BiggerPockets Real Estate Podcast

BiggerPockets Podcast 373: Invest Locally or Out of State? Why Not Both! BRRRRing & Building with Lee Ripma

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Four years ago, Lee Ripma was brand new to real estate. She vowed she’d one day appear on the BiggerPockets Podcast. That day has come.

And we’re all better off for it!

In this action-packed episode, Lee traces her journey from full-time field biologist to newbie who jumped straight into long-distance multifamily (wait ’til you hear about her first deal!) to developing apartment buildings in the high-end Los Angeles market.

You’ll learn how she formed relationships with local, “boots-on-the-ground” partners on her BRRRR deals in Kansas City, why she came to prefer value-add multifamily deals over BRRRR, and how she’s able to find higher and better uses for properties in Southern California.

From looking at our podcast stats, we know a LOT of you are in hot markets like L.A., New York, San Francisco, and Washington, D.C. If you’ve ever thought to yourself, “My market’s so expensive… How can I invest in real estate?”—look no further.

This episode will get you motivated, and it may just ignite your real estate investing career!

Be sure to subscribe to the BiggerPockets Real Estate Podcast, sample the other BiggerPockets podcasts in our network (just search “BiggerPockets” in your favorite podcast app), and as always, if you appreciate this content, please give us an honest rating and review on Apple Podcasts.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Brandon:
This is the BiggerPockets Podcast, show 373.

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Lee:
I googled top 10 cash flowing markets in the United States. And I went on the list, and I was like, “Yeah, Omaha … ” They’re all in the Midwest. I didn’t know anyone in any of them, and I didn’t know anything about any of them, except for I had been in Kansas City one time in college, and I knew it was cool. And my partner at the time was a Kansas City Chiefs fan, so we were like, “That’s it. Kansas City it is.”

Speaker 3:
You’re listening to BiggerPockets 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, host of the BiggerPockets Podcast, here with my co-host, David Greene. David, having a good real estate week, I hear.

David:
Oh my gosh, I had the busiest day I’ve ever had in my life with real estate two days ago, but it came out awesome. The next day, we basically put four people under contract. There’s a ton of people that are house hacking right now in the Bay Area, which is a perfect market to do it because housing is so expensive. But spring time’s coming, so this is like that last mad push when you can try to get people under contract before it just becomes crazy. And it’s very exhausting, but it’s very rewarding.

Brandon:
Yeah. Very, very cool. Well, congratulations on that. And I know you’ve got some cool flipping stuff going on as well, so keep it up. I’m excited to hang out with you. I think you’re coming out here in like a few days.

David:
Yeah. Thank you. A couple days, yeah. Absolutely.

Brandon:
Yeah, we’re going to have a good time.

David:
The last time I was there, you told me that … You’re like, “You’re the best real estate [inaudible 00:01:39]I’ve ever heard,” when we were talking on the phone. And that really did a lot to help with my business. I just wanted to say thank you for that.

Brandon:
Wow. I don’t remember saying that, but you’re welcome.

David:
Every once in a while you say nice, intelligent things if you wait long enough.

Brandon:
Speaking of nice, intelligent things, today’s episode is with Lee Ripma. I hope I’m saying Lee’s last name right. Lee is an incredibly intelligent real estate investor, used to be like a scientist. And takes her scientific methods of being awesome, and puts them into real estate. And you’ll understand why … And I know I say this a lot, but really it’s one of my favorite shows we’ve recorded like ever. So many good things we cover here. In fact, probably my favorite thing we cover in the whole episode was talking about apprentices and how being an apprentice can make you so much … gets you years ahead of everyone else around you. And I’m not just talking to newbies. I’m talking to everybody, including David, me, Lee, everyone else. Listen for that. Also, we talk really in depth about how you can invest in an expensive market, in a cheap market, locally, far away. It doesn’t matter. Real estate is multi-dimensional. Stay tuned for that conversation and more.

Brandon:
But before we get to that, let’s get today’s quick tip.

David:
Quick tip.

Brandon:
On today’s show, we talk with Lee about partnerships, a bit about partnerships, and how she’s found partners, including partners on BiggerPockets. And so here’s what I want to encourage you guys to do, is go check out your local real estate forum. We have actually sub-forums. There’s like a California forum and then there’s like a San Diego forum and an LA forum, so there’s sub-forums inside the bigger state forums. Go in there and just see who’s in there. Go find some people in your local market. And if you can’t find your sub-forum, just go to the navigation bar, the little magnifying glass and the search, and search for your zip code or for your city name and just see who pops up. See who’s active in your area because those people may end up getting you deals some day. You may end up partnering with them. Maybe they’ll lend you money. Maybe you’ll work with them. Maybe you’ll lend them money. The point being, real estate, you’ve got to take it from online to offline, and BiggerPockets is a great way to find people to connect with in the real world. So, that is my quick tip for today.

Brandon:
And now let’s jump into this. David, any final notes before we bring in Lee?

David:
Yeah. Listen to this one twice everybody. Lee has a lot of information, a lot of value. Brandon actually says some moderately intelligent things this time too, so you don’t want to miss those. I would just plan on listening to this one twice because there’s a lot of good stuff.

Brandon:
Good stuff. All right. Well, with that, let’s get to the interview with Lee Ripma.

Brandon:
All right. Lee, welcome to the BiggerPockets Podcast. How are you doing today?

Lee:
I’m doing great. Thanks so much, Brandon.

Brandon:
Yeah. So, let’s talk about your real estate. I’ve got a little bio here of you, and you look like you’re crushing it down there in … You’re in the LA market, is that right, at least that’s where you live?

Lee:
That’s where I live, yes. And I invest locally in LA. And I also invest out of state, in Kansas City.

Brandon:
All right. Well, this will be fun because a lot of people that listen say things like, “Well, you can’t invest if you live in LA, or San Francisco and New York or whatever.” And you’re obviously doing it there. And you’re doing it at other places, so you’re kind of hitting both ends of the spectrum there.

Lee:
Absolutely. Yeah.

Brandon:
Very cool. So let’s start at the beginning then. How did you get into real estate investing?

Lee:
Yeah. So, I sort of took the more standard path, right? Growing up, I didn’t know anyone who was a real estate investor. My parents owned houses, but they were really just to live in, that sort of thing. So I really followed my passions, and I loved math and science, and so I became a field biologist. And I did that professionally. I worked professionally as a biologist for 13 years. And I actually just quit my day job about four months ago. So I started out … I had this other career, and I just sort of had this epiphany that all day jobs are dead end jobs, right? Even if they pay you really well because you’re always building something for somebody else. So, knowing that, I kind of had this idea. For my day job, I worked in … I was part of the entitlement process for development. So that’s my specialty is helping people comply with biological laws related to development and impacts.

Brandon:
Okay.

Lee:
So, David, you live in California, so you know what an Environmental Impact Report is, right?

David:
Yes, I do. That’s my favorite part of my job, is getting the privilege of reading those.

Lee:
Yes, pretty dull. I wrote the technical appendices that underlie those documents. Thrilling. So if you have like an endangered species survey, that would be me. Anyway, so I was doing that, and so I knew a little bit about development. And I just kind of had this idea like, “Maybe I could become a developer?” This was back in 2016. And I had this thesis that the future of living was smaller, and so I was like, “I’m going to become a tiny house developer.” Right? This was like my whole idea.

Lee:
And so I’m at home and I’m telling my roommate, “Yeah, I’ve got this idea.” And he’s like, “Well, have you ever heard of BiggerPockets?” And I had never heard of BiggerPockets, so I started listening to episodes. And I had listened to about three of them, and I came home and told him, “I’m going to buy enough real estate that I can be on the BiggerPockets Podcast.”

Brandon:
That’s awesome.

Lee:
So, here I am. That was like four years ago, right?

Brandon:
Yeah.

Lee:
So I have this idea. I’m going to become a tiny house developer, right? So in order to vet my idea, I have to learn how to underwrite commercial real estate. So I can still remember really struggling through this article on BP. I’m trying to figure out net operating income and all my costs and everything. It was really … It was hard. But I got through it, and I figured it out. And it turns out, my idea was terrible.

Brandon:
The tiny house thing? It doesn’t pencil out or what?

Lee:
The numbers were just awful, right? And so I realize, “Okay. Well, that’s not the path,” but now I knew how to underwrite commercial real estate. And I remember I was talking to my brother. He’s kind of a Silicon Valley tech guy, and he’s like, “Okay, pitch me. Pitch me your idea.” So I’m trying to do all this novel stuff in real estate, like I’m going to be, “Future of living is smaller, and I’m going to be a tiny house developer.” And he was like, “Why don’t you just do like the standard thing? And you can innovate later if you want to.”

David:
Wait, wait, wait. He’s a Telecon Valley guy, and he said you can innovate later?

Lee:
Yeah.

David:
This man stands alone as a god among men, practical thinking. I love it.

Lee:
Yeah. So he said that. And then I remember on a podcast I heard Andrew Cushman talking about how he had all these different ideas, and he was trying them all out, and I had the same thing. I’m like, “I’m going to make a backpack that can carry a yoga mat.” I had all these ridiculous ideas, right? And then I was like, “Oh, this is great. I’m actually going to follow the totally standard path. And then I can … I can innovate later.” And now, years later, I am innovating a bit, but I followed the standard path to get started.

Brandon:
This is such a good point. I bring this up occasionally on BiggerPockets webinars. I talk about people, like if you want to start a business … Let’s say you’ve got this really great idea and you’re like, “I want to do a mobile dog washing grooming business for chihuahuas.” And you’re like, “I’m going to do it.” That’s not been done in your area ever, and it’s kind of a gamble. I mean, it’s a huge gamble. You’re just completely risking everything. And I’m like, “When you get into real estate, it’s not like dozens or hundreds but millions and millions and millions of people have done exactly what you want to do.” And so it’s just like, “Well, follow the script that’s been done millions and millions and millions of times before and just do what everyone else is doing, and it tends to work okay.”

Lee:
Absolutely.

David:
I heard such a quote. I just got back from Dallas for the Keller Williams family reunion event, and Gary Keller was talking. Simon Sinek was supposed to be talking, but he actually got the flu really bad- [crosstalk 00:09:09]

Brandon:
Oh no.

David:
… laid out. And Gary said something that nobody wants to hear but everybody needs to hear. He said, “You just have to make peace with the fact that success is going to come from doing the boring thing over and over and over.”

Brandon:
I just read that today, his quote saying that. Yeah.

David:
Really?

Brandon:
I was like, “That is so good. That’s like a David quote.” And then that’s funny you brought that up.

