BiggerPockets Real Estate Podcast

BiggerPockets Podcast 368: $3,500 per Month From One BRRRR Deal With Palak Shah

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On today’s show: accelerated wealth-building through leverage and systems!

Palak Shah walks us through how she built a $4M portfolio in just three years by “supercharging” the BRRRR strategy.

Palak left a career in corporate America to focus full-time on real estate in the Philadelphia area, and she applied her training as an engineer to create airtight processes that help her business run without her.

You’ll love hearing how she finds deals from wholesalers on Facebook, why she’s not afraid to sell off some of her BRRRR properties, and how she creates checklists to determine whether a deal fits her criteria.

Also, we discuss how to beat “analysis paralysis” by remembering her acronym “A.B.L.E.”

Palak is a relatable, inspiring investor who offers great tips for anyone hoping to transition away from a 9-to-5… so check out this episode today, and share it with a friend or family member!

Click here to listen on iTunes.

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Read the Transcript Here

Brandon: This is the Bigger Pockets podcast show 368.

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Speaker 2: 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.

Brandon: Hey what’s going on everyone this is Brandon Turner, host of the Bigger Pockets podcast here with my co-host Mr. David Green. David, welcome to the podcast buddy.

David: Thank you Brandon. It’s been a great day. We just had a really, really, really good interview with Palak. I am pumped over the listeners to get to hear what we just heard.

Brandon: Yeah, Palak she brought the goods today. Really good interview. We talk about everything from how to get started with BRRRR investing, how to work with hard money lenders, how to get wholesalers, she has some great tips on finding deals through wholesalers. You’re going to get all that day. She even talks about like how one of her BRRRR deals, one single deal, a BRRRR deal, makes her $3500 a month in cashflow. I mean imagine what that would do to your life and if you could do it in one deal, and the coolest part of that story is how little money of her own she ended up using. She used a couple of different creative strategies including the BRRRR strategy to pull it off. You’re going to hear that and more today. But before we get any further let’s get to today’s quick tip.

Brandon: All right so let’s talk about offense and defense real quick. So, offense when it comes to your finances means earning more money. You’re going to go out there and make more money and we can all probably do that in different ways. That’s why people flip houses or work hard at their job or whatever. There’s ways to make more money. But, if you don’t also play defensively, which means knowing how much you’re spending and controlling your spending it doesn’t matter how much you make because you’re just going to spend it all away anyway. I know people making a million dollars a year who spend like a million dollars a year and they still have no money. They’re broke.

Brandon: Here’s what I want to encourage you to do for today’s quick tip is to go out there and create like a financial spending plan. Like go look at your, like right now, what you’re spending exactly and put it all in categories in terms of like how much are you spending on fun stuff, how much is like variable expenses like gas, groceries, stuff that goes up and down a little bit, how much is fixed expenses meaning your mortgage payment, taxes, utilities I guess you could maybe even call it. Like a fixed, it’s regular, and what are you giving away and what are you saving. Just define that stuff because once you define it you’ll have a better idea of where you’re headed. So, very simple quick tip is go out there and figure out like where is your money going so that you can make sure you’re also playing defensively in your goal to build more wealth and financial freedom for your family. That’s today’s quick tip.

David: Awesome. Great job Brandon.

Brandon: Thanks man. I just recorded a video this morning about that topic. That’s why it was on my mind. If you want to watch the full video I did go over to the YouTube channel, BiggerPockets.com/YouTube or YouTube.com/BiggerPockets. Either way will get you there.

David: And make sure you listen all the way to the end of today’s episode because all three of us give the moment where we knew real estate investing was for us.

Brandon: Yeah. It was cool.

David: It was funny hearing the similarities in all of our voices that we knew exactly when we were first in love.

Brandon: Before we get to the show I just want to actually say one quick thing. If you are not attending the weekly Bigger Pockets webinar that is different than the podcast. The webinar is a live thing that either David will host or I will host or we have a few others like Jay, Scott and Tarl Yarber that host them. If you’re not attending those, or Matt Faircloth too, I would highly encourage you to do so because you’re going to learn a whole lot of like how to do stuff. You can go to those anytime, sign up for one at BiggerPockets.com/Webinar. Just wanted to put that out [crosstalk 00:03:36].

David: Yeah, tell your friends.

Brandon: Once in awhile. Yeah.

David: Tell your friends so other people can get into it like what you’re into. That’s something I’ve been thinking about a lot whenever I say, “I wish I had more people into this thing.” Well why don’t I just tell them about it and make it fun and then they’ll want to be involved in it.

Brandon: Yeah that’s a good point. It’s a good point. It’s not true what they say about you David. With that, let’s get to today’s episode.

Brandon: All right Palak welcome to the Bigger Pockets podcast. Glad to have you here.

Palak: Thank you. Glad to be here.

Brandon: Yeah, so let’s get into your story a little bit. How’d you get into real estate? I know you’ve been listening to this show for awhile which is awesome. When did you start getting into real estate? Walk us through that very beginning journey.

Palak: Yeah, so I am a mechanical engineer and I worked in corporate for 17 years and I was climbing the corporate ladder and I thought I had it all figured out. My job was to travel all over the world and teach CEOs of companies this framework that we had developed to increase their bottom line. I was like this is a fabulous lifestyle, I was making six figures, I was married and then we decided to have kids and during maternity leave I just had a complete shift in my mindset about how we were living these two stressful corporate lives. You know, like not really understanding what motherhood was going to be until I was in that spot. Then I was like there is no space for this baby in this stressful lifestyle that we’re living. We’re traveling a lot, working long hours, and I had two kids within a span of two years and then I went to my boss and I said, “I need some flexibility. Like, this is … I’ve worked for a long time in this business and in this company and you know my reputation. I just need a few days working from home or something.”

Brandon: Sure.

Palak: And that request was not very well received and he rejected it and I said you know what? We’re pawns when we work in corporate. No matter how high up we go and also the higher up we go the more time it takes, so we waited until our late 30s to have kids and then I had no time for kids because of the lifestyle that I had built. So, I spent months in turmoil because I had worked so hard for the career and then eventually my husband and I decided to become a single income family and I decided to build my real estate portfolio. So, flash forward three years. I quit my job three years ago. I built a four million dollar real estate portfolio. This year our revenue is about a million. The best part is … Well, two really awesome things. One, my kids are still not in kindergarten. They’re in preschool so I get to take any random day of the week off and take them to the zoo and, you know, spend all the time I want with them and two there is no glass ceiling. Nobody controls my potential because of the way I want to spend my time. So it’s been an amazing journey.

Brandon: That’s awesome. Where’d you get the idea of real estate? Why not like, “Hey I’m going to go start this company, or that, or be a consultant?” Or whatever. You obviously got the idea you didn’t want to work the corporate slavery nine to five commute kind of life that majority of Americans live but yeah, how did you come to real estate?

Palak: Yeah, so after my daughter was born, she’s older, so after she was born … Well I’ll start from before she was born. Before she was born what we would do is we were double income, no kids couple. We would take any bonus, any tax return, whatever came we would take that and we would buy furniture or go on a trip or whatever and then after she was born we said, you know, let’s try to figure out a way to build some extra income. So, we scraped up everything and I love … I’m like the only person who’s not in a convent but loves tax season because every month it like forces me to save. So, I would take tax returns and scrape up everything and put 25 percent down and just buy a rent-ready property. So we did that twice and we started understanding how important it was to have that cashflow and the concept of passive income and so when I quit my job it became like the natural thing that I would go towards because we already experimented with it a little bit.

Brandon: That’s cool. Did you read any books, I’m curious, at the beginning? Or was it more like, “I saw a rental property …”? I mean we’ll go into your first deal but I’m wondering like how do people … I’m always fascinated by that idea of like why real estate you know? What made it so appealing to you?

Palak: Yeah, so I mean I approached real estate like a student. So basically I would listen to your podcast late at night. My husband and I would put our kids to bed and we would listen to the Bigger Pockets podcast.

Brandon: That’s cool.

Palak: And read every book and blog we could get our hands on and really tried to figure out if this was for us. So, just approached it like students.

Brandon: Yeah that makes sense.

David: One of my favorite things about your story, Palak, is that you took the knowledge, the skills that you’d built in the corporate world and rather than just complaining, “The corporate world is hard, it’s not fair, I’m working for someone else” you actually applied them to something that would allow you to have the flexibility that you needed to make you feel like you’re being the mother and the wife that you were made to be. I love that that’s how your story started. It’s not like, “Well I went and I took a seminar and so I started trying to figure it out and I fumbled my way through it.” You actually took all of the strength and the skills that you had built in the corporate world and applied it to real estate and you scaled so much faster than most people when they get started. That’s very encouraging to me for a lot of people listening that are thinking, “Well I have this job. I don’t want to leave this job and jump into real estate until I get to a certain point” or “I don’t want to lose everything.” But you didn’t waste anything. You just took those skills and applied them to real estate.

