. Okay, well, that's good for my listeners to know. The next thing now, we've spoken about your money and how you raise money and what type of returns you're giving, which is huge in my industry of fix and flipping

because you're always continually raising money. You can never really have enough money, right? And I guess the same would be said for you because why stop at 100 properties? Why don't you get 200? And once you're at 200, why not 300, right? So no need to ever really stop raising money. The numbers per the home make sense.

Now, one of the things that I've found with students of mine as well as just people in general is they don't tend to do what we call a cap rate correctly so they don't necessarily adjust it for the property taxes and the property managers, and so on. So how would you define and how do you use or look at a cap rate? Specifically, what goes into your cap rate and what gets taken out of your gross rental income per year? Well, of course, you know, it depends on what part of the country you're in and what price range you're in. But a rule of thumb for me, at least it's a good enough rule for me to make a move and put the property under contract, is I'll just take, I'll account 40% of the gross rent for expenses.

So that's going to be your vacancy. It's going to be your maintenance. It's going to be your taxes. It's going to be your insurance. And that's where I get the 40%. And over my portfolio, that's probably just about right. I have some properties that perform at 20%, 25%, no problem. I have some properties that are at 50%, 55% expenses,

but I found a 40% rule of the gross rent that's worked fairly accurately for me. Once I'm under contract, then I'll actually go in and confirm all those numbers with the numbers, not necessarily a percentage, but that's good enough for me to get under contract for. What do you typically pay your property managers per month? 10%. I think I got a couple that are 8%, but I pay them at 10%. A lot of people ask about that expense and, wow, don't you think that's a lot or have you ever tried to negotiate it down? One thing you're going to know, when you're a cash flow investor,

your most important and valuable relationship that you have is your property manager. And I remember this dynamic when I was a real estate agent. When people tried to grind me down on my commission, I didn't like to work for them as much as I like to work for the other people that paid me really well. And I just imagine that property managers, you know, contrary to popular belief, they're people too, that they probably felt the same way. So as long as I treated them well and I held them accountable, I mean, I certainly hold them to a high level of performance, but as long as I met that, I wasn't going to negotiate

or really, you know, try to dig into their pocket, so to speak, and rob them of an opportunity of making a living. So I stick with the 10%. I'm okay with that. And I factor that into the, that's part of that 40% also as well, if I didn't say that. Yeah, no, that's, I mean, yes. Glad you said that. I don't think you said that. So that's good to know. I didn't know that. No, that's definitely part of that 40%. Right. I'm just going to use numbers here in Phoenix because I know they're slightly different in California. I know I have students and I also have listeners all over the nation. For example, rental property here is $100,000 to keep numbers

simple. That would usually rent for about $1,000 a month. If you times that by 12, your gross rental income is $12,000 a year. And what you do when you're looking at it is you immediately then multiply that by 40%. And now you come up with the number that you're netting at the end of the year for your rental income, right? That to make it very... No it's times it by 60 to get my net. Right, I guess, I'm sorry, so I didn't mean to confuse anybody, but I was doing it backwards. I was taking that 40% and I was just going to subtract it. So yes, times it by 60 to get your net. Correct.

So, okay, and that's the simple way to look at it. Obviously, you would obviously urge any of my students or listeners that that is a very simplistic way to look at it. However, it's a very good foundation when reviewing a deal. Yes, yeah. It's good enough to get under contract, to get into contract under that number. And then once you're in contract, then you can take your time to go ahead and evaluate the actual cost of the property. And the reason I like to do it that way is because, and we've noticed it, and you probably really noticed it in your market, is that it's such a fast-paced market.

And if you sleep on a deal or take a few more hours to go and factor out the numbers and conduct some minor due diligence up front, that deal might not be there once you've decided to move forward on it or not. Oh, absolutely. I couldn't agree with you more. You got to take action and you always give yourself that contingency, 14, 21 day to do your quote unquote inspections and get in contract first. If you have to back out, you have to back out because the roof or the AC or the pool or whatever, the foundation is cracked, whatever that may be.

But you're exactly right. Don't miss a deal when it comes to you. Exactly. Exactly. So that 60% of the gross rent, that's a good enough number to evaluate to get under contract. You're going to be pretty much in the ballpark. And if there's something weird comes up, then you do have your contingencies to where you can get out of the deal and go look for the next one.