David:
We never want to because innovation just sounds so much fun, right? And that’s exactly what happens. You get caught up in that. But the reality is you put in so much work to get good at doing something. And you’ve done … like surfing, right? Surfing sucks. Well, Brandon loves it, but I don’t like doing anything I’m not good at. It was not fun the first two times that I went because you just swim a lot, and your shoulders get tired, and you don’t ever do anything. So if I finally got good at surfing, it would be like, “Oh, now I’ve learned it. I’m going to go do something else.” That’s why you get to enjoy the fruits of your labor. And I could not agree more. You have to make peace with the fact that success will become boring if you just stay focused on what you’re doing and kind of scale from there. And there is a point to work innovation in, but it’s not until you’re on a well, well beaten path.

Lee:
Yeah, absolutely.

Brandon:
Very cool. All right. So what did you end up doing? What is that well beaten path that you followed for the first deal?

Lee:
Yeah. I remember, it was right before my wedding in 2016. I took off. I went to Iceland with a friend of mine. We’re driving around Iceland in the rain, and I put on a BiggerPockets Podcast. And I was like, “I want to do this.” And he’s like, “I want to do it too.” So we’re like, “Great. We’re partners.” So we started looking into a bunch of different markets. We lived in San Diego at the time, so we were looking at that. And then we were looking at having a vacation rental in Mammoth Lakes because we both really loved it. It’s a mountain town here in California. And I kept … Everything I was underwriting, it just had negative cashflow. And I was like, “I don’t get it. I don’t get how you can scale cashflow. This makes no sense. So why don’t I do … Why don’t I go out of state?”

Lee:
At the time, I was very sold on cashflow markets, and so I … This is great. This is how I picked Kansas City, right? I’m a scientist by training. Ready? I googled top 10 cash flowing markets in the United States. And I went down the list, and I was like, “Yeah, Omaha, Des Moines … ” They’re all in the Midwest. And I didn’t know anyone in any of them. And I didn’t know anything about any of them, except for I had been to Kansas City one time in college, and I knew it was cool. And my partner at the time was a Kansas City Chiefs fan, so we’re like, “That’s it. Kansas City it is.”

Brandon:
They’ve got a good team. That’s how I pick where I invest.

Lee:
Yeah, there you go. Actually, they weren’t good though when we [crosstalk 00:11:39]investing.

Brandon:
They weren’t good. Okay.

Lee:
Yeah. We were lamenting that we didn’t buy season tickets then. So, anyway.

David:
Can we just highlight how this is exactly what Brandon says, where he says, “Just pick something and go it”? It doesn’t matter what you pick, as long as you pick it. You just chose a name out of some MSN.com list that somebody through together, and you’re like, “Okay, I’ll go there.” And now I’m really excited to hear what you went and did with it. But I love that you’re a super smart … you’re a scientist, and you said, “I’ll just Google whatever Google says and go do it.” And what do you know, you end up on the BiggerPockets Podcast. Obviously you did it well.

Lee:
Right. And I’m all about that. I tend to have action bias where I’m like, “It doesn’t really matter what you do, as long as you’re moving forward. Because if you’re moving forward, you can always pivot later.” Right?

Brandon:
Yeah.

Lee:
So I just wanted to get started. So, what I did is I found what I thought was a deal in Kansas City. I called up a broker, who I found on BiggerPockets. I was like, “Hey, is this a deal?” And he was like, “Yeah, that’s a deal.” And I was like, “Okay, great.” So I flew to Kansas City. I remember, it was winter. And so everyone in Kansas City’s wearing like jeans and a sweatshirt, and I have this giant parka, like drooped down jacket-

Brandon:
It’s not hard to spot the Californian when we go out of state.

Lee:
Yeah, these snow boots. And I’m like, “What? It is so cold here.” It was like the dead of winter. Yeah. That deal, I ended up losing that deal. And someone else bought it ahead of me, which I think was fine. But while I was there … This is totally crazy. I was driving around Kansas City, and I’m like, “Okay, I need to find … ” And I talk about this a lot. The MSA, Kansas City, Indianapolis, Cincinnati, whatever it might be, LA, it doesn’t matter as much as the sub-market. So within each of those MSAs, there’s a sub-market. And there’s great sub-markets. And there’s terrible sub-markets. And there’s sub-markets that meet your needs. And so you’re really after a sub-market, right? And so I’m driving around. I’m looking for that sub-market, and I’m like, “That’s not it. Not it. This isn’t it. Oh, this is it.” So I found this place, and just really thought, “This is it.” It’s only 10 minutes north of downtown. There’s a bunch of re-development going along the main street. There was this cool bar that had all this pickle ball going on, and lots of young people. I just thought, “Okay, this is it.”

Lee:
And then there was a guy posting on BiggerPockets … This has not happened before or since. I've got this deal under contract, and I don't know how much the rehab's going to be. I end up talking to this guy on the phone. I'm like, "Hey. Look, if you bail on that deal, let me know." So he's like, "Yeah, I'm bailing on the deal." So he gives me his inspection report, so I've got the inspection report for this four unit building. The owner is in distress. He has a commercial loan, and the bank has called a note on the loan. And he's also getting divorced, so he's like double motivated, right?

Lee:
And so I look, and on the same street … He actually owns multiple properties, and he has one other one on the market. So I’m like, “Okay, this is great.” So I make him a cash offer. The list on the fourplex was 175, and the list on the duplex was 150. So it was six units total, a duplex and a fourplex. So I make him a cash offer. The total list was 325. Cash offer, 225, and he immediately accepts it. I’m like, “Oh man, I should have offered lower.”

Brandon:
That’s exactly what they say.

Lee:
So, that’s what I did. That was actually my first deal in Kansas City. So it was a [BIR 00:15:06] deal. It had a ton of rehab. Did I mention that I don’t know anything about construction?

Brandon:
All right. So let’s go into that. A lot of people are terrified by that first deal, if it’s a rehab. So, how did you get through the rehab? What was that like? What was your experience? Was it all easy? Did you learn a lot?

Lee:
No, it was not easy.

Brandon:
Yeah. Tell us about that.

Lee:
It was actually a total nightmare, but I got through it, and I think that’s the important thing. What I did is I took everything that I’d been hearing on the BiggerPockets Podcast. What does everyone say? “You’ve got to do value add. Don’t buy single family homes. Just go bigger.” Okay. Well, how about it just listen to these people. Right? So I went and I did it, and it was great. I thought that I kind of had it figured out, but it turned out that I didn’t. I had this broker, and that broker was both a property manager and a rehabber, red flag.

Lee:
So, he, while we were still in escrow, had come up with this rehab budget for me. And I thought I was really ahead of the game because I had this thing. I think the rehab budget was like 45 grand on the fourplex. It was like maybe 20 grand on the duplex. It was like 60 grand all-in. It was all laid out and everything, and so I thought, “Okay, this is great. I’m just going to send this guy checks. He’s going to send me pictures. This rehab’s just going to be … It’s just going to all be buttoned up.” Right? But it wasn’t. So, the communication kind of starts lagging on the rehab. I just told my partner, “You know what? I’m just going to fly out there. I’m just going to fly out there, and I’m just going to see what’s going on.

Lee:
So I get out there, and I will never forget this. It was a heatwave in Kansas City. It’s July. And I go into my fourplex, which is completely … It’s basically gutted. And I just remember thinking, “Man, this project is such a disaster. It’s never going to be finished.” And so I go in. I don’t really know anything about construction. My partner knows about construction, but I know a lot about project management and getting things done. And I knew that what was going on was a complete disaster. So I remember calling my partner and just saying, “We have to fire this guy. I don’t know what we’re going to do, but we can’t use him anymore.”

Lee:
And so we did. We fired him. We ended up taking over the project. We almost acted as like general contractors. Then we found another contractor. So I thought I had this $60,000 rehab that was going to take me a couple months. It was going to be great. And I was in it all cash, so we can talk about financing on it if you want to. But I was in it all cash, and so I thought I was going to do this re-finance. It was going to be great. Well, it ended up taking me, to finish that rehab, I closed escrow in March, and I didn't get my cash out re-finance until December. So it took me a long time to do that rehab, and the rehab was also way more expensive. I thought it was going to be 60 grand, and it was 150 grand … 140 grand.

David:
Oh wow.

Lee:
So it was way over budget, way over time, but it actually totally worked out. Because I did a nice rehab, I could get these high rents. And my values actually came back … They came back really high from the bank, so I was able to cash out pretty much all of my money. So I actually did successfully complete a BIR deal, and then I later exited those projects at a profit. So it all ends well, but at the time it was very, very difficult going through it. But, at the same time, I ended up spending a lot of time in Kansas City getting to know a lot of local people, having a nice local network, which I think is key in your market. And so there’s a lot of good things that came out of that. I also learned a ton about rehab.

Brandon:
To go back to the surfing analogy David used earlier, it’s like the first time you went out on the surf board, you went out there and you fell off your board. And then you got hit by a wave, and you scraped your face on the bottom of the ocean. You got a little scar. And then you went out the second time. You did it again. You went out a couple more days. And so most people would look at that and be like, “Man, surfing sucks. You should just quit. That sounds like a horrible thing.” But now today you’re like riding waves doing yoga while upside down on a wave because you went. You can’t get to the other end. You can’t become a good surfer without being a crappy one. You can’t become a good real estate investor without going through the difficult times, but most people just stop. They just don’t do it. So do you regret those first deals, or you obviously would just do them differently today?

Lee:
Not for a second. Actually, I wouldn’t do anything differently. I mean, I would have … Now when I do deals like that, obviously I’m aware of my rehab budget going in. I’m aware of the timelines. Obviously those go smoother, if you will, today. And I have structures that make it go smoother today, but I wouldn’t take that back for anything because that experience was so, so valuable. And I learned a ton. And I also made money.

Lee:
The thing that really I remember, I ran kind of my numbers when I finished the project, and my cash on cash return was like 28%. And I was like, “Great, boom, sold.” Like that was a botch job.

David:
Isn’t that what’s awesome about real estate, especially if you’re doing a BIR deal? That you can screw it all up, and your consolation prize is a 28% ROI. And I’ll hear people complain about that. “I thought I was going to get all my money back out of the deal. The contractor screwed me over. The ARV came in low. David, in your book, you said to do this. And I did it, and it didn’t work.” And I’m like, “Okay. So everything went wrong, and you have a 28% return on money and $40,000 in equity on the first deal you ever did.”

Brandon:
And a million dollars in education.

David:
Yeah.

Lee:
Killer deal right there.