David: Can you share with me a little bit about what that was like? Was there some trepidation or fear to go from something you knew to something you didn’t know? Was there something you did to make that transition easier to keep your confidence up?

Palak: Yeah, one of the big things as a nine to fiver is you get so used to this pushy lifestyle where there’s like a paycheck coming in, you know, you go to work at a certain time, you come back at a certain time and then you get a certain amount of money every month and there’s very little, what do you say? Unpredictability, although you could get laid off any minute. But you just get used to this lifestyle and it’s really hard to become a risk taker. Being that way for years and years it kind of conditions you to just be used to like these little vacations. Like I get two weeks at this time and I get one week at this time and it’s really hard to do that but what I learned is you know risk is like taking risks. I always assumed actually that people are born with these abilities but that’s a skill that can be developed and I probably read it somewhere, I don’t know, but I call it like flexing my risk taking muscle and in the beginning I had to learn to be comfortable taking risks and assigning numbers to it so that I got more and more comfortable.

Palak: Then it’s in the last few years I have understood that it’s a skill set. You can develop it. So, just building a framework around it helped.

David: That’s really good. Did you have any advice for the listeners of some things that you did that helped you build that risk taking muscle? Because I really do think that, and Brandon you might agree, probably the majority of people who want to get started in this and don’t it’s because of just that fear that encompasses the risk that’s involved.

Palak: Yeah that’s a really good question. What I would do is I would make a spreadsheet and do like the first column as put all of the risks involved in a deal and in the beginning … So we do BRRRR deals. That’s what I work on.

Brandon: BRRRR, okay, yeah.

Palak: In the beginning, for example, thinking about my very first BRRRR deal there are like so many risks that come to mind and as a new investor what one does is you just clump all of these together and put them in a big risk pot and then it just seems like a really, like a massive daunting task but they can be broken down. So I would make a spreadsheet and build first column as all of the risks and, for example, for in a BRRRR deal I would say maybe I go over my construction numbers or what if the property doesn’t appraise for what I want it to appraise for at the end. What if I don’t get the rent that I want? So, list all of them and then assign a dollar value to it that would be like the worst case scenario. So, for me, for example in construction to mitigate that risk we started putting 15 percent extra towards contingencies. So we say okay this is a risk, we can over over construction so let’s start putting 15 percent and that mitigates that one risk.

Palak: So, moving onto the next one right, then you say okay what if it doesn’t appraise for what I want it to appraise? And having been in corporate and being a dabbler investor before I know that a lot of people put 25 percent down and buy properties. So if I’m left with five percent in the deal it’s still better than putting 25 percent down and buying a property if I don’t get the rent that I want, okay, do I still want to invest in this property knowing that the worst case scenario rent $100 less than what I’m expecting it to be, and assign dollar values to them and then decide if it’s still worth pursing it and then if the worst case scenario I always think the worst case scenario happens and I willing to spend that money to learn what I’m going to learn from this deal?

Brandon: That’s really good. Yeah, it’s Tim Farris of the Four Hour Work Week talks a lot about, I think he calls it the first case scenario analysis and it’s the idea of taking all those risky points, like this is a risky thing that a lot of people just internally feel anxious about and weird about and therefore don’t take action.

Palak: Right.

Brandon: But once you define it and say well what really is the worst case and what can I do to mitigate that risk right now, once you define it then you put it on paper or on a computer screen and now it’s no longer as scary as it once was. So, I think that’s a smart move.

Brandon: Hey, can you real quick define for those who may not heard of the BRRRR strategy, the B-R-R-R-R strategy? Can you define exactly what that is? Because we’re going to spend a little bit of time I think talking about that today because it’s such a powerful strategy.

Palak: Yeah it’s amazing. BRRRR strategy is literally how I built my portfolio and we kind of supercharged it a little bit to grow fast. So the BRRRR strategy basically stands for the letter B and then three Rs. Buy, rehab, rent, refinance and repeat. So you buy a property that is distressed, under market value, rehab it, renovate it so you can add value and get a higher after repair value for it, rent it out and stabilize it, refinance it pulling all of the cash that you originally put into the property out and then keep repeating that again and again to build a portfolio that is cash flowing but at the same time you’re not left with cash in the deal. Did I do justice to it?

Brandon: That was great.

David: Very good.

Brandon: That was good.

Palak: I learned it from you guys so …

Brandon: Well good, yeah that’s awesome. David here, David wrote the book on BRRRR investing.

Palak: I have it.

Brandon: It’s called Buy, Rehab, Rent, Refinance, Repeat. Nice. Yeah, so it’s cool.

David: Let’s put her on the spot. What did you think about the book after you’ve actually done the strategy?

Palak: I have just started reading it. I am sure [crosstalk 00:15:53]…

Brandon: She did it without … Wait you can do it without reading the book? Impossible. Impossible.

Palak: I don’t think the book was … Was the book out when I started?

Brandon: No, I don’t think so.

Palak: I don’t think the book was out then.

Brandon: Well it should’ve been David.

David: Yeah, I’m dragging my feet. Thank you for pointing that out very much Palak. You made a point I love about why BRRRR is good because, it’s funny, people are sending me all these videos of people hating on the BRRRR strategy right now because I wrote the book. So what do you think about this person and it’s these … They’re looking for attention, right? 10 reasons why BRRRR doesn’t work and what I’ve noticed is they always frame their argument like you can’t always get 100 percent of your money out. That’s their argument for why you shouldn’t BRRRR and you made the counterargument for that which is the question isn’t can you always get 100 percent of your money, the question should be can you get more of your money out than if you had bought it traditionally?

Palak: Exactly.

David: So even when you leave five percent in the deal you are so much better than if you had left 25 percent in a deal. It’s not even a question, and your ROI will skyrocket. You’ll have that capital back to buy the next property but you still got all the benefit of learning from the deal. I love that you mentioned that because I often find that on my deals that don’t go well, maybe my rehab gets out of hand or the ARB comes in lower than what I thought, that’s not necessarily a failure. It just means it didn’t go perfectly and my consultation prize is a 75 percent ROI on that deal because I left such little capital in there.

Palak: Yeah, and I feel like because you renovated it it’s still better than buying something out there because you know what’s inside behind the walls so that’s another perk of doing it yourself.

David: Very good point. As opposed to just hoping somebody else did a good job.

Palak: Right, exactly. We don’t …

Brandon: [crosstalk 00:17:36]Go ahead.

Palak: Go ahead.

Brandon: Go ahead.

Palak: I was saying we do a few things to supercharge it so we leverage the initial funds. So we bring a small percent down, we use hard money, and then start a project that way and then this year we decided that every year we were going to sell two properties. We invest in the appreciating neighborhoods in Philadelphia and every few years we’ve had good enough appreciation that every couple of years that every couple of years our goal is now every year we sell a few properties and then invest in more using that money. That strategy is so powerful. You can truly supercharge it by doing so many different things to it.

Brandon: Yeah, I want to talk a little bit more about that, about the supercharging thing. So the first thing you said there is you utilize hard money, right, to buy these things? Like what’s your purchase price typically look like? What price range are you buying in and then I want to talk about the whole selling them a couple a year too.

Palak: If I maybe just take a single family home for an example, because that’s easy, I would buy them anywhere between $50,000 and $80,000 and then I put in, in terms of construction, somewhere between $30,000 to $55,000.

Brandon: Okay.

Palak: Then, all in I try to stay around $100,000, $110,000 max and then they appraise for around $160,000 usually, $160,000 to $180,000 and the rent is anywhere between $1400 and $1600 or maybe $1300 to $1600. Somewhere around there depending on …

Brandon: That’s awesome.

Palak: Yeah, so this is like a template that I’ve used again and again.

Brandon: And that’s the beautiful thing about BRRRR is once you templaticize, I’m going to make up a word, templatcize, once you templaticize your plan like I buy in this range, 50 to 80, I do this much rehab so I’m all in about this much and then is what the ARV is going to be I just know that is what I’m good at, that’s my pattern, I can repeat it over and over and over. So, I think that’s smart no matter what kind of real estate you do. That’s why some people jump around to this real estate deal to this real estate deal or this kind, they’re going to do an apartment, they’re going to go back to a single family and I’m not saying that’s necessarily that’s the worst idea in the world but it sure is hard to templaticize an investment strategy when you’re just doing all sorts of different things. You never become an expert, like the person, at that one thing which you seem to be with the BRRRR in that neighborhood.