Perfect. Now, I know we've had a good amount of time here, but I wanted to kind of ask a pretty looming or larger question specifically regarding the updating slash rehab of any rental property that you are going to buy because I think that ultimately then reflects the first two parts of what we talked about on the podcast which is your money that you bring to the table because you will need more for the rehab slash renovation or updating. And it will also affect how much rent you get and what your cap rate looks like. So if you can briefly just look or speak to the point

of when you are reviewing a deal, how much rehab would you shy away from? Or what is the point where you're comfortable with the amount left? Do you do any work in general, or do you only buy deals that need no work? And how does that kind of fit into your business model when raising money and at the same time looking at your return on investment? If you could globally kind of answer that, that I think would be the final segment of

this podcast. Sure. Well, when I talk about 1% of the purchase price, I'm talking about the property acquisition plus the rehab. So that's really how I define purchase prices, how it would cost to acquire the property and fix it up to rent ready. Got it. Now, when I'm looking at rent ready, my first goal is to make sure everything works, everything is safe, and everything is clean. That's my minimum standard. What I do above that is in direct correlation to what other rentals in the market are doing. So if I'm in a higher end area and I need to compete with higher end amenities and fixtures, then I'll go ahead and I got to play the game. I got to at least

be even to my competition in that area. In other areas, I have a lot of property in lower income areas and I don't have to. And I've experimented with it before. I've put more into properties and I don't necessarily get more rent, Justin. What I do notice though is it will increase, say, the longevity of how long that person is going to stay there. So if you make it comfortable and nice, they're not going to want to move out and go to another place. I haven't found that it actually, let me rephrase that. It will get me a little bit more rent, but it won't be enough to pay for the extra money I put into it, if that makes sense. Sure. Absolutely. But it does help in the longevity of how long a person stays there. So if you can cut down on vacancies and you can cut down on turnover expenses,

then in the long term after two or three years, then that upgrade in the amenities might be justifiable, but it's still a little bit of a gamble. So I just kind of look at what my competition is doing. Once I've made everything work and everything is safe and everything is clean, then I'll bring it up to the competition, maybe a little bit above that. But that's how I justify how deep I go into rehab.

Sure. Well, that definitely solidifies and wraps up kind of the idea of how much work do you do? And I know we have some friends of ours that run a very large wholesale rental program out in Memphis and Dallas. And they really go after kind of getting everything, really spending the dollars to get it to a certain place. But they're also selling those rentals. So they don't want their buyer to have to handle anything. And I think for our listeners here today and that listen to us every single week here at the Science of Flipping, it's good to know how to raise the money, how to get the seller to negotiate with you.

Because what Matt has basically been telling you guys and us here is you don't need to have all the money to acquire these homes. You can make the seller be flexible and carry a certain note. And again, if you defund the payment, they can take the home back and resell it. On top of which, how to raise the money. So I think, Matt, you've done a very good job of getting my listeners to at least wrap their head around what it's like to really build a rental portfolio. And so I'm very thankful for your time. I'm sure my other listeners are as well. And if there's anything you'd like to leave us with as far as, you know, kind of creating your rental portfolio and some last thoughts.

I think my listeners would definitely appreciate it. Sure. Kind of a bunch of stuff, but I'll leave you with one, just one that comes to my mind immediately is go out and network with other real estate investors and specifically look for the guys that have been in the game for a while. And specifically what I'm referring to are the guys with the gray hair or no hair, the guys that have really been in it for a long time. And if you go up and you ask them what their biggest regret is,

undoubtedly that you're going to hear, I wish I would have bought more and I wish I would have held more. And there's a great quote by Mark Twain where he says, learn from other people's mistakes because you won't be here long enough to make them all on your own. And that just resonates with me when people say that they wish they would have bought more, they wish they would have held more. So for the fix and flippers, for the wholesalers,

for real financial independence, you're going to have to eventually hold. So I'm not saying fix and flip is bad. I'm not saying wholesaling is bad. Knock yourself out. There's a ton of money to be made, and it's a whole lot of fun to make a lot of money. But put some sort of formula in place where every three, every four flips or so, take one off the table and hold it for yourself, even if it's every ten depending on the volume that you're doing.

But really just that, I can't stress that enough. If those, the guys that have been doing this for 20, 30 years, if their biggest regret is not buying more, not holding more, there's something for all of us to learn from that. Absolutely. Absolutely. And guys, his name is Matt Theriault. He actually has a podcast as well. It's called Epic Real Estate Investing. So get on iTunes, that podcast, subscribe to his podcast. He does it very similar. Each and every week, you'll see one to two new podcasts. Matt, listen, I truly appreciate you being here and giving everything you got for the last 40, 45 minutes to my listeners here.

I know they truly appreciate it. So thank you very much, sir. Oh, my pleasure, Justin. Good luck to you and awesome job you're doing over there too. Right on. I appreciate it. And guys, again, if you want to work closer with me, if you want to ask me a bunch of questions,

feel free to email my personal assistant at info at thescienceofflipping.com, and we will make sure to answer your questions and stay in contact. Again, big thanks to Matt Theriault. That's all we got for this week, guys. I've been your host, Justin Colby, and we're out.