David:
Lee, you have the right perspective. It’s that you didn’t expect surfing to be easy when you first did it, right? So what happens is Brandon and I are metaphorically surfing in real estate, and we’re having so much fun that we’re talking to each other like, “We’ve got to tell everybody about this.” It’s just the best feeling ever when real estate works great and you make 100 grand on a flip, or you get this cashflowing property and you get to live off the cashflow. So we’re people who espouse the virtues of surfing. We are out there, disciples of we love surfing. We’re telling everybody about it.

David:
And so people hear about it, and they say, “That sounds fun.” And then they go have the experience of scraping their face on the bottom of the ocean and swallowing salt water and not catching a wave. And they say, “Oh, that’s a bunch of crap. It doesn’t work.” I shake my head because, well, did riding a bike go that way for you? When you got on a bike, did you just take off down the street, and you were super good at it? Why at every other thing in life were you okay to take the bumps and the knocks learning how to do it, but with real estate there’s this understanding that, “Oh, it should just be easy right away”?

Lee:
Yeah, and there’s just no way through it, right? You’ve got to have these projects. You’ve got to go through these rehabs. And what’s amazing is how much you learn going through it. You can read about it in a book all you want, but the experience is really what is going to teach you. And I think I have this relationship with … just I have mental fortitude where I’m able to go through that. And even when I was standing in that moment … I always remember when I was standing in my half done, vacant project that was just basically like catching my money on fire. It was just like churning through all this money. I still … Even though that was hard, I was like, “I will get through this.” I believed that I would be able to get through it, and I would be able to be successful. And I had no illusions that it was hard, but it’s okay that it’s hard. Most things in life that are worth doing are actually hard.

Brandon:
Yeah. That’s really good. So what came next? I mean, you didn’t give up. Did you buy more in Kansas City then?

Lee:
Yeah, I did. Yep. So I started out doing these BIR deals, right? And I have since transitioned to doing … I mean, it’s always been multi-family, but I switched to doing more of a value add multi-family model in Kansas City. To me the difference is a BIR deal is like highly distressed, right? You can only get cash financing. You kind of have these really unknown problems, this big construction budget. And if you do a value add multi-family, you’re going in, you have these identifiable problems. You’re probably turning one unit at a time, and you can get bank financing. So you’re still getting the same result, which is that you’re adding a lot of value, and then you’re able to a re-finance. It’s just on a little bit of a longer timescale, but it also really reduces your risk.

Lee:
And so, going in, I didn’t have that much capital to start with, and so I really wanted to get these high cash on cash returns, and BIR was really appealing. And now the value add multi-family is actually more where I’m focused on my longterm portfolio.

David:
That’s a pivot. You started. You learned. You realized, “Okay, I’ve got momentum going. Now I can take what I learned and apply it, and something works better.” And you pivot.

Lee:
Yep, exactly. But if you don’t get started, there’s nothing to pivot.

David:
Yes. I was thinking when you started talking about that whole momentum idea, and I couldn’t come up with a good analogy. But it’s really good that if you’re like, “I don’t know which direction I want to go,” getting started is always the hardest no matter what direction you’re going to pick, so you’re better off to build momentum in some direction. And this is where I couldn’t come up with an analogy for the first time. And then move your momentum from wherever you started to the next area, and enter that with the momentum as opposed to stopping and starting.

Brandon:
Like Apollo 13 style, you can swing around the moon and pivot by using your momentum and gravity.

David:
Didn’t that happen in that movie?

Brandon:
It did. They went around the Earth.

David:
[inaudible 00:24:43]space cowboy. There you go.

Brandon:
But they couldn’t have done that if they were not moving.

Lee:
Totally.

Brandon:
Very cool. All right. So you started doing these value add multi-family. And I like the way you kind of differentiate that because when we think BIR, again, I think usually single family house or very small multi-family. It’s a nasty property. You usually buy it with a [inaudible 00:25:03]lender, or cash, or something like that. And then you fix all up, and you go to a bank. It’s a little bit … It is risky. It’s not a risk free thing because you’re dealing with a big rehab. Versus, you’re buying a multi-family that’s already rented, it’s just not … Maybe it’s a C class property and you want to turn it into a B class property. So you buy it at C, and you improve it one unit at a time to a B. And then maybe you still can refinance, get your money back out, and go do it again. That’s kind of how you differentiate, right?

Lee:
Yeah, exactly. A bank doesn’t want to touch those really nasty properties, right? If there’s a giant hole in the roof, and some of the units are gutted, and it’s vacant, that’s not a bank financing type property. That is their collateral, and they’re not interested in having that as collateral, right?

David:
Yep.

Lee:
But once it’s nice and it’s rented … And a lot of times it will be, just like you said, it’s a reposition, or you’ve got tenants who are paying maybe $500 a month, but you know in that area, if you were to renovate nicely, you could get $800 a month. There’s some delta there in potential rent versus rent right now, and all you have to do to unlock that is some cosmetic renovations.

Brandon:
Yeah. One thing we don’t talk about a lot on this show, but I’ll bring it up here because I’m just fascinated by this, that concept that real estate is so multi-dimensional. Like you said, it might be rented for 500 a unit right now, but if you … And maybe you’re fine with that investment. It works out just fine. But I like asking that question, “Well, what if you were to rehab it with 30 grand? Then what would it rent for? What if I rehabbed it for 150 grand? Then what could it rent for?” And I’m not saying you put more money and you naturally are going to get higher rent all the time. There’s limits, but this is where you can see opportunity where others don’t because you realize, “Hey, this market is actually improving dramatically, and there are some higher rent … higher comp rents around the area.” And so you’re saying, “Hey, I’m going to think creatively about what this could be.” And so you’re finding deals that way, which is cool.

Brandon:
I’m curious though, I guess, of how you’re able to do this long distance. I mean, living in LA, you’re not flying out to Kansas City every week, I’m sure.

Lee:
Nope.

Brandon:
So, what are some of the tips and tricks and tools and ideas that make this work for you, buying in Kansas City, without being able to be there every day?

Lee:
Yeah, absolutely. So I have a structure that I haven’t heard anyone really talk about where I have a local partner on all of my deals. And so we’re splitting that deal in some way, right? And they’re actually there. They’re doing the rehab. Sometimes they’re doing the property manage as well, especially while we’re turning it around. And then we’re splitting it. And so we’re both bringing to the table whatever we’re bringing to the table, but that way they are there. They’re invested in the project, and they’re making sure it’s a success. So, that’s been really powerful for me. And I know other people have other systems, and I’m sure those work, but this has been great for me.

Brandon:
I love the idea of local partners if you’re going to go long distance. When I bought my mobile home park the first time, like when Ryan Murdock brought it to me, he was just like, “Hey. I don’t know if you want this, but it’s 50 unit that you said you wanted, so here you go.” And I was like, “I love this deal. There’s no chance I’m doing it without you.”

Lee:
Yeah.

Brandon:
I don’t know that market. I don’t know the contractors. I don’t know the first thing about anything in that market. So how do you find … How are you finding partners? And then how do you vet them, and how do you know you’re going to work well with them?

Lee:
I have found them through different ways. I think most of it's just networking, could be chalked up to networking. But one of them, I met through my agent. He was also working with her as an agent. And then another one, I met because we were investment property neighbors. He owned the property next door to me. And another one, I met through BiggerPockets, just through networking. And I think one thing to think about when you're looking, if you want to do a local partner or just want to work with anyone, is that you really have to vet kind of their mindset and their approach and make sure it jives with yours.

Brandon:
Yes.

Lee:
That is really, really critical, and I have made the mistake of not doing it.

Brandon:
Yeah. Because not everybody wants the same thing. Not everyone approaches problems the same way, business the same way. So you want someone to be like … It’s like a partnership. It matters, like their skill, but it almost matters more, their heart, going into stuff. Because when things go bad or when you have a disagreement, how do you get through those things? Any tips on knowing that?

Lee:
Yeah. Or how do you treat people, how do you treat your contractors, what’s your relationship, like time versus money, what’s your … Because I remember my first partner, we were friends, and I didn’t really vet him. He’s a great guy. He’s a great friend. But his primary motivation was to save every single penny possible. And I remember us having this argument where he was like, “A hundred dollars is a hundred dollars.” And I was like, “Not if it takes two weeks.” And we had this fundamental difference.

Brandon:
That’s probably why David and I don’t work together yet. Because I’m putting together Ikea chairs in my kitchen, and David’s like, “Let’s hire someone to do this. Man, what are you doing?” And I’m like, “Yeah, but I can save $20 by putting together this Ikea chair.”

Lee:
Yeah, not worth it.

David:
I really liked the point you made, Lee, about like money is money, but so is time. And really, if you think about it, for almost everyone listening to this money and time are the same thing because you trade time to get money for the most part. Even if it’s not working at a job, you’re still trading time out of your day to make money.

Lee:
Yeah.

David:
So when you think about something costs a hundred dollars, you also have to think about, “How much time will I spend to save the hundred dollars or get back if I spend a hundred dollars? If I can spend a hundred dollars and have someone else do the work, can I make $1,000 with that time?” And I’ve really changed the way I look at money, and I’ve almost looked at money as just a different representation of time. And then throw into it energy. But Brandon likes to put that Ikea chair together because it relaxes him, and he feels accomplished, and he enjoys doing it. I don’t. It frustrates me. It takes me too long. I want to be done, and I want to be doing something else.

Lee:
Yeah, I’m with you. I’ll call someone from TaskRabbit to assemble my Ikea furniture every day of the week.

Brandon:
If I had a TaskRabbit in Maui, I would probably do that. I don’t yet.

Lee:
Listen Brandon, you can find someone to assemble your … Do you have Craigslist?

Brandon:
I may. We do have Craigslist.

David:
Lee, it’s a lost cause. Don’t waste your time.

Brandon:
This morning, just before this, I was transcribing my own video that I recorded this morning. I’m like doing transcription and edited the whole video. And the whole time I’m like, “What am I doing?” I even have people that work with me that do video editing, but I was like, “It’ll take me longer to upload it than it will just me to do it myself.” Not true.

David:
So, my flip partner, Mario Matsumoto, he’s Brandon’s friend and I, we had that very same conversation together with Brandon.

Brandon:
[inaudible 00:31:34]

David:
Mario runs an appraisal business. He told me about how he and I wanted to flip more houses, but he didn’t have time because he’s doing like tons of appraisals. And it was a super easy thing to leverage. He’s got assistants that know how to do it. He’s trained them what to do. There’s a science to doing appraisals. He really just needs to verify the last couple steps to make sure it was there. Why is he going to the house, and taking the pictures, and entering all the stuff in himself? So, he finally is like, “I’ll give it a try.” And in two weeks he said, “I’m never going back. I don’t know why I took so long.” And now we’re flipping all these houses because Mario has time. This is a complete side note. I don’t know how we got onto this topic, but I am very big fan of leveraging other people to do stuff and focusing on what you do best.