Palak: Yeah, we do smaller multis also but it’s very hard to build a template around it, you’re right. The single family’s are awesome because I know exactly what it’s going to be and I know exactly what the finishes are going to be, I know what the kitchen is going to cost.

Brandon: Yeah, and do you … You said you use hard money for the purchase, right?

Palak: Yes.

Brandon: What does that typically look like in terms of rates and fees? For those people who don’t even know what hard money is maybe we can talk through that too.

Palak: Yeah, so hard money lenders are short-term money lenders. They will charge a higher interest rate than a long term loan. The interest rates that we have paid are anywhere between seven and 12 percent and then sometimes they charge points up front, which means a percent of the loan upfront, one or two points. You hold that loan somewhere between six and 12 months and during that time you finish the construction, the construction amount you can withdraw usually maybe four draws depending on the size of the project, or more if the project is bigger. Then, when you're done … So they will lend you acquisition and construction funds and they want to see some skin in the game. So they'll ask you to bring anywhere between 10 and 20 percent depending on how long they've worked with you, what your experience is like, what kind of other rates you're getting. Maybe if it's a high interest rate maybe they'll ask you to bring less money to the table or vice versa. Then you're expected to refinance at the end of the six, nine, 12 months, however the deal is structured.

Brandon: Yeah, so the other big objection I hear with BRRRR, probably the number one if not the number one objection people have to it is okay, so you find this property, let's say you pay $50K for it. You spend $50K rehabbing it, now you're into 100. You borrow that $100,000, most of it from hard money depending on the lender how much they'll give you but you borrowed most of it, and now you've got $100,000 that you owe at like 12 percent interest let's say to a hard money lender. That's a scary proposition. Now you go to refinance it. Now the thing is worth, let's say, $150,000. Good for you, you know, you've got a $150,000 property worth $100,000 and the bank says … You try to get a new loan so you can pay off the hard money lender because it's only six to 12 months and you go and the bank says, "No. I won't give you the refi." For whatever reason, like you don't qualify for this or that or you got too many loans or your debt to income is too high or whatever. You have too many mortgages. How do you handle that? How have you been able to scale your BRRRR investing through the difficulty? How do you overcome that problem of what if the bank doesn't give you a refi?

Palak: Yeah this is a really good question. This hasn’t happened to us recently but in the beginning when I had first quit my job we went from two W2s to one W2 and I’ll give you an example. So, in the very first BRRRR deal that I did after I quit my job I had no idea what the concept of debt to income ratio was. Like I had no idea. I was just like, you know, I have an 800 credit score. Bank of America was willing to give me $50,000 on a personal credit line. I took that money and I decided to use that money to do deals. I didn’t realize it was going to hit my debt to income ratio because a personal line of credit shows up as revolving debt on your credit. When we went to refinance it the banks were like you have a lot of debt, and what I found is the best banks to work with when you are in a situation where you’re finding it hard to refinance is the credit unions, the local banks are always more willing to work with you. They want developers to succeed in the neighborhood.

Palak: So, what the bank did was they said, "Okay we can refinance this if we take the Bank of America loan off directly so we know that that debt will be gone when we refinance." So there are ways that banks will work with you. You just have to call. There was a point where I took two weeks and I made a giant spreadsheet calling 90 different banks.

Brandon: Oh wow.

Palak: Because I wanted to do a deep dive into refinance and I was like I’m just going to figure this out. So I just went intense on it and called 90 banks and by the end I understood how it worked.

Brandon: Yep.

Palak: As much as a person could.

David: I really want to expand on that because you're bringing me back to my days when I was a police officer and I was trying to find a loan and I had too many properties and they were in other states. I remember just going into work, logging in, going to my calls and making a spreadsheet like you said on my phone in between … Just a list of like 30 or 40 banks every single day that I was trying to find. You call them, they tell you no, then you ask why and they say why not? That is literally how I learned 80 percent of what I know about how the loan business works. I just started a mortgage company a couple of months ago primarily because I learned so much about how loans worked from being an investor that I figured out here's how we can get our clients cheaper loans. There is so much value that comes from doing that, but for some reason people are so loathed to put that work in. They're just like, "Tell me the answer. What's the one bank? Let me just shortcut the process. I want to call them. Somebody else can tell me." And then if that doesn't work they quit. They say, "It didn't work. You can't refinance a house. The BRRRR strategy doesn't work. Real estate doesn't work." They're shortchanging themselves of all the learning that comes from that.

David: Not only the learning of how loans work but I bet you you ended up developing a system to quickly find a lender because of all the ways you wasted time doing it inefficiently. That's what I did. I started to recognize patterns. Okay, banks are always telling me no but credit unions and savings and loan institutions they will actually have the conversation. So I know they've done them before.

David: Now the common things that they say they don't like are, "You live out of state. Maybe like your credit score wasn't where we wanted it to be." Or whatever the case may be. Now I know, jump to the chase and get these two things out of the way. Okay that's all right now we can get into the deep dive and your brain does not figure that stuff out if you don't take the action. That's just what I love about what you did because there is a direct correlation between you being willing to do that, Palak, and building a four million dollar portfolio. You scaled to that point because you took those steps where the person who just wants the really quick answer, "Tell me where the deal is, tell me where the loan is. I just want it to be done and really easy." They never built the foundation that you've built to get you where you are.

Palak: Yeah, I always say fortune favors the finance savvy in real estate. That is the biggest thing to learn is how to leverage your money initially and then how to get it refinanced for a BRRRR strategy and putting in the effort, like you said.

Brandon: Yeah, that’s awesome. Okay. So let’s go back to you’re selling a couple of properties a year. What’s the purpose of that and what are you doing with that?

Palak: Yeah, so we in Philadelphia we invest in appreciating neighborhoods. So, the neighborhoods we invested in a few years ago they have appreciated to the point where the properties have almost doubled in value and, at that point, the return on investment, our ROI, is still good but the return on equity is terrible because there's all this equity sitting and then if I get it refinanced to pull the equity out or if I try to do a loan on top of the existing loan the property wouldn't cash flow. Also, as the neighborhoods start appreciating the taxes go up. That kills the cash flow as well. So, we said you know what? Let's supercharge the existing strategy. Let's take a couple of properties that have the lowest return on equity and sell those each year so we can grab that money and then we can reinvest it and buy more properties with it, do more and more deals.

Brandon: Repositioning that equity is so important. It's funny actually, you know the BRRRR strategy, the very beginning, I don't know if a lot of people know this, the very beginning of where the term came from, I mean people have been doing it forever but the term came from an article I wrote called "How to Make Six Figures With Fixer Upper Rental Properties." I think that's what it was called. I'll try to link to it in the show notes. That's where I was like writing that article and I was explaining this concept that I've done where you buy a property and you fix it up and you rehab it, you refinance it and then every like five years … If you did two of those a year, if you bought two of those a year after like five years if you started selling off a couple of those properties every year you could make like tax free essentially or at least low tax like $100,000 a year by making $50,000 a property on each one because the loan gets paid down, the property goes up in value, you built the forced equity or forced appreciation. All that stuff.

Brandon: Anyway that’s where that whole concept came from is from the idea of how to make $100,000 a year by selling off your BRRRR strategy and then that’s where the analogy came from. So, anyway it’s cool that you actually did that and do that. Yeah, because that return on equity thing is so important. I was talking to a gentleman the other day who we were looking at all his properties in a spreadsheet and he had the exact, like all his properties listed, how much each one made in cash flow after all expenses every year, how much it was worth, blah, blah, blah. Then one of his lines was how much profit he would have if he sold the property today. Like how much after pay in realtor fees and all that, how much cash would he have to reinvest into something else? So we simply … I made a new column in the spreadsheet. We looked at the amount of cashflow per year he’s getting, actual cashflow, divided by how much equity, how much profit he would have if he sold it and that was our return on equity.

Brandon: What he figured out was that he was averaging about a two percent return on equity on all his properties. So, as much as he felt like he was doing really, really good which he was, I mean he was making six figures in cash flow we figured out he could triple his income simply by moving those assets that were earning two percent return on equity to a like 10 percent. Like not even going crazy like 15 or whatever, we’re just talking 10 percent. He would over triple his income which pushed him over the line of financial freedom and he could retire like if he just did that. So it’s crazy that whole idea of return on equity.