David:
And it sounds, Lee, like what you’re saying is when you’re picking a partner, find someone with a similar philosophy. If your partner wants to be out there doing the work … I read a critique on Goodreads in my long distance investing book. And the guy said, “A book about buying rehab properties from a guy that doesn’t know how to change a lock. No thanks.” Like, “Why would you want the guy that changes a lock to write the book on how to put systems together?”

Lee:
Well, here’s the thing. That guy doesn’t have time to write the book. He’s out changing locks.

David:
Or he can’t buy the houses. Yeah, he’s changing my locks for me. That’s exactly right. But that’s a good point. You don’t want to partner with that person if they’re going to be out there saving money finding old nails they can straighten out and put back into wood instead of looking for the next deal, or managing the people, or saving money somewhere better.

Lee:
And I’ve always had this philosophy. When I was in graduate school, I was kind of famous for saying time is money because nothing is less valuable than a graduate student’s time. They would just spend … It drove me nuts. They would spend three months to save like $500. I’m like, “You know you can outsource that, right?” So then to do my thesis project, I wanted to do this really complicated DNA sequencing thing, and I outsourced it. And everyone was like shocked, right? I’m like, “I got a grant to pay for the outsourcing.” And then, lo and behold, here’s my project. Anyway, the thing about this DNA sequencing, not to go too high into it, is that you didn’t know if it didn’t work until the end. So you could waste two months, and then it didn’t work, and you wouldn’t know. Let’s task that out to a professional.

Brandon:
Yeah, that’s great.

David:
So what are some of the things that you do now, Lee, with your time? What have you found is the highest and best use of your time?

Lee:
That’s a really good question. I think one of the … So I have these different things that I’m doing, right? We’ve been talking about my portfolio in Kansas City, but I also do development here in LA, so that is what I quit my day job to do. So, I think right now in development I spend a lot of time talking with investors, talking with potential sellers, so I think connecting with people is a good use of my time because no one else can do that in the way that I can, right? And I used to run a consulting business, and I had staff that would … They could go and do the work. They could go and do the surveys for the Keno checkerspot butterfly, but I was the one who talked to the clients and explained to them, “This is what we need. Here’s how we’re going to approach this project. Here’s what it’s going to cost,” and I couldn’t outsource that portion of it, right? I know that sound strange. But connecting with people, forming relationships with people, I think that is actually a very good use of my time.

Lee:
And I still do … I do all my own underwriting. I’m looking at deals. I’m going through deals. I’m calling agents. Because what I’m doing in LA is I’m usually buying like a single family home, tearing it down and building a fourplex. It’s actually two duplexes on a lot, but anyway. So, I am the one who knows like, “Okay. This is the zoning. That’s going to work. Oh, there’s this setback.” That’s the kind of thing that’s pretty hard to task out to someone else.

Brandon:
Did you say you were buying single family houses, tearing them down and then building up fourplexes on them? That’s cool.

Lee:
Yes. It’s actually two duplexes, but yes.

Brandon:
Okay. Let’s talk about that because that’s super cool. How did you get into that? How are you … One day you’re like, “I’m going to go tear down a house and go build four units on it.” How did that happen?

Lee:
That’s a great question. Going back to the beginning of my story, we talked about how I had this kind of idea that I could become a developer. That was actually something that was always intriguing to me because … Okay. Backing up, I really love real estate because you can create money out of thin air, right? You create money. And as a scientist, I’m very taken with this because matter cannot be created nor destroyed, but money can.

David:
Real estate is the real alchemy.

Lee:
Right? So, that creating equity has always been really what I focused on. I’m a big fan of creating equity, and I’ll talk to people about how equity is really the big driver of your return on investment. But anyway, so development fits into that, right? Because you’re creating a lot of equity. You’re taking this, I don’t know, crappy old house, and you’re tearing it down, and you’re building two big duplexes. And so you’re really increasing the value of that, and you can create a ton of equity doing that. And so I really like that. What are the steps that I took to get into development? I did it actually through personal relationships.

Lee:
I started out in real estate, and I remember I met this guy … It was actually at a pride parade. So he’s the kind of guy who’s in a pride parade. He’s not gay. Our wives actually work together. So we’re in this parade, this pride parade, and then he’s like this real estate developer. And I’m like, “Oh, that’s so cool. I want to get into real estate.” And then once I had done a couple deals, I sent him. I was like, “Hey, check it out. Check out what I did.” And I just kept in touch with him over the years. And then finally it kind of came. He was like, “Well, why don’t come in? We need someone to do acquisitions. You’re an agent. Why don’t you come in? And you can help us, and you can learn.”

Lee:
And development is actually very, very complicated, and so I was … It’s more of like an apprenticeship almost. The only way to learn it is to almost be an apprentice, right? And I had tried to teach myself some of this stuff, and I was not very successful. So, getting in with them and then being able to provide value because I was an agent, and I was able to close these deals. And then they showed me like, “Okay. This is what you do. This is what you need to look for.” Because they taught it to me and they’re masters, I learned it so quickly. And so now I can go out and do it, and then I can … Yeah, I can source those lots. And then I bring them to them and I’m like, “Okay, this one works. See? Here’s all the underwriting.” Then they check it and they’re like, “Yeah, that works. Okay, let’s do it.” So that is how I went from, I guess, being a biologist who had never invested in real estate to being a developer four years later.

Brandon:
I want to bring something up here. We don’t talk enough about this. But for thousands of years, I don’t know, maybe a bit longer, forever, humans operated on the apprenticeship sort of model. You just learned from somebody else who taught you that. That kind of went away over the last 50 years, but that is one of the greatest ways to get started investing in real estate is to go work for a real estate investor. And people today I feel like are … I don’t know if greedy is the right word, but so independent. “No, I’m going to figure this out on my own. I’m going to go do this.” I can guarantee you if I would have spent the first … I’ve been now in for 14 years I’ve been in real estate, or 13 years I’ve been in real estate. Had I spent the first three years instead working for somebody who was doing what I’m doing today, I would be way further than where I am today.

Brandon:
It’s like in the beginning, yes, you might feel like you’re going slow because you’re not actually buying real estate of your own, or you don’t have the biggest share or piece of the puzzle. You might be getting either no equity or maybe one or two, 5% of a deal or whatever, and so you feel like you’re going slower than somebody else who starts at the same time. But because you’re learning so much more and way faster then, five, 10 years down the road you’re going to be so much further ahead. Actually, just yesterday, my buddy Micah just started working for me. He’s actually in my sea shed here right now and just started working as kind of our bookkeeper. But he’s jumping in from not having bought any real estate to now he’s seen how we buy hundreds of units mobile home parks and flip six figure houses. So hopefully 10 years from now he’s way further along than where he would have if he went and did it all by himself just starting from day one.

Brandon:
And so, again, I think the apprenticeship thing is just such a great idea. In fact, David, you’ve done the military apprenticeship thing, right?

David:
Yeah, several times.

Brandon:
I’m doing my first one here shortly. I’ve got a guy coming out to move to Maui for six months to do an internship and the military pays for it.

David:
Nice. So what Brandon’s referring to is called the SkillBridge program in the Air Force. Different branches have names. But the military will pay military members for the last six months of their employment to go intern with somebody for free and learn skills to help their transition. So, if you’re in the military and listening, call me, call Brandon when you want to.

Brandon:
Yeah, it’s cool.

David:
But this is on my mind every single day. It’s like I cannot stop thinking about this. Because as I’m trying to grow my business, I have all these people that say, “I want to come learn from you, David.” And then we sit down, and they know nothing about how to do the job they want to do. And they want me to pay them to learn how to do something they’re supposed to be helping me with. And it takes six to nine months before they even know how to do the thing that I’ve been paying them to do. And then I don’t even know if they’re going to do well. It doesn’t make any economic sense. So what happens is I don’t. They don’t get hired. They don’t learn. They keep listening to a podcast, and they never actually make any progress.

David:
And I was getting interviewed on a different podcast for Acton Academy a couple weeks ago, and I realized when I was saying it that I make more money now in real estate in one month than I used to make in about two years when I was in college or right after college. It almost, from a financial sense, didn’t make sense for me to work during that time when you compare how much money I can make now with the skills I have versus then. My time is worth so much more. And if I had done what you said, Brandon, if I had trained underneath someone else who was doing this, for free, when I finally started being able to do it, you’re going to make so much money. If you average it out over the year or two that you didn’t make much or anything, you still come out way ahead.

David:
And that’s the thing, like what Lee said on that BIR deal, I got a $100,000 education … Or maybe Brandon, you said that. And I ended up making money. And if you really want to learn tough things like this, that’s the way you have to think.

Lee:
Yeah, absolutely. And I used to hire, right? In my former life as a biologist, I would hire biologists. And I would never hire anyone unless they had one marketable skill. So you either had to know how to identify birds. Like you had to have something that I could put you to work on right away, otherwise you didn’t get hired with me. And it’s like, “Oh. Well, I can learn.” Well, I don’t care. Go learn then, and then give me a call.

Brandon:
Yeah.

David:
That’s exactly what I tell them. And then they say, “Hey, I’m a really hard worker. Bring me on, and hire me, and teach me.” I’m like, “Then go learn how to do it, and then you have the skills to apply for the job you’re asking to get,” right? Or, “If you don’t want to do that, come work for me for free, and I’ll teach you.” And so far I’ve had four people that said, “I’ll do it,” and then all of them flaked before they actually came. They didn’t want to come learn. And it’s a very high chance that a year from now they’ll be in the exact same situation that they’re at in life.

Lee:
Yep.

Brandon:
So, true story, I mentioned Micah a minute ago. Micah, I’m going to talk about you again. Here’s the story of how Micah came on. Micah sent me a letter. He’s been listening to the podcast for a while, new BiggerPockets. He sent me a little to my house, just said, “Hey, thanks for the podcast.” He sent me a gift card … What was it, 25 bucks or something like that? … to Monkeypod, which is my favorite restaurant, so clearly knew what I was interested in.

Brandon:
So then I asked him just to help out, just helping out with the bookkeeping. He had experience bookkeeping and doing financial stuff, just helping with the flip stuff, organizing it. Just gave him a little bit because he brought a marketable skill to the table, which was like knowing how numbers worked and knowing how bookkeeping worked. Anyway, he did an awesome job of that, just knocked it out of the park. And so then, what was it, a month ago? I offered him a full-time job working here. And so, yeah, bring that marketable skill, but I didn’t even know that until he had worked for a couple months just helping me figure out … on a small level. Yeah, the apprentice thing, working for other people, it’s so key.