Brandon: Now, granted to do that now you probably got to go do like a 10-31 exchange and that brings up a whole new set of difficulties. Is that what you’ve been doing is 10-31s? Or have you been paying taxes?

Palak: I am completely fine paying the taxes on it.

Brandon: Okay.

Palak: I’m just like, you know, we made that money. It’s okay for me to pay the taxes so I can stay nimble and I can do whatever I want with that money as opposed to being tied down to investing it in a like kind of property in a specific amount of time. So, we’ve been completely comfortable just paying taxes on it and having the flexibility.

Brandon: Sure.

David: Thank you for saying that so much. It becomes an issue of contention for me with people that complain that they have to do a 10-31. “Oh but if I sell it I got to …” That is such a cool, amazing privilege that you get to avoid taxes and you have to maintain that mindset that, realistically speaking, I mean I know people that have made $300,000 over three or four years buying a deal and just letting the market rise. They’re complaining that they have to pay taxes on the easiest $400,000 that anyone could’ve ever made. They bought a property, had no idea the market was going to do what it did. It shot up and then they have to pay taxes and then it gets a bad attitude. The problem with the bad attitude is it will stop you from taking action in the future. You’ll start thinking well while invest in real estate if I just have to pay taxes? But those taxes are a sign that you did something really, really good, right?

Palak: They’re our profit.

David: You made a ton of money. Yes. It’s okay to pay them. It’s also okay to avoid it if you can do it but don’t let that stop you from taking action. I love you pointed that out.

Palak: Yeah, exactly. I’m completely fine paying those taxes because it’s on profit. It’s okay.

Brandon: Here’s the worst part for me. It’s not even the taxes it’s the recapture of depreciation. That’s the worst part for me because basically what happens is the government … If you own a property, let’s say for 10 years, like I have property I’ve now owned for 15 years and I’ve been depreciating that property every year of 15 years. It’s been giving me a tax break every year for 15 years. Now if I go sell that property now I got to go pay back all of those taxes I’ve been deducting for the last 15 years. That’s where the 10-31 comes in really handy.

David: Brandon, do you remember us sitting on the beach talking about appreciation recapture and how we were being told by these gurus like, “Hey all you have to do is accelerated appreciation and you can write off all of your gains and you can take the money off the income you’re making in the other things.” Like, yeah but you got to pay that back at some point.

Brandon: Yeah, unless you 10-31 for life.

David: Yes. You have to continue to … But that’s just a good thing for listeners to understand is there’s always a yen and a yang. When you get something upfront there’s always a price you pay for it later. When you make a lot of money in real estate there will be capital gains that go along with that and you have to accept both of them when you move forward. Otherwise what happens to me is my emotions just get wrecked. I think oh I did something wrong, I made a mistake then I don’t take action. I don’t move forward and I make less money in the future because I wasn’t prepared for that.

Brandon: Yeah my … Oh, go ahead, go ahead.

Palak: No, go ahead.

Brandon: Well I was going to say my long term plan is yeah, I’m kind of trapped in that were I have to just keep 10-31’ing forever on a couple of my projects because the taxes are so high that I almost pay more in taxes than what the profit would be if I sold the property. So, I’m like because of all the accelerated appreciation so now I’m trapped in that life which is fine. I recognize that I’m trapped in that cycle now so my long term plan now is to just keep doing that and then eventually just roll the money until I get DST which is a type of real estate fund or syndication basically where you own like .001 percent of a billion dollar shopping mall and there’s ways to do … You can dump your money and then you’re only going to get like, what, a five percent return maybe? But that’s fine. I’ll just sit on that later on and still not pay taxes until I die. The beauty is when you die then your kids get the money at the stepped up basis and your kids don’t pay taxes. It just wipes it clean.

Brandon: Now, granted all this could go at any time. Like different political people get in power and who knows what’s going to happen in the future so we can only plan what is today and right now the 10-31 is there, might not be there next year. Who knows. That’s all I got with that.

David: Well the important thing to remember is when you pay taxes it means you did something good. It means that you made money, and I don’t know anyone who’d say I’d rather go to work and have to slave my way to $300,000 when your real estate property could’ve made it for you passively just owning it. It’s a better way to make money. It comes with much more. You’re going to pay something on all the money that you make. You’re not going to get away from it but it’s better to do it the way that Palak is doing it with all the benefits then in the corporate world where she made that money, she got taxed just as high on it, actually probably even higher. If they’re long term capital gains they’ll be less than what you’d be making in the corporate world but you’re doing it 50, 60 hours a week locked in a place where somebody else wants you to work. There’s a lot of perks of doing it through real estate and paying capital gains taxes.

Brandon: All right so let’s go back to your story. So out of your 26, you have 26 units right now is that right?

Palak: Yes.

Brandon: Out of those 26 units what is that make up? You said you buy some small multi, some single, like what does that portfolio look like?

Palak: I think it’s like half and half right now. Half single families and then the other half comprises of like smaller multis.

Brandon: Okay very cool and do you do the BRRRR for pretty much all of them then? That’s kind of your supercharged BRRRR strategy?

Palak: Yes all of them.

Brandon: Okay that’s very cool. What would you say is your biggest lesson or I don’t want to call it a mistake but in the last four years of you building this portfolio like what are those things that you didn’t expect and you got hit with and now you’ve learned a very good lesson?

Palak: That's a good question. We had a theft at a property once. I guess that's probably a good lesson learned. So this is what happened. We closed on a property and the realtor made a comment at the closing table and she said, "If I were you I would change the locks right away because a lot of people have keys to this property." I was like, "Okay we'll starting work tomorrow morning. First thing tomorrow morning we're starting. Our tell him first thing to do is change the locks." The next day my contractor calls me early in the morning and he's like, "Well I think you should come over here." The one thing that was working in the property was the boiler. That was stolen. It was so easy for the thieves. They had the key, they opened the door to the boiler and I went there and my contractor was like, "You're taking this really well." I was like, well number one contingency. This is why we have contingency.

Brandon: Yep.

Palak: And second, you know I mean this is lesson learned. We’re going to change the locks right after closing. Now I have a locksmith on call and I tell him as soon as I close I’m going to give you a text and just go and change the locks right away. So, this is what we do now.

Brandon: Yeah that’s smart and I feel kind of guilty. I don’t change locks nearly as much as I should when I’m rehabbing property. It’ll take me sometimes weeks. Now I’m going to make that more of a priority right now. This is what’s beautiful about interviewing people is like you learn about their lessons is now, I mean hopefully now I will implement that change in my life and then not make the same mistakes. You can learn from other peoples mistakes as well which is cool.

David: Oh trust me, listen guys. This is how Brandon learns everything that he knows about real estate, right? We interview a guest and he types in the messages to me, “Oh my gosh I’m not going to sell that house. I’m going to do what this person did instead.” That’s absolutely the way you’re learning is the same way that we learned.

David: What I love about what you just said Palak is that you didn’t look at that like, “Oh I suck. I shouldn’t do it. Woe is me.” You just changed your system. You just went to your checklist and you said, “Change locks earlier” and now you make that a part of how you do business. That is literally everything that I do in every business that I have whether it’s my rentals, flipping houses, selling houses for people, doing loans. I see where a mistake was made, I ask myself, “How did we make that mistake?” And then I go to the timeline of all the stuff that has to get done and I move it earlier or I move it later or I add it where it wasn’t there before. Then it becomes some persons job to make sure locks are changed when we close. Then we have tools like CRMs or something that we use to automatically remind us hey it’s been three days. Make sure the locks have been changed or whatever. But this is how you build a system.

David: That’s something you’ve done really, really well is you’ve incorporated systems into your investing which helps you to scale really fast. Do you mind sharing for people that are unfamiliar with them? Maybe they haven’t worked in the corporate world where you have to understand how important systems are to success? To help people understand how they work and why they’re so important.

Palak: Absolutely. For scaling it is so important to build systems around everything so that you’re not reinventing the wheel each time. So, since the very beginning day one I started I used to take meticulous notes about the process. This is what happened, this is what didn’t work, this is what I’m going to do next time and in the beginning I used to use Microsoft Project, like build a detailed plan around it, detailed project plan because I was winging it the very first time. I have some overall idea but all the details completely figuring it out as I was going forward. Then now I have a simple flow chart, a PowerPoint flow chart and I know the big picture items and I know what item can be assigned to which person.