Brandon:
So, I would actually challenge everyone listening to this. I know there’s like two types of people right now listening to this. There’s people that are just getting started and going, “Oh man, I want to go work for a bigger real estate investor.” But then I want to turn the table a little bit and talk to everyone who’s like David and Lee and me, who can we … not that we’re going to go drop everything we’re doing right now and work 40 hours a week, but who can we learn from that’s where we want to be five years from now? Right? Because obviously that’s kind of the experience people have [inaudible 00:43:53]of, like we’re the top and there’s somebody else that’s going to learn from us. But if we humble ourselves and say, “Hey, we’re just kids and newbies at the same time. Compared to where we’re going to be, we’re newbies to our future selves, so who can we go learn from and apprentice under that’s 10 years further down the road from where we are?’

Lee:
And how can you add value to that person, right?

Brandon:
Yes.

Lee:
What can you do? Because reciprocity is like a strong human emotion, right? So maybe that person needs an introduction to an investor, or maybe they need your take on whatever it would be, right? Don’t go to them and say, “How can I help you?” That’s the worst, right?

Brandon:
Yeah.

David:
Yes it is.

Lee:
Something that you can help them with and go and add value, and it’ll come back to you, right? And it’s okay if it doesn’t. You have to go into it with no expectations, but it will. It comes back in life, right? I have this whole sort of philosophy of life where you have to think about other people’s needs and make sure their needs are getting met. So I have these local partners, and I would never try to like hose them on a deal. Maybe I would be in a position to, but I never would. Because if you hose someone on a deal, you’re going to do exactly one deal with them. I’m not interested in doing one of anything. I always say, “Do one so you can do 10,” right? So I’m building these relationships with people so that we can go do lots and lots, and scale together, and do lots of stuff, but I’m always negotiating to be fair. Anyway, this is something about working with people, I guess.

Brandon:
Yeah. You don’t want to screw people over because it’s going to come back to you. I had this conversation yesterday with a guy who is local here to Maui, a friend of mine who wants to get into wholesaling. He wants to get into flipping eventually and rentals eventually. But in the beginning I was like, “Help me find some deals, and we’ll make sure you’re compensated. We’ll make sure you get paid somehow. Whether or not you do the official wholesale contract, assign it, blah, blah, blah.” And I was like, “Normally that’s not done that way because somebody could screw you over.” Like if you bring me a deal, I will make sure I take care of you. And he kind of asked the question like, “What if you just took the deal for yourself?” And I’ve heard other people say that as well. Yeah, but then I’m never getting a deal from you again, so why would I? Why would I screw you over if you brought me something good? If you have the skill to bring me a deal, why would I screw you over? I’d be killing the golden goose, right?

Lee:
Absolutely. And trust and relationships really make the world go around, right? We may write up everything into LLC operating agreements and things, but that isn’t what governs everyday communication and partnerships.

Brandon:
100% agreed.

David:
Very good point. Lee, can you share with us a little bit about what your portfolio looks like now?

Lee:
Yeah. So right now, I’m in the middle of an exchange actually. Currently, that I own, I have 23 units. 22 of those are in Kansas City, Missouri, and one of them is in Mammoth Lakes, California.

Brandon:
Oh, you got the vacation rental?

Lee:
I sure did.

Brandon:
That’s awesome. Next you just need the tiny home community, and you’re set. All your dreams will have been come true.

Lee:
It’s so amazing though, really. I’ve been thinking about it. I should buy a mobile home park and make it into my tiny home community.

Brandon:
You probably should. Actually, we have been having legit conversations out here in Maui lately about building a campground, like a tiny home community slash campground slash … get a bunch of old VW buses. You and me, we could make a nice … I could be your local partner here in Maui, and you can do the rest, and it’ll be great.

Lee:
Let’s do it. I’ve got an exchange. I’m ready to buy some land. Let’s do it.

Brandon:
That’s great. I have a feeling though, the reason we haven’t moved forward is I believe it’s going to be very much like your first entrance into tiny homes. It’s like, “Wait, this doesn’t make any financial sense whatsoever.”

Lee:
It doesn’t make any sense.

Brandon:
It sounds so cool.

Lee:
You know why it doesn’t make any sense? Because the cost of a tiny home is way too high.

Brandon:
Yeah.

Lee:
It’s tiny, and yet it’s so expensive.

Brandon:
It is. And I think there’s solutions to that, especially if you can get them pre-built. I’ve been wondering, “Why don’t they just build them in China and put them on a boat and send 20 of them over here, and you get them for five grand a piece?” That feels like it should be a thing, but it’s not a thing yet.

Lee:
That is a thing, but it’s not five grand.

Brandon:
Is that a thing? Oh, it should be five grand.

Lee:
The problem with China is quality, so you’ve got to really check your quality control over there. And then in LA, so I don’t own any of my own deals. I just own sort of shares in the deals, if you will. So I buy into my own deals, but I don’t own 100% of them.

David:
I think listening to Brandon Turner talk about tiny homes is like listening to Andre the giant talk about Weight Watchers. Brandon would need like three tiny homes stacked on top of each other just to get inside of one.

Brandon:
I used to live in a car, so … Okay, I slept in a car. I didn’t live in the car. I slept in the car every day.

David:
Yeah, with the windows rolled down and your feet sticking out.

Brandon:
No, I just curled up in a little ball, crying myself to sleep.

Lee:
Listen, compared to a Prius, a tiny house is huge.

Brandon:
I agree. Prius camping, we did that for years. It was amazing.

David:
Yeah, we called you the [tree-is 00:48:55], as big as a tree.

Brandon:
I like it. All right.

David:
So you’ve got a portfolio of 22 BIR properties … or 23, 22 in Kansas City.

Lee:
Yep.

David:
And then you’re into value add multi-family now. Can you give us a brief overview of what that looks like as far as how you work yourself into these deals and what you’re concentrating on to build your business now?

Lee:
Yeah. You mean for my portfolio in Kansas City?

David:
Is that where you’re doing the value add multi-family?

Lee:
Well, there’s the duplex duplex model in LA, so I could talk about that.

David:
Yep, let’s go there.

Lee:
It’s really kind of a cool model. So, in LA you have, obviously there’s zoning, right? And so there’s a lot of zoning that is single family home, but there’s also a lot of zoning that will allow multi-units. But on those multi-unit zoned lots, you just only have one single family home, right? So it’s one of these like highest invest use questions, right? So what is kind of the maximum build of that property? And so what I do in LA is I look for properties in areas that are like … I like to call them trendsetter adjacent. So they’re not … It’s not your like hot market. It’s the market right outside of that. And then I’m buying a single family home, and I’m tearing it down, and I’m building two very large duplexes. And what we’re actually doing is, as you guys know, when you do construction, you’re exposed to a lot of time and cost risk. And so, the group that I’m with, we were like, “How are we going to control this?” And so we ended up going with pre-fabricated construction.

Lee:
Prefabricated construction is really, really cool. It’s like a kit of parts. And what you do is you have a parallel process, right? So you’ve got your lot. You scape the lot. And then you pour foundations. And while you’re doing all of that, you’re actually in the factory building all of the pieces that are going to become your house. It’s kind of like legos, where you’re building all the pieces, and then you’re taking them to the site, and then you’re putting them all together. So it was really cool because there was a project that we were doing, and it was next to a stick-built home, and it was just ridiculous. It was basically done before they had finished framing the second story. So it was just this awesome comparison. Yeah, so it’s just way faster. It’s not necessarily cheaper, although it’s a little bit cheaper, but the real savings is on time. Getting back to time is money, it’s huge. You’re quicker to bring this to rent, to market, whatever it’s going to be, and you just don’t have that exposure when your projects don’t go over a long period of time.

Brandon:
Yeah.

Lee:
Yeah, so it’s pre-fabricated construction. It’s two duplexes on a lot. Every one is a little bit different. That’s what’s cool about pre-fabricated versus modular, which is like what you were talking about of, “Can they preassemble this in China and ship it over?” That’s modular, where it’s already totally built. But this is a kit of parts, so it can be completely customized to the lot. And this is LA and real estate is very valuable, so we want to maximize every buildable square foot that we can.

David:
What’s the permit process like with earthquake code and stuff like that for these modular homes?

Lee:
Pre-fabricated construction.

Brandon:
Pre-fab.

David:
Yeah, sorry.

Lee:
So it’s exactly the same as stick-built. There’s no difference. But, so what we do is … There’s another risk that I didn’t talk about, entitlement risk. So if you have to in front of the planning board and talk, talk the public into approving your project, you don’t want to do that because it takes a long time. So what we do is by-right construction. I mentioned we’re buying like a 7,000 square foot lot that is zoned for four units, so that is called by-right construction. And so you basically just go straight to permitting. And so you hire a structural engineer. You have an architect, and they design your project. And then it goes through the permitting process. It usually takes about three months. And we’ll even try to get started on all that stuff while we’re still in escrow because it’s free. Ones you haven’t closed, it’s still free.

Brandon:
All right. By the way, is pre-fab the same as like SIP panels? I’ve heard that term, SIP panels. Is that the same thing? Do you know?

Lee:
I’ve never heard that term, but it wouldn’t surprise me if it’s the same. It doesn’t appraise for any different. I mean, it’s still standard materials. It’s still wood and everything. It’s just because you’ve already done a lot of that assembly work in the factory, it’s just way faster. So you can frame out, for example, one floor of one duplex in a day. It’s really, really fast.

Brandon:
Yeah. I had a buddy who did that. He actually built his whole house that way. They built the panels outside, brought them in. And he just operated a crane, and they just like dropped all the pieces into place.

Lee:
Yeah.

Brandon:
Are they pre … Is the wiring already in there, or does that come after? Is drywall there, or is it just the actual bare wood walls? What’s it like?

Lee:
It’s basically the kit that you get is the dry wood walls. And then it includes what we call MEPs, so your mechanical, electrical, plumbing, all of that comes with this pre-fabricated kit. And it’s all built. It’s built at the factory. They actually have this thing called a core. They build this core, and that’s where all your plumbing and electrical and everything is. And then everything in your house backs up to that core. So it’s really an innovation on construction, and it’s actually … It’s very, very cool. And that’s all been assembled at the factory, so they just bring it on a crane, and then they drop it in.

Brandon:
That’s cool.

Lee:
You can finish it out with whatever you want, so you get basically a shell, right? And then you just put in your flooring and your drywall and your cabinet, whatever you want.