Palak: So, for example we were in India visiting family earlier this year and we acquired two properties while we were in India. That's all because we have developed systems and processes around acquisition. I'm not even that big. What we did was there was a realtor, I trust her judgment 100 percent. I went to a property walkthrough with her and we said okay this is what I look for on every walkthrough. I want you to take these pictures, these videos, I want you to ask these questions and send me all of that information. So I don't physically have to go there. So basically she knows, she needs to go in the basement, open the electrical panel send me a picture. She knows to look at all the mechanical and send me a picture of what was the last day they were serviced and she knows all of these details and she sends me those and then one thing I do from my end is any deal that she brings to me obviously I would go through her and make sure she gets the commission. Her and I have developed this system and it works really well. Once she sends me this information and we go through the numbers and the numbers work then she will take my contractor and he'll do a walkthrough.

David: Did you read my long distance investing book by chance?

Palak: I think my husband read it.

David: Because what you're describing is exactly what I teach people. This is how you do it and I want to tie it into what you're saying. It's the fact you have a system that allows you to delegate some of these steps to your realtor to do for you which they're happy to do if they're going to get a commission. That's the beauty of why this works is you've made a process of everything that has to get done and then you can delegate those steps to somebody else like your contractor or your agent or any member of your core four that I have. Then they do it, they send you the video, you can be in India or wherever you are and working I say with air quotes as you look at what you need to have done. Not only does somebody else do it for you but you know it was done the way you want it to be done because it was your checklist and this is how simple real estate investing can be when there is a system.

David: When there’s not a system, when everything is in your own head and you’re trying to make judgements based on your gut and you don’t know exactly why you feel like you do, you just do it can be chaotic because you’re the one that thinks “I have to look at the electrical panel because I don’t even know what I’m looking for. I just know it when I see it.” People don’t realize that’s where all the stress comes from of doing this job and they think I have to be there and what if something goes wrong but you have taken what you’ve learned in the corporate world because you had to be in charge of other human beings. Here’s all the things our company has to do to make money, who’s job is it to do what thing and you naturally understood how delegation works and you applied it to real estate and I love hearing how well it’s going for you.

Palak: Thank you.

David: I want to ask you about how you’re finding deals and then how you’re rehabbing deals. Do you mind sharing with our listeners the way that you’re finding the deals that you’re doing?

Palak: Yeah, so I worked in the beginning on building a good deal pipeline and I have refined it over the course of the last few years. So in the beginning the most important thing to do is define the type of property that you’re going to go after and narrow down the neighborhood as much as you can. So, I will tell everyone who I meet is this is the type of deal I’m looking for. I’m looking to acquire such and such number of properties by the end of this time frame and these are the specs of the property. I want it to be three beds one bath, row home in the city, not a corner … This is just an example. This is the type of property I’m looking for. These are the streets I want it to be on or within these boundaries and then any networking event I go to, any wholesalers I meet, any realtors that I call for a specific deal I will tell them if you see something else like this send it over to me. What happens is people, when you are that specific, people start associating that type of property with you because you are so specific compared to everybody else out there. So, I make it super specific and then I tell everybody that’s there.

Palak: One of the things I started doing in the past year that I didn’t know about before is I started searching on Facebook things like … I’m in Philadelphia so I’ll search for Philadelphia wholesalers, Philadelphia real estate, Philadelphia investors. Then I find that a lot of people are posting deals on there so when I find someone who consistently posts deals I will reach out to them individually like on Facebook messenger and be like, “I noticed you’re posting a lot of deals. I would love to be on your mailing list and establish a connection.” Or, “Could you put me on your list?” And just get on a phone call, have an introduction conversation and get on their list. That’s how I’ve established a lot of new contacts.

Brandon: That’s smart. Yeah that’s a great idea. With the wholesalers I think we all know … I think everyone has heard like the 80/20 rule totally applies with wholesalers. 20 percent of the wholesalers out there, one percent of the wholesalers out there and I use wholesalers in quotes here, one percent of the wholesaler who thinks they’re a wholesaler probably do 99 percent of all the wholesale deals out there.

Palak: Right.

Brandon: There are few that do it. So you’re saying you go on, you find out who the active ones are, the ones that are actively doing a good job of wholesaling and even if you don’t buy that deal doesn’t matter. Now you’re just getting on their list. The same thing is true that you can find with brokers. If you’re looking for apartments and mobile home parks there’s probably a few brokers that are handling the majority of the sales and there’s probably a few real estate agents in your market that are dealing with the majority of the purchases or the sales. Like get in that group. Find/seek those people out and you’re instantly on a different level than everybody else. It’s such a great tip.

Palak: You see that a lot of people are posting the same deals sometimes and they hit my mailbox and within a week I see multiple people send me the same deal at different price points and then I kind of figure out based on the price point who originally had the deal.

Brandon: Yep. That stuff drives me kind of nuts.

Palak: Yes.

Brandon: The wholesale chains. It’s like this guy wholesaling from him and pretty soon you’ve got seven guys in between trying to get a higher price for it. It’s crazy.

David: Well that’s what you deal with with a profession like wholesaling that is unregulated. I mean really what is even is wholesaling? It’s very hard to define what it is. There’s no licensing board. You’re kind of in the wild west and so that’s what can happen. The same deal is passed through five peoples hands and they’ve all added their piece onto it and that’s what you’re paying for.

David: I love the point, Palak, that you made that you're looking for the top producers. You're not wasting your time with people who aren't players, which I'm sure is something you learned in the business world and then Brandon you seconded it. As a real estate agent I quickly learned 80 percent of the business that is done in real estate goes to the top 20 percent of the agents. It's a feast or famine world. Either you are one of the top dogs and you're taking a big share of the pie or you're scraping over the leftovers. There is no in between. I hear people complain all the time that I used this realtor and they didn't do a good job. Well why'd you use them? Because they discounted me their commission, because they answered my phone call every single time when I called. Well that's because they don't have clients. They have nothing else to do but take your phone call. Would you take your car to a mechanic that does three jobs a year? And for the last year they've fixed three cars a year and that's who you're going to go to?

David: Of course we say no. You wouldn't hire a contractor that does two jobs a year. But, when it comes to who is helping you build your business, finding you deals we often end up in that exact same scenario thinking well all agents are the same, all wholesalers are the same and it's really not. People are not the same. If you took Palak and you took her out of her profession and you put her on my real estate team she'd become a top producer as an agent selling houses on my team because of what's inside of Palak, what she's made of, the skills she has. I'm saying this because if you want to build a good real estate business you got to look for those kind of people with a proven track record of doing well at what they do with the high standard that they hold themselves to. This is what really successful people do.

David: This is another reason Palak is so good when she got into investing. She already knew what to look for. She knew from the world she worked in who is a player and who’s not, who’s going to get things done and who’s going to make excuses and she’s just applying that into the world of real estate. This is why Brandon and I when people say like, “Well how do you invest in real estate?” We’re not trying to give you a four step formula. “You go here to find a deal, you go here to find a lender.” It’s actually skills that you have to build up. It’s business principals that you have to learn and then apply to your business. I believe this is why we see the people that are successful at one thing typically are successful at most other things they do. They have that skillset that applies really well.

David: Do you have anything you want to add Palak with your experience as far as why you think you did so well compared to most investors who, a couple of years in, are still kind of floundering around trying to get some traction?

Palak: One of the other things is I built a framework around being in analysis paralysis because I found myself fumbling around that for so long. I was like I got to build something around this because each time we improve the strategy or each time we pivot a little bit, like I said we supercharged the BRRRR strategy and you know each time we do that I hit a spot where I feel paralyzed because of all of the information overload that’s out there. So, I built a framework around it and I gave it an acronym, ABLE. It was meant for me, for my head to remember how to get through it. I said okay, A is going to be define the property avatar. If you’re going to change the type of properties we’re going to go after let’s define what kind of property it is and the … I see Brandon smiling.

Brandon: It’s smart.

Palak: Then if you’re a brand new investor I would say to define your property avatar keep it small, simple and scalable. Don’t go after a large deal from the get go. Everybody wants to become a real estate mogul when they get started but the first deal has to be something small that you can handle that’s low risk that you can make mistakes and learn from. Keep it simple. If you’ve never been around construction before don’t buy a fire damaged property that has a missing wall in the back, and scalable. Pick a property that you can find again and again. Not like a needle in a haystack type of a deal. So, defining that and then putting your blinders on. This was really hard for me in the beginning because I was listening to a lot of podcasts and reading a lot of books and everything sounds so interesting. Every strategy sounds so shiny and fun and it’s hard to just ignore all that and be like I’m going to put my blinders on.