Brandon:
That makes sense. I wonder if you couldn’t do that with tiny homes. Maybe that’s a way to bring down the price is pre-fab tiny homes. Maybe that’s how they do it. I don’t know, but it feels like you could build them out faster.

Lee:
Yeah. You know what makes it really cheap, Brandon? Is if you put together your own tiny home.

Brandon:
That would make that cheap.

David:
Can you buy a tiny home at Ikea yet?

Lee:
So like move over Ikea furniture.

Brandon:
I will do it. I built this shed that I’m right now. Okay, I didn’t. I had a contractor build most of it. But this whole entire shed cost like, I don’t know, 20 grand to build. It’s got no bathroom, but whatever.

David:
You built the idea that the contractor executed on your shed. That counts for something.

Brandon:
Look at that, see? I did the flooring, but whatever. [inaudible 00:55:09]the shell, and then I finished it up.

David:
All set with laminate panels.

Brandon:
Exactly. So I want to know more about the details, real quick before we kind of close this thing out, about the build, the numbers. But I want to the deal deep dive soon. We’re going to go the deal deep dive soon. So I’m wondering, in your deal deep dive … Before I go there, are you talking about one of these fourplex things, or should we go there first?

Lee:
Let’s go there first because that wasn’t my deal deep dive.

Brandon:
Okay, cool. So let’s go there first. I’m just curious, what are you typically buying a lot for? What does it cost to tear down a house? What does it cost to build the new one? And then are you selling them, or are you renting them? How does the math work behind this?

Lee:
Yeah. All great questions. The lot acquisition really depends on where it is. So we’re buying the lots anywhere from between … The cheapest one I got was I think 550, or 520. And then all the way up to like 1.15. I usually cap out around 1.2. This is for a tear down. This is LA. Keep in mind, it’s LA. So we purchase those, that’s kind of our acquisition price. And then our exit is based on what our cap rate is going to be because these are rental properties, so they’re built as rental properties. So we talk about a build cap, which is similar to cap rate if you’re just buying an existing multi-family, right? And so, how much does it cost to do these things? It really all depends on the lot.

Lee:
What we’re really looking for … Usually this is the profile of the lot. It’s between 6,000 and 7,000 square feet. It has certain zonings that work for four units, but not more. Because if it had a zoning where you could build really, really high density, then it would be more valuable, and we wouldn’t be able to buy it. So usually the by-right construction on the site is maybe between four and seven units or something like that. And this is what we would call infill development, right? We’re in neighborhoods. All the lots are already built out.

Lee:
And so then in terms of demolition, again it depends on how big of a home is there, but the site prep could be anywhere between 20 and 50. It could go … We had one lot we looked at, and we thought the demo was going to be around 125, so it can get … And that’s all of the site prep. It’s not just the demo of the home. So it depends on how large the home is. We just underwrite every single line item cost, right? And calculate it and say, “Well, what’s the rent when we’re finished? How much is this going to be worth?” And we back into, “Well, we can afford to pay 800 for this lot,” or, “We can … ”

Brandon:
Sure. It’s just like flipping where you just work backwards is what you’re saying.

Lee:
Yeah, you just work backwards. It’ll only work, like the rents have to be decently high. And we’re also building large units, so we’re building either for our five bedroom units. And the reason we’re doing that is because of parking requirements. Parking kills all deals in LA.

Brandon:
Interesting.

Lee:
But you can’t do underground parking because it’ll kill every deal. Anyways, so I could go on and on about exactly what we’re looking for. But think about it like a build cap is similar to when you’re acquiring a mobile home park or when you’re acquiring a multi-family or something like that.

Brandon:
Okay. So then the idea being you’re selling these to investors who are just trying to get a return on their investment. So, I’m a rich investor. I want to just get a return. So you build this property. I’m like, “Okay, I’ll pay two million dollars for that fourplex.” And then that’s how you guys get your money back. Is that right?

Lee:
Yeah. It’s usually more like three million dollars.

Brandon:
Really, for a fourplex?

Lee:
Yeah.

Brandon:
That’s insane. What do they rent for? What’s a three million dollar fourplex rent for?

Lee:
So yeah, the exists are usually between two and three million, so it just depends. And we always forecast really conservative values. So, what’s cool about this model is we are building for sale products, but they are rental properties. And so, if anything … This is like always preparing, right? Real estate is cyclical, and you have to be prepared. I always say like, “Winter is coming. How are you preparing?” And so what I really like about this model is, although you are building a for sale product, you can rent it out. And we can rent it out and ride through any kind of correction in the market or anything like that. So you’ve got that downside protection. So, yes, people are coming in. We always say … It’s a four unit, so we have to look at comps, but then we also are looking at cap rate. And we’re always pretty conservative on it. Actually we always underwrite at between like a 5.1 and a 5.2, even up to like a 5.4 cap on the exit, and then never exceeding the area comps.

Lee:
And we use a construction lender, and so they’re actually checking all of that. So if they wouldn’t lend on the project, then that means that they don’t think that the exit value is high enough to lend, and so that’s good indicator that the project might not be viable.

Brandon:
That’s smart. I’m blown away that an investor would pay like three million dollars for a fourplex. What’s a four bedroom, half of a duplex rent for in LA? Is that $10,000 a month, or is it $1,000 a month? Where is it?

Lee:
Yeah. So a four or five bedroom will rent, I think on the low end maybe 3,500, maybe in our more B minus areas I guess. And then on the high end, probably for a four unit … I don’t think we’ve ever gone over 4,400, but I actually think we can rent them for more than that. But again, you always want to be … You want to be conservative in your underwriting, but you also want to be realistic, right? Otherwise, no deal’s ever going to work.

Brandon:
Sure.

Lee:
Yeah, I know, but it is that value. So think about how much income it’s actually producing, plus you’re getting a brand new product, brand new. And the other thing is that rent control in LA and California rent control, so these properties are exempt from that.

Brandon:
Oh, interesting.

Lee:
So there’s a lot of value there. There’s that, you have this new construction, and it’s not subject to rent control. And then you could also just … I mean, it’s like the ultimate house hack to buy this four unit. It’s expensive, but you have all these bedrooms. You have between 16 and 20 bedrooms. So if you do the rent by the room model, you could really kill it.

David:
I know it sounds crazy because we’re not at the 1% rule with this.

Brandon:
Yeah, it’s so far below it.

David:
It’s about half, right? Like 4,000 unit, and it’s about 16,000 total. So it would have to be 1.6 million. If you’re selling it for three, you’re a little over half, maybe like 0.55. But, here’s what you’re not thinking about in California real estate. They’re not looking at it from an ROI perspective as much as they are from an IRR perspective. They’re thinking, “I’m going to buy this thing. I’m going to hold it for five to ten years. It’s going to generate some kind of money. But then when I exit, it’s going to be worth four and a half, five million. That’s kind of how … California is a different animal in that sense.

David:
And what Brandon’s saying is a very good point because that’s what everybody else looks at. When we’re helping house hackers in the Bay Area, I’ll get, “What do you mean I’m going to be coming out-of-pocket 1,200 bucks? I thought you guys said you could get the house to pay for itself.” I’m like, “Yeah, it does work that way in Kansas City Missouri, where you can buy a triplex for 80 grand. But in California, your mortgage would be 9,000 a month in Silicon Valley. You’re going to be coming out-of-pocket $1,400.” That’s a pretty big win, right? That’s a really, really big win. It makes sense to do it. It’s about understanding, kind of tempering your expectations and knowing what the play is.

David:
Because it’s not uncommon when we help people out here that house hack, we’ll buy a place for 1.2. We’ll spend 50 grand to be able to turn it into something they can house hack. Their mortgage will be three grand a month instead of nine grand a month, and it’s now worth 1.35. It’s common. All the time, there’s houses right down the street with comps that are that much more. And in two years of this crazy, crazy spring time, summer time, nuts … It’s like the hunger games around here with all these people fighting for the same house. It’s going to be worth 1.8. And then when you sell it, you look like a genius that made 400 grand and saved on your rent. But it’s completely different than what you can expect if you go to somewhere in the Midwest or the South. And that’s kind of what you have to think about with what Lee’s doing here is it’s going to appreciate a lot. You don’t have to fight to buy a property and try to evict a tenant that has some kind of rent control protection where you can’t raise the rent on them, and they’re only paying $1,200 a month. We run into those problems in California a lot of the time.

Lee:
Yeah, absolutely. And looking at … There’s these four wealth generators of real estate, right? There’s appreciation, which is both market and forced appreciation. There’s tax benefits. There’s cashflow, and then there’s principal pay down, right? And so I, like I’m pretty analytical, so I’ve looked at this. And I’ve looked at this for my actual deals. I have a real deal actually in mind. Going through those four, my overall contributor to my ROI, if all four of those were equal and you pictured a pie, it would be split 25% for each, right? But it’s not at all.

Lee:
So on my recent deal 78% of my return came from forced appreciation, some market appreciation as well. 11% came from tax benefits. 7% came from cashflow, and 4% came from principal pay down. If you want to make a big win, look to where the big drivers on that return on investment are.

David:
Yes.

Brandon:
That’s such a good point. I’ve never known anybody that actually quantified those percentages. You’re my kind of people, just so you know. This is great.

David:
I love it. You basically articulated what Brandon and I just kind of do by our subconscious or by second nature. You made an algorithm in your own head that said, “If appreciation is the main driver in an IRR model, then that makes sense.” And Brandon and I have actually had a conversation very similar where we realized, at a certain point, cashflow isn’t necessarily as important as when you’re new. We had this example of, “What if you bought a house in Beverly Hills for 10 million dollars, and you lost $1,000 every month or $2,000 every month. And then five years later, that mansion was worth 16 million or 15 million, would you really be that upset that you lost 12 grand a year or something, that you just made five million dollars over that period of time?

David:
But what you have to do is zoom out. When you zoom in super hard, which is always what happens when you’re scared. When you’re feeling fear, you just zoom in, and you look at what can go wrong. And you have to force yourself to zoom out and see, “Oh, what could go right?” And then make an informed decision. That’s a great point, Lee. Like, “If cashflow is 4% of your overall profit, why is that the part you’re focusing on so hard?”

Lee:
Yeah. A note on cashflow. When I first started, I was very sold on cashflow. I think a lot of new investors are. And cashflow is really, really important because it is your hedge. Your cashflow is your margin of safety. It makes it so that you do not lose your property, and that is really, really important, but it is not a very big contributor to your overall ROI.