Palak: It’s time to just go after I’ve decided I’m going to do and then the third letter L stands for leap of faith. I would say real estate investing there is some inherent risk involved no matter what we say. So, you really have to, at some point, pull the trigger and move forward. And then the last one is E as in managing expectations. I have to remind myself, okay, even though we took this first step doesn’t mean things are going to go right. We’re going to fail at something. Make mistakes, manage expectations. Your first offer will probably never get accepted. Your first construction project will probably have surprises. Anytime you pivot and change your strategy you’re probably going to have a failure somewhere in there. So, just managing expectations. This is a framework I built for myself and I’ve used it again and again throughout the past few years.

Brandon: Can you summarize that again? ABLE, A-B-L-E. What is that?

Palak: A-B-L-E.

Brandon: So I can write it down.

Palak: Defining the property avatar or whatever you want to call it, the specs of the property. So A stands for avatar. Putting your blinders on, B. L stands for leap of faith, taking the leap of faith. At some point you’re going to have to take action, and then E is managing expectations.

Brandon: Perfect. I just wanted to make sure I got that down because that’s really, really good. Really good points. All of those things new investors tend to want to do everything and they want to just jump in and do real estate because it’s fun and they heard this podcast and this one so I think just that focus and the blinders and just taking action is so important and finally, yeah, expectations like man. David, you and I talk about this all the time about just managing expectations in every aspect of your business. I think most unhappiness comes from not managing expectations correctly.

David: It’s almost like 90 percent of what goes wrong you can trace it back to I didn’t give clear expectations, I didn’t have reasonable expectations. They didn’t know what my expectations were, we didn’t have that talk. I mean I’m sure Palak you can see from some of the stuff you’ve learned in the corporate world how that’s like the leaders job and when you’re owning a business you’re the leader of it. It’s constantly clarifying and setting expectations and Brandon I bet you have some stuff to add about this with Open Door Capital and it’s basically like a start-up that you’re trying to get off the ground and that’s when most of your mistakes are getting made. Would you agree that a lot of it is just expectations were not communicated clearly?

Brandon: Yeah definitely. Speaking of like hiring people that’s always like this is what the role is, this is what you need to do and this is what we’re looking for, this is what we’re not. This is how we handle phone calls, we don’t handle them. All those expectations, yeah. That’s been the biggest drama, yeah. Biggest drama I’ve had in the last year building this has been managing expectations. I’m glad you brought that up Palak.

Brandon: All right. Let’s shift our focus here. I want to move to the next segment of the show and dive into one of your deals. So it is time for the Deal Deep Dive. All right, the Deal Deep Dive is a part of the show where we dive into one of your properties. I won’t say deals, I’ll try to keep the D’s out of it. We’re submerge into one of your properties to find out more about it. So do you have a property in mind that we can pick apart?

Palak: Yeah.

Brandon: All right first question then. What is it and where’s it at?

Palak: So, it is a triple triplex deal we did last year in the Germantown section of Philadelphia.

Brandon: A triple triplex? That means like three triplexes?

Palak: They were three triplexes side by side.

David: Wow.

Brandon: Ah, all right. That’s cool.

David: How’d you find it?

Brandon: Triple triplex.

Palak: So I wasn't really looking for three triplexes but as I was scrolling on … I love RedFin. That's my favorite app to find deals. So I was in RedFin and I was scrolling, looking … Scrolling is probably not the right word. I was zooming in and out of Germantown trying to find what was on the market and what was new and I found that there were like three properties next to each other listed for the same price and I'm like this is weird. Why are they exactly the same? Is this a mistake? Then I went in and checked the description and all three of them were triplexes, they had the same description and it was the same listing agent. So, I knew that from that it was probably the same person trying to sell these three triplexes.

Brandon: All right well how much was the properties?

Palak: Yeah so they were …

Brandon: How much were the properties? I don’t speak English good.

Palak: They were $207,000 each. So $621,000.

Brandon: 621K. Okay.

David: How did you negotiate that price?

Palak: So that was the list price and we purchased them at $125K each, so $375,000.

Brandon: Whoa.

Palak: Yeah, so initially when I first saw them on the market we went out to see them. We found that there was a lot of issues. There was no heat in a lot of the apartments. The roof was about to cave in. The rents were like half the market rents. Some of the tenants had like changed locks on their own and we couldn’t get in. So we had to build the numbers accordingly. So we offered $125,000 each and I mean it’s a little insulting to offer such low prices but they were overpriced to begin with. So I told the realtor look, this is the offer that I can give you. I completely get it that they just came on the market. You’re probably not going to want to just accept my offer tomorrow. But, just keep this in mind. This is what I can pay for it because it has to go for remodel.

Palak: Then I just kept in touch with her for, I think it was like four months and during these four months they had individual buyers put in offers on one or two of them and then none of the offers worked out because some of them were like FHA loans with owner occupants and one of them had cold feet, one of them just the loan didn't go through and whatnot. I had told her that the only way I'm going to do this deal is I do all three of them because I don't want to buy like one triplex and then have somebody else own something in the middle and then buy the next one if I can have all three.

Palak: So, two things in negotiating I always do is if I see the same owner selling a few properties side by side I want to make an offer on all three because as a seller that would be awesome for me. I would want somebody to just get it over with, take it off my hands, I’ll give you a break on the price. So that’s one thing. The second thing is the only thing I want to negotiate on is the price. So this owner, this seller, was selling the property. She was 90 years old, wanted to get out of the business, heat wasn’t working and I think we started talking again in like November time frame and he really wanted out of it before the temperatures really dropped. So, we said okay we don’t want you to deliver it vacant because the tenants are not easy to deal with, we don’t want you to worry about fixing anything. All we want is to negotiate on the price because if the price works for us then we can deal with the rest of it.

Palak: So that’s what I told the owner and it worked. So it was like a win/win where you know they didn’t have to deal with any of the issues. They didn’t have to go into winter knowing that the heat is not working, and we dealt with all of that and got it for $375,000.

Brandon: That’s awesome.

David: That’s awesome.

Brandon: Very cool. How did you fund that deal then?

Palak: So I went to my local hard money lender, it's a grassroots organization in Germantown, it's called Jumpstart Germantown and the rates are pretty great there. They're around like seven percent because they're trying to develop Germantown. They said this deal was too big because $375,000 would be acquisition, the construction was going to be around $250,000 and they were like, "This is too big of a deal for us." Then they put me in touch with another lender. That's something that I always do when somebody cannot do business with me for whatever reason I'll ask them for a recommendation because they probably know somebody else in the business who can …

Brandon: That’s so smart.

Palak: Who can do it, yeah, and then put me in touch with another bank who had a cool product which was construction to permanent loan. So they funded hard money upfront and also the permanent loan. Both of those we closed on the day we bought the property and they did a before and after appraisal. So, going into it we already knew we were going to be able to cash out and BRRRR the deal.

Brandon: Yeah that's cool. There are an increasing number of those loan programs out there I'm noticing. They're almost like BRRRR loans for lack of a better term. They're purposely designed for people trying to rehab a property and then refinance and then the bank just takes care of all of it. So, just a matter of picking up the phone, calling a bunch of them so very cool.

David: I’m assuming this was a BRRRR deal. What was the outcome in the end?

Palak: So, the outcome was the after repair value they appraised at almost a million and all in we were $375,000 acquisition, $250,000 construction and we paid about $50,000 in closing costs and interests and all that stuff. It sounds really high, but for a deal this big if I'm able to build that in and still cash out it doesn't matter. So, we brought $160,000 to the table ourselves. We got that money from a home equity loan for our primary residence, which had thankfully gone up in value, and then …

Brandon: Was that a home equity loan or line of credit? I'm curious.

Palak: Home equity loan on our house.

Brandon: Okay.

Palak: Yeah, we got a home equity loan on our house and we got $160,000. We brought that to the table, closed on the deal and then we're able to cash out at the end. The rents are around $12,000 and the cash flow is I think around $3500 after principal interest, taxes and insurance, 20 percent for capex and opex and five percent for [inaudible 01:01:36]. I think the cash flow is around $3500.

Brandon: That’s awesome. Congratulations. That’s very cool. Now, when you refinanced it I guess did you leave that $160K then, that’s still in there or did you …

Palak: No, we cashed out already.

Brandon: Okay, you cashed out. Okay.

Palak: Yeah.

Brandon: So you got it all back?

Palak: Yeah, the cashout was also built-in from the get go.

Brandon: That’s so cool. What lessons did you learn from this deal?

Palak: So, the biggest thing for me was this $3500 would have been, if I really wanted to compare this to my salary that I was making as a nine to fiver this should be really compared to my take home because I am probably not going to pay taxes on that $3500 cash flow because of depreciation that we were just talking about. I’d have to deal with it when I sell it like you just said, but for now $3500 compared that to the salary I would’ve made that was take home and if I really look at it that, just that one deal, covered a huge chunk of my nine to five salary that I was making and it’s insane to think that I would have worked 50, 60 hours a week for years and years to keep making that and this property if I just keep managing this property that’s like less than six hours a week just to do that and it’s just insane to just compare that and realize what a fog I was living in before doing this.

David: If you include the appreciation and the loan pay down and the fact rents are going to go up every single year probably faster than what your raise would've been every year at your job and that you have depreciation to shelter the money that you're making that $3500 is actually more if you try to convert it into what you'd have to make at your job.

Palak: Absolutely.

David: You’re hitting such a good point that I realized very strongly about a week ago, an epiphany hit me that the reason you work at a job to make $3000, $4000, $5000 a month versus doing it through commissions or as an entrepreneur is because there’s security and safety in it. You’re getting that two week check regardless of which you really earned it. Unless you get yourself fired, you’re getting that money just for existing and doing the bare minimum, whereas entrepreneurs have to give their best. They have to try really hard. They have to not know they’re getting the money and if you’re willing to give up the security you lose the glass ceiling, like what you said. To try to get a lot of money and have security you’re just weighing yourself down so much. It is so hard and then you get taxed so badly on that money that you make.

David: It just became very clear to me like what you just said, like you were living in a fog, right? You did not need that much security. You’re doing so much better in the way you’re making money right now and you came up with this risk mitigation strategy of writing down what your risks are and covering them all so you could feel that security you had before and, boom, it worked out perfectly. This is such an awesome.

Brandon: Yeah very cool. Where do you see yourself heading in the future Palak? What’s your next five, 10 years look like?

Palak: So, in the next couple of years my goal is to figure out also retire my husband and bring him into the business. I was fortunate that he was willing to bare the burden of being the sole provider until I figured the strategy out and we love strategizing real estate together, and I am operations. So I’m out there doing my thing, acquiring properties and it would be fun to have both of us in the business together. So that’s my goal in the next couple of years. Try to also replicate his income so we can do that.

Brandon: Yeah that’s awesome. Very cool. Well before we get out of here let’s get over to the next segment of the show, the world famous fire round. The fire round is a part of the show where we ask questions that we get from the Bigger Pockets forum. So, real life real estate investors asking questions and Palak we want to see what you’ve got to say to them.

Brandon: So, number one from Chris Mandel. What is your biggest challenge? What has been your biggest challenge when using the BRRRR method?

Palak: Oh that’s a really good question. I would say my biggest challenge has been figuring out how to scale it. So, in the beginning when I first started for the first year I think I was crashing ahead. I was like $200, $300, $500 a month. How am I going to ever replicate my income and really understanding that the BRRRR method isn’t short term. If you look at a year or two you won’t see it really, the impact of it. But you really have to do it long enough to really understand that when you scale it and when you hold onto these properties for awhile it’s something else.

Brandon: Yeah.

David: Beautiful. Next question. Do you think newer investors should avoid buying a property from a wholesaler?

Palak: That’s a good question. My first two properties were just right off of the MLS because I was buying them as somebody who dabbled in real estate on the side. I believe if you’re going to dabble into real estate it’s probably not a good idea to go with a wholesaler because you won’t know if they’re legit or not. But, as a new investor if you’re willing to put in the effort to understand the process and understand what a legitimate wholesaler is and how they work and make sure that you’re working with someone who is reputable, even in the wholesaling industry I think as a full time investor who has the time to research that I think it’s okay.

Brandon: All right good stuff. Now, last question for me of the fire round my tenants are wonderful people and I want to give them a little something to say thank you for being such great tenants. What do you think? What should I get them?

Palak: I haven’t …

Brandon: I know, I don’t know either.

Palak: I haven’t gotten my tenants anything to make them feel appreciated. I don’t know where I read this, in a forum somewhere and somebody was saying that, and I agreed with it so I kind of just followed this philosophy, somebody was saying like does your mortgage company send you a gift for paying your mortgage on time and not destroying your house?

Brandon: Yeah, exactly.

Palak: Why are you getting your tenants a gift? But there are other ways of making your tenants feel appreciated. I probably wouldn’t go by doing a gift or something like that. Is that what you were asking? Should I get them something?

Brandon: That’s what they’re asking it sounds like.

Palak: Instead what I recommend is I treat my rental property management like a hospitality business and I generally make my tenants feel comfortable and make sure that I care about their experience at the property. I think that’s a better gift than getting them a thing.

Brandon: Yeah, smart. I was going to say even a letter, a card that says, “Hey we just want to say thank you guys for being such great tenants. Really appreciate you. You’re a pleasure to work with.” Would make somebody’s day and it would be the cost of a stamp.

Palak: That’s true.

Brandon: Then it’s not like an expectation but you get them a $50 gift card all the sudden now there’s an expectation. “Hey how come last year you gave me a $50 gift card and this year you didn’t?” Then it becomes a little bit weird.

David: One of the biggest things I had to learn as a business owner is not everybody values money the same way I do. I’ll have employees that I can be like “I’ll give you a $5000 bonus if you just do this one thing” and they won’t do it. They’re not motivated by that. But the card saying, “I love you, you’re awesome” will make them run through a brick wall for me and it’s weird but that’s just how people are and so assuming that your tenants care about a $50 gift card could be a mistake because that might be worth five dollars to them. But, like you said Brandon, a card saying this might be the biggest thing in the world to them. Maybe just swiftly having their phone calls returned or something matters more.

Brandon: I think even just like you give them anything that is monetary in value and this is a place for employees to, in a way, as well. You give people monetary value things and they’re instantly going to think, “Well I just paid the guy $800 in rent and he gave me $50 back? I’m still in the hole for $750.” Or, “I pay an employee $4000 a month. I gave them a $50 … Wow. That’s $50 out of $4000.” It’s a monetary thing. So I like the idea of a card maybe or, “Hey I upgraded your stove. I know your stove has been acting kind of funky lately and now it’s a property addition.”

David: And just say, “This is why we did it. We know the stove was old. We appreciate you paying your rent on time. We wanted to do something for you so we put a new stove in.” That’s so much smarter. Yeah. Really like that.

Palak: That is something that tenants always appreciate, when you’re preemptive about upgrading any of the things that they own. That’s much appreciated.

David: Yeah. Okay cool. Last question from Scott Railey out in my hood, San Jose, California. “What was your ah-ha moment when you realized the power of real estate investing?”

Brandon: That’s a good question.

Palak: So when we purchased the first property while I still had my job and we had no idea what we were doing. We were like, “Oh this is an appreciating neighborhood. Let’s just go out and buy a property.” I had no idea that just tenant relationships was actually going to give me fulfillment. That was a big thing. That was why I decided to grow the portfolio because that would’ve really been something that would’ve deterred me from moving forward.

Brandon: Yep.

Palak: But I would take my daughter, wear my daughter, and go show the property and I loved meeting people and tenants and I was like oh this is kind of fun. I could do this.

Brandon: That’s cool.

Palak: It was just understanding that it’s completely different than what I was doing before but I could do it.

Brandon: That’s awesome. There are these little moments you can look back in your life. I’m actually curious David, what’s yours? When did you realize or what was the illustration or moment where you’re like, “Wow this is cool.”

David: Yeah, I know what it was. I bought my first three houses just kind of on accident. Like, “Oh yeah, it’s right there, I might as well buy it. I have nothing else to spend my money on.” I wasn’t really passionate about it at all. The first one I bought you can hear about in episode 169 of this podcast. My second one came for sale down the street from my mom and I thought, “Eh maybe I’ll just buy that house because it’s down the street from her.” My third one my grandma passed away so I bought her house. The fourth one was a fourplex and it was the first time I actually ran numbers to calculate the ROI and I realized that I was making a 35 percent return on my money and I remember just sitting in my uncles house in Washington, in Bellingham, just blown away. Oh my god, like all I would need … In three years I’ll have my money back? Like where is this ever happening? I’m buying every single one of these that I can ever find. That came right before the market turned around in 2013 in California and you couldn’t buy houses anymore.

David: I was crushed in my soul, like what was I doing with my life? Why didn’t I do this earlier? Which eventually opened the door to long distance investing and it was really cool that that was the way that I had. But it’s funny how you remember that exact moment when you knew. When you knew you were in love.