David:
I say that all the time. Cashflow really is a defensive metric. It protects you from losing the property. But people who build big wealth through real estate do it in a very boring way, like we said earlier, holding property for a very long period of time, letting the loan pay down, and letting it appreciate.

Brandon:
Yeah.

Lee:
Absolutely. Yeah.

Brandon:
One last question before we move to the deal deep dive. On those properties, are you separating the water, I’m assuming, so tenants will pay their own water? Or is the landlord responsible for … Is it one just meter going in?

Lee:
Oh no, it’s all sub-metered. It’s all new construction, so we can totally do that.

Brandon:
I want to bring that point up because when you buy … If you were going to go … because water bills, primarily water because usually electricity is already sub-metered, but when you’re looking at fourplex some people are like, “Would I pay a million dollars for a fourplex?” And the biggest question I always want to know is, who pays the water? And so when you’re building new construction, I love the fact that … Let’s say you just built new construction fourplexes just to own for yourself, like if you were doing that let’s just say. You can sub-meter them. You can add the additional bedrooms because you’re going to get way higher rent for it. We talked with Joe Asamoah a while ago about the Section 8 numbers, how dramatically they’re higher for more bedrooms.

Lee:
Yeah.

Brandon:
So you can do all those things to make it way better than buying a used fourplex that you pay the water, and the property is going to fall apart every year, and you’ve got to fix all the stuff, and the roof’s going bad in a few years. So, again, it goes back to what I said way earlier, that real estate is multi-dimensional. It’s not, is just a good deal. There’s a hundred ways to skin a cat here and to try to figure out what makes a good deal. And so you can invest in LA, in an expensive market, and find a way to make it work. You can invest in Kansas City, find a way to make it work. And you can find a way to make it work in every other market in between. And so people just come up with excuses why it doesn’t work in their market. And I love that you are doing both. I think that’s just like the theme of this show is you figured it out in both markets. So, way to go.

Lee:
Yeah, absolutely. And the strategy is different, right?

Brandon:
Yep. It is.

Lee:
And so you have to know those markets. You have to know what’s possible and where your returns are going to be and everything, but both are really great real estate markets for different reasons. And I actually think they’re a great combination.

Brandon:
Yeah, 100%.

Lee:
Kansas City’s like the bonds in your portfolio, and LA’s like the Apple and Tesla in your portfolio. What’s really cool about what I’m doing in LA is that it does have this downside protection, and I wouldn’t want to do it if it didn’t.

Brandon:
That’s why we’re doing the mobile home park thing right now. Because I look at the mobile home parks, I’m like, “I’m just filling … I’m buying properties that have like 70% occupancy, so there’s like 30% room there. So if the economy turns, more and more people are losing their job, more and more people are going to move to a mobile home park, so we just infill more.” And so it’s downside protection again. I’m always thinking, like right now I’m not worried about a recession, but I’m always thinking about a recession. You kind of said something earlier about that too, like you’re always thinking, “What if that happens?”

Lee:
Yeah.

Brandon:
It’s smart, very smart.

Lee:
Yeah, you always want to make sure you’re protected. My attorney said you can’t say recession proof.

Brandon:
Recession resistant. That’s what I usually say is recession resistant.

Lee:
Yeah, she didn’t like that either actually, so I just don’t say … Downside protection is my euphemism.

Brandon:
Very, very cool. Well, I want to keep talking about this for about 10 more hours, but we’ve got to get on with the show, so let’s get over to the next segment. It is our deal deep dive.

David:
Deal deep dive.

Brandon:
All right. This is the part of the show where we dive deep into something you’ve done, a deal that you’ve done. So, Lee, let’s get into that. You got something in mind that we can pick apart?

Lee:
Absolutely.

Brandon:
All right. What is this property? Like what is it, and where is it at?

Lee:
It is a fourplex, and it is in Liberty Missouri, which is a suburb of Kansas City.

Brandon:
All right.

David:
And how did you find this deal?

Lee:
This is great. So I joined all of these Facebook groups. You know there’s like buy/sell local Facebook groups? So I joined all these ones in Kansas City thinking, “One of these days someone’s going to post a property on these.” And my wife was making fun of me because she saw my Facebook feed and she’s like, “What is all that junk in there?” It’ll be like one baby shoe. Like there’s someone selling counterfeit laundry detergent. It’s just ridiculous, right? But I knew, I knew one day this would happen, and it did. So here it is.

David:
It’s funny you say that. I just joined three of them in the Bay Area because I’m so tired of all the deals that are on MLS going for 25 offers on everything. And at least if you’re in one of these groups, you may pay fair market value, but it’s better than paying 200,000 over. Yeah, I’m a fan of the Facebook groups. You should be joining them everybody, just not the ones where I live. I don’t want the competition.

Lee:
Yeah. So join your local Facebook groups. And so it was actually sort of an obscure one. It was like the Northland Swap Meet or something. And I see on there, so it’s Bob, and he’s got his phone number. And there’s just a picture of the outside of the fourplex.

Brandon:
That’s it.

Lee:
Found it on Facebook.

Brandon:
That’s awesome. All right. How much was it, or what was Bob asking?

Lee:
Bob was asking $150,000. And I know the market really well, and I know what kind of rents are achievable with a nice rehab. And so I know, fixed up, it was worth very conservatively 280, probably more like 300, maybe even a little bit more. So, I knew that was a deal. Now, it needed some … It definitely needed some rehab.

Brandon:
Okay. So you bought it at the 150?

Lee:
Yeah, I did actually. I bought it for 150. You have another question about, “How did you finance it?” But basically Bob was … I talked to him on the phone. So I see this ad, right? I talk to him. I give him a call, and it’s because he’s posted in this obscure group. It’s only like me and one other person, right? So I call up my local partner, who’s awesome, Derek and Trista Fenner. I actually met them through BiggerPockets, and we became friends, and then we started working together. And they’re great, total rock stars. And so I call up Derek and I’m like, “Hey, can you meet this guy tomorrow at 10:00 AM?” I’m like, “Just go over there and bond with him,” right? Of course they have stuff in common. They both race cars. And it was just us and one other group. And so Bob was saying, “If you give me 10% down, I’ll give you 6% financing with a 20 year AM and a 10 year balloon. And I knew that there was all this upside.

Lee:
So, could I have negotiated and tried to get it for 120 or 130? Yes, I could. But the way that I beat out that other party was basically by not negotiating. And I knew that there was a lot of upside, right? So I knew that I was going to be able to get, I don’t know, 70 grand in equity. So, sure I could get 80 grand in equity, or I could just take 70 and get the deal done, right? And then Bob was-

Brandon:
David brings that up a lot. People are so keen on getting a deal, but it’s more about like, “Does the numbers work? If you pay 10 grand over asking price, does it work?” So top whining about it.

Lee:
Yeah.

David:
I just had a conversation about that with a group I belong to the other day. Where we shouldn’t be saying, “Did I get as good of a deal as that person?” Or making up a scenario in your head and then saying, “Did I get as good as I could have gotten?” You should just be saying, “Is it better to buy it or not buy it?” It really is that simple. Do I want to lose this deal over 10 grand and walk away from $70,000 in equity? 30 years later, will I even care that I could have got 80 grand in equity instead of 70 when it’s got 500 grand or a million, right? And I’ve really changed the way I think because we shoot ourselves in the foot so often. I see this with clients all the time that don’t want to pay ask price or don’t want to pay over asking price on a house that’s worth … It’s listed at 900,000, and they have to pay a million fifty to get it, but there’s a comp on the street for 1.15, a hundred grand more, right?

Lee:
Right.

David:
It all is where you put your baseline. Is the baseline the comp, or is the baseline the list price? And it’s really, really stupid to get caught looking at the wrong one.

Lee:
Right. If you’re getting a bunch of equity in a deal, just focus on that. This was a deal, and it worked. And because Bob was asking 150, and I paid him 150, it was super easy to get the deal done.

David:
That’s exactly right.

Lee:
And the seller financing was also very valuable to me.

David:
Well, you’ve got to wonder if you tick off Bob, does Bob still want to give you seller financing? Is Bob coming after you for a better interest rate now? Like you mentioned earlier-

Lee:
Well, it’s interesting because actually we’re about to refinance it, so we’ve finished the total re-position, and we’re going to cash out, refinance it. But I was thinking what I’m going to do is I’m going to get the appraisal from the bank, and then I’m going to call Bob and say, “Hey, I’m going refinance with the bank for this. Would you rather this is you?”

Brandon:
Yeah, that’s smart. In fact, actually I just approached a guy yesterday because I said, “I’ve got a [inaudible 01:14:26]lender that will do 8% on this flip I’m about to do. Would you like 8% instead?” It’s such a great negotiation because it’s like, “Not a big deal. Take it or leave it.” Like, “I’m not asking you to do something unreasonable. But hey, if you want 8% on your money on this flip, you can have what the bank’s going to have.” So I love that you’re doing that for Bob. That’s such a great negotiation tactic.

Lee:
Yeah, absolutely. And the great thing about seller financing is there’s so many less fees, right?

Brandon:
Yeah.

David:
Oh yeah, totally.

Lee:
You save a lot there.

David:
What if he said no on seller financing, and you had to pay closing cost to buy it, and then you had to pay closing cost again when you went to re-fi it. And maybe you work out a deal with Bob where he doesn’t make you pay any interest while you’re repositioning it, and you save way more than the 10 grand you think you could have got on the purchase price because you weren’t worried a vanity metric. You were actually looking at the big picture. You zoomed out. You’re really smart, Lee, in case nobody’s ever told you.

Lee:
Oh. That’s nice of you, David.

Brandon:
David, you should write a book called Zoom Out. That would be a good business book, right?

David:
That’s good, Zoom Out.

Brandon:
Yeah, Zoom Out, and it’s all about looking at your business as a whole, not getting caught up in the minutia.

David:
Do you guys see what I’m saying about Brandon is the best marketing mind in the world. There’s nobody better. He just pulls these things out of his beard.

Brandon:
You’re like the best wing-man in the world.

David:
Thank you.

Brandon:
I think you said it. All right, moving on. You talked about how you funded it then seller financing. Those who are unfamiliar with seller financing, it basically means Bob carried the mortgage. You paid him every month. It’s kind of like if you sell your car to your brother, and your brother pays you 100 bucks a month for your car. It’s the same thing, just with a house, so there’s no bank involved. But now you’re going to refinance, which is awesome. So, what did you do with it? You kind of mentioned you still have it today. You’re going to refinance it, right?