Brandon: I remember my tenants bringing me rent in cash. I don’t do that anymore, but the very first time I bought that duplex I lived in one unit and rented the other unit out. I remember them meeting … I walked halfway between the two houses that were on the same lot and I met the guy and he handed me the envelope of like $650 and I remember holding that envelope and just thinking my mortgage is only $620. This is $650. I don’t have to pay any mortgage anymore. This is like I’m mortgage free and I’m like this is incredible. I can do this with more properties and get even more money. That was a cool moment.

Brandon: All right last fire round question I'm going to throw in one more at you. This is from a guy named Brandon in Maui, Hawaii and Brandon wants to know let's say you hire a couple of handymen to work at a rental house of yours that you're fixing up, or you bought a rental house, and in the middle of a podcast you get a text message blowing up your phone from multiple contractors with drama. In that one of the contracts decided to tell the other contractor how much he was making and the amounts are different and so now the other guy is ticked that the other guy is making more and trying to pull me into the argument and now everybody wants more money. How do you deal with that? Hypothetically speaking of course. Hypothetically for this poor, sad Brandon in Maui.

Palak: Yeah because I don’t know any Brandon’s in Maui.

Brandon: Yeah I don’t either. I don’t either. What do you do in that? My phone is just blowing up. I don’t even know. I mean technically I’m not in charge of it. I have a guy running that project but they’re all texting me, including the guy. Like all of them are. Like, “What do we do about this? One guy is threatening to walk off the job if I don’t raise his rates.” And I’m like this is ridiculous.

David: I can jump in and tell you what I would do.

Brandon: What would you do?

David: “Because you told the other guy what I’m paying you I’m now dropping your rates down to what his are so he doesn’t leave. Thank you for being dumb.” That’s how I’d handle it.

Brandon: Yeah. Yeah, I think that’s probably the way to go. Anyway you got anything to add to that Palak?

Palak: I would raise the rate.

Brandon: You’d just pay the higher rate?

Palak: I would raise the rate, yeah.

Brandon: Yeah.

Palak: I don’t know. I don’t think it’s a good idea to put two guys on the same job and pay them different.

Brandon: Well it’s like one guy is …

Palak: [crosstalk 01:15:30]all the time in corporate but I’m just saying, they’re going to talk about it.

Brandon: Well the problem is one guy is a tile guy and one guy is a demo guy. So they shouldn’t be making the same amount of money.

Palak: Oh yeah.

Brandon: Tile is an expensive job, right, however it’s ironically … I don’t know. They should earn different rates because they’re different skills but ..

Palak: Well that’s different then.

Brandon: So like the …

Palak: Maybe tell him, “If you come tile for me I’ll pay you the same rate as the tile guy.”

Brandon: Yeah, but the problem is the tile guy started doing other work that wasn’t just tile so he was like, “Oh I got to demo this …” so now they’re kind of doing similar work and that’s where the problem is coming from. Anyway, I’m dealing with it but it just shows if you don’t have a good system and process in place and the right people in place then your phone gets blown up from contractors in the middle of the podcast.

Brandon: All right let’s get to the world famous Famous Four. All right this is the Famous Four, the same four questions we ask every guest every week. Palak, let’s get to this. Number one, favorite real estate related book. Go.

Palak: Oh. The One Thing by Gary Keller.

Brandon: Great book and we just Jay Papasan on the show recently. I think it came out right around the new year so he was one of the co-authors of that work alongside Gary Keller.

David: Yes, it was. It was almost as good as this one but not quite. Palak you’re amazing.

Palak: Thank you.

David: You’ve made Jay look like an amateur.

Palak: I’ll take it.

Brandon: By the way that was episode 362 with Jay and Wendy, FYI. Anyway, okay, David.

David: Next question what is your favorite business book?

Palak: The Million Dollar One Person Business by Elaine Pofeldt. So, the one thing really showed me that focusing on one thing would help me grow in, what did she say, 12 inches in one direction as opposed to one inch in 12 directions and I’ve really taken that to heart and figured out why I’m doing it and just went with just buying homes and BRRRR strategy. Then The Million Dollar One Person Business emphasizes the importance of processes and systems and how a solo entrepreneur can have a million dollar revenue business. One of the examples is a person who owns 200 rentals and he says, “I see myself as an orchestra conductor” and he says, “All I have to do is make sure everybody plays their instrument correctly. I shouldn’t go out and start playing the instrument.” And that’s a good mindset for somebody who is a single person, like a one person business to remember to not start working in your business and start working on your business.

Brandon: Smart.

David: Beautiful.

Brandon: Very cool.

David: When you’re not scaling a huge portfolio and balancing being a wife and a mom and a real estate investor what are some of your hobbies?

Palak: So I love to write. I’ve been writing since I was a kid and I recently started really taking it seriously and writing real estate blogs to add value to new investors.

Brandon: Very cool. Yeah, I like writing. It formulates my thoughts about what I’m doing. It makes it more like systemized about what I do because I’m writing to to explain it to somebody else so I’m right there with you.

Palak: Yeah, for me it’s also very therapeutic It kind of helps me, like you said, formulate my thoughts and clear my head.

Brandon: Cool. Agreed. All right, then my last question of the day. What do you believe sets apart successful real estate investors from those who give up, fail or never get started?

Palak: I think the biggest thing is to have a strategy and any strategy is better than no strategy at all. So if you’re going to go into real estate you’re going to find a lot of different ways to make money and it’s important to decide a strategy and stick to it instead of like fumbling around trying to try out multiple different ways. So I think the real estate investors that are successful decide something and go with it and then over time they may change it but they decide this is what I’m going to do and do it.

David: Beautiful.

Brandon: Yeah, it’s awesome.

David: For those who are fascinated by your story as much as we are where can they find out more about you?

Palak: They can follow me on Instagram at OpenSpacesWomen or go to my website, OpenSpacesWomen.com. That’s where I post things about real estate, tips, tricks, maybe pictures of my kids.

Brandon: Perfect. All right Palak, thank you so much. I’m going to go follow you on Instagram right now and we’re going to get out of here I think. We’re going to try to like … We used to do like a long after show where David and I would talk, but we might just end it right here so David, you want to take us out?

David: Absolutely. You did a great job. Thank you very much Palak. I think that this is going to be one of our better episodes we’ve done. People are going to love it.

Brandon: They’re going to love it.

David: So thank you very much for sharing your story. This is David Green for Brandon Contractor Drama Queen Turner.

Palak: Thank you for having.

Speaker 2: 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.

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In This Episode We Cover:

  • Leaving her corporate job to take more control over her time
  • Why she’s OK paying capital gains tax rather than using 1031 exchanges
  • Flexing your “risk-taking muscle
  • Using hard money for BRRRR projects
  • Creating “templates” to make investing easier over time
  • Criticisms of the BRRRR strategy
  • Why she sells off some of her BRRRR properties
  • Using local banks and credit unions
  • Her mantra: “Fortune favors the finance-savvy”
  • How her systems allowed her to buy 2 properties from India
  • Her “A.B.L.E.” method to escape analysis paralysis
  • How she bought 9 units for 40% off the list price
  • How she used a home equity loan to borrow $160K
  • And SO much more!

Links from the Show

Books Mentioned in this Show:

Tweetable Topics:

  • “I approach real estate like a student.” (Tweet This!)
  • “When you’re owning the business, you’re the leader of it.” (Tweet This!)

Connect with Palak

Real strategies that work for real people seeking to build wealth through real estate investments. Co-hosted by Brandon Turner and David Greene, this podcast provides actionable advice from investo...
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    Kevin Zolea New to Real Estate from Parlin, NJ
    Replied 12 days ago
    Awesome Episode! I loved her A.B.L.E. method to escape analysis paralysis.
    Zach Lemaster Rental Property Investor from Denver, CO
    Replied 12 days ago
    Enjoyed all the real concrete information given in this podcast! Thanks for sharing!
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied 11 days ago
    Great podcast!
    Garrett Diegel Rental Property Investor from Nevada
    Replied 6 days ago
    Awesome show! Honestly a great roadmap for the struggling investor.
    Jakob Petschel from Tampa Bay Area, FL
    Replied 6 days ago
    This was such a great episode! Really great insight and such a relatable and great guest!!
    Serhii Aksiutin from San Jose, CA
    Replied 4 days ago
    How did Palak cash out their $160K with this triple triplexes deal?
    Palak Shah Developer from Philadelphia, PA
    Replied 4 days ago
    Thanks for the comments guys! Glad I was able to add value.