Lee:
Yeah, absolutely. I bought it about a year and maybe three months ago, something like that, late 2018. And so when we got it, we had what I like to call legacy tenants, which usually don’t work out very well. But so we had one unit vacant, so we went ahead and turned that unit. And then we … One of the guys wasn’t paying, so we evicted him, and then we turned his unit. The delta that I look for between current rent and market rent is usually between 250 or 300. More is fine, but you know, at least that. You need to have that delta.

Lee:
Sometimes it makes me laugh. You see like a broker’s [inaudible 01:16:38]and it’s like, “Value add potential, $25 more per month on the rent.” And you’re like, “It’s pretty much at maximum rent.” You need to have that big jump to add a lot of value. Yeah, it was the same. I knew the market. I knew with a nice rehab, we could get 795, something like that. And all the rents when we bought it were like 500, 550, something like that. And it wasn’t fixed up, so that was the market for the current position, but then it could be repositioned.

Lee:
Yeah, then we just turned each unit slowly through time. And so now we have the upper two rented. And then the bottom one, we just finished renovating. And then we have one … This is about my record on legacy tenants. About 25% of them work out, so we have one good one. It’s like this woman and her husband. So they moved into the one we just renovated, so we could renovate their unit because they agreed that they would pay higher rent if we renovated. Then they’re going to move back into their original unit. Then we’ll rent that last one. So that will all be finish, I just think in a couple of weeks. And we’ve already ordered the appraisal from the bank. So I have a takeout lender, and he’s willing to do 75 LTV because we held it for more than a year. So, again, the value conservatively is 280, probably a little bit more, and we will get the bulk of our money back. And that has been my experience in value add deals or BIR deals is you get most of it, but I’ve never actually gotten all of it.

David:
And that’s okay. The difference between leaving five grand in a deal, getting all of it out, or pulling an extra five grand out, at the end of the day is really just $10,000 plus or minus. It’s not … It doesn’t have to be a certain way to make it a win.

Lee:
No, absolutely. And I’m totally happy with it. Actually my favorite is to leave like maybe $10 in because-

David:
Then you get an ROI, right?

Lee:
Because an infinite cash on cash return is kind of unsatisfying.

Brandon:
Yeah.

David:
Yeah.

Lee:
But like a 12,000% cash on cash return-

David:
That’s a really good point. “I left $4 in the deal.” Because when you don’t leave any money you’re like, “Well, there is no ROI because there is no I. I can’t count.”

Lee:
Yeah, that five bucks, it’s amazing.

Brandon:
Yeah, that’s really funny.

David:
I also like what you said about legacy tenants 25% of the time work out. That’s probably similar to what I see.

Brandon:
That’s exactly what I see too. Yep.

David:
So most people when they have a property that’s performing well with good tenants and they’re not thinking about it, they don’t want to sell it. Most landlords say, “Screw it. I want to get rid of this thing,” when something’s causing them trouble, and it’s usually the tenant. So it’s not a good thing, just inherently, when someone says, “Oh, buy it with tenants in it. You’ll have no vacancy.” No, you’re probably just buying an eviction is what you’re doing.

Lee:
Yep, absolutely.

Brandon:
Which is also why one of the strategies I like talking about for finding deals is to contact … get the local eviction records from the courthouse, and then just contact all those landlords that are in the middle of an eviction that just filed for eviction, because all those landlords are in that pit of hell that they … I’m like, “I hate this rental property.” And then all of a sudden somebody randomly calls them and says they want to buy the rental property. Yeah, you’re buying an eviction, but it’s already been started for one thing.

David:
That’s so good. I just told someone that the other day. They said, “Why would anyone ever want to sell their rental. Everybody wants them.” I said, “Because not everyone listens to BiggerPockets.”

Brandon:
I said the same thing too.

David:
Did you?

Brandon:
I’m like, “Because they don’t read our books, and they don’t listen to BiggerPockets.” Most landlords are terrible landlords and hate being landlords.

David:
And probably didn’t want to be one in the first place, right?

Brandon:
Yep, they got it from … Exactly.

David:
They inherited the house from someone else, or they lived in it, and then they rented it out, and now they’re stuck with it. That’s exactly right. For them, you’re buying their problem.

Brandon:
Yeah, true. All right. Last question of the deal deep dive, David.

David:
What lessons did you learn from this deal?

Lee:
Well, always the value of relationships, those local partners. The fact that Derek took my call. He said, “Yeah, of course I’ll be there at 10:00 AM if you think this is a great deal.” So, that’s huge. And then what else? I think the value of … kind of what we were already talking about. If the deal is good at the list, and you can buy it from the seller at that price, don’t negotiate just to negotiate. Actually negotiate for something. And in this case, I could pay him what he wanted. Everyone was going to be happy. I was going to get all these other benefits. And I just think it’s important to remember that. I could have gone in and tried to negotiate it down 20 grand or whatever, but it wasn’t worth it. Again, zooming out, it wasn’t really worth it. And I can kind of suss that out, right?

Lee:
So I built a relationship with him, the seller and his wife. They were moving to Florida. And then I had the relationships with the local partners. And sometimes people are really focused on the deal, but they’re not focused on the team and the relationships, and that can be as important as the actual property itself, right?

Brandon:
Yeah, so good. I think one of the biggest negotiation mistakes people make or things that can help the most is just to understand the situation in which you’re in, like whether or not you should negotiate or not. I mean, there are times where you can definitely negotiate. We got a call on a house a couple days ago from our website. We have a lead-gen website. We got a call on it. And we knew that we were the only one that this person was talking to because we built a relationship. We built a rapport, so we knew we could push harder. And so we got … I think we ended up negotiating down to 75 grand or something like that, or 65 grand. But we only knew we could do that because we knew she wasn’t competing. If it was on the MLS, I can guarantee you I would have just paid either the full price or offered what I could and known that I wasn’t going to probably get it. But yeah, know where you’re at is a huge tip on negotiating.

Lee:
Yeah, absolutely. And it’s always those funny … People will say, “Well yeah, knock 75 grand off of it.” And you’re like, “There’s a full price cash backup offer. We’re not in a position to do that.” So know your position, right?

Brandon:
Yeah, so good. All right. Well, Lee-

Lee:
So know your position, but also you usually have a little more power than you think you do, so I probably could have pushed on that. It just wasn’t really worth it to me because it was fair, and there was so much equity.

David:
The juice was not worth the squeeze.

Lee:
Yeah.

Brandon:
All right. There we go. Well, let’s close up this deal deep dive and head over to the last segment of the show. I think we’ll bypass the fire round this week because it was a long show, and it was so good. But let’s get to the-

Speaker 5:
Famous four.

Brandon:
All right. This is the part of the show that ask four questions that we’ve asked every guest for hundreds and hundreds of episodes. And we’re going to throw them at you right now Lee. Are you ready for this? I know you’ve heard the podcast, so you know what’s coming.

Lee:
I think I’ve listened to every episode since I started listening back around episode 100.

Brandon:
That’s awesome. Well, with that, that means you might not have listened to episode 92, which was my story.

Lee:
Actually, I don’t think I did.

Brandon:
Man, you’ve got to go back and hear my … All right. That’s all right. Let’s get to the famous four. But before we do, I want to hear from Mr. J Scott to see what’s going on this week over on the BiggerPockets Business Podcast.

J Scott:
Hey there Brandon and BiggerPockets real estate podcast listeners. This is J Scott, your co-host for the BiggerPockets Business Podcast. And this week on the Business Podcast, we have Laura Spaulding. She is a former police office who started a crime scene cleanup business that did so well that she ended up franchising it all around the country. On this episode, she tells us all about franchising, and she even gives us some of her most interesting crime scene cleanup stories. So, check us out this week on the BiggerPockets Business Podcast. Now back to your famous four.

Brandon:
All right. Number one, favorite real estate related book, Lee?

Lee:
I actually think a great real estate book is the Ultimate Beginners Guide, the BiggerPockets guide, which is free.

Brandon:
Yay.

Lee:
I was telling about my story and how I was driving around Iceland with my friend, right? And I said, “I really want to do this.” And he said, “I do too.” The plane ride home from Iceland is about eight hours, so I downloaded that, and I read it. And I really, really read it. I picked … It says like, “Go through and pick your strategy.” And I was like, “Okay, this is it. This is the strategy that makes sense.” So I actually really … I give BiggerPockets a ton of credit for teaching me these concepts of real estate and providing these great resources. That’s an incredible book, and it’s like a free pamphlet.

Brandon:
Thank you. People can get it by going to BiggerPockets.com/UBG, like Ultimate Beginners Guide. That was the very first thing I ever did, I think me and Josh did when we started working together like seven years, eight year ago or whatever it was. We’re like, “Let’s just write a free online book that people can learn how to invest.” So, it’s good to see at least one person’s read it.

David:
What about your favorite business book?

Lee:
I’m going to go with one that I’ve never heard anyone mention, which is Choose Yourself by James Altucher.

Brandon:
James Altucher, yeah.

Lee:
You know that one?

Brandon:
I do. It’s a great book.

David:
He knows every book ever written.

Brandon:
No, that made a big-

Lee:
Here I was thinking I was going to get you, Brandon.

Brandon:
Yeah, I know. Sorry. That made a big impact on me as well. It’s an awesome book.

David:
Brandon named his new son, Wilder, his middle name is Dewey after the Dewey decimal system because he’s basically a librarian.

Brandon:
That’s not true at all.

David:
Brandon’s going to retire as a librarian, hoarding all these books. He’s going to be this like really wise old man.

Brandon:
I think it was Kevin actually … Was it you Kevin? Kevin’s our producer. [inaudible 01:25:36]Was that you that texted me the other day about meeting James Altucher, or was that Mindy? Somebody just met … Okay. Mindy just met James the other day. Yeah, [inaudible 01:25:43]. But anyway, and I was very jealous because I have not met James yet. Anyway, Choose Yourself, tell us about it.

Lee:
So the premise is basically the corporate hierarchy is kind of dead. And so whatever you were going to go do for someone else, just go do it for yourself. And this was kind of my realization where I built a business for someone else.

Brandon:
Yeah. That book, it applies in so many areas of our life too. Yeah, you could wait for someone to choose you to be a real estate investor, to be wealthy, to have financial freedom, to get vacation time, to be a podcaster. Or you could just be like, in today’s economy, choose yourself. Stop waiting to be picked like, “Put me in coach.” Just go make your own game, and then put yourself in.

David:
Just know that might mean you have to apprentice for a while before you can do that. There’s a trade off, right?

Lee:
Yeah. I think it’s about mindset, just thinking about, “Okay, am I waiting for someone to give me permission to go and do these things?”

David:
Ah, yes.

Lee:
That’s not going to happen. No one really cares what you’re doing. So if you want to go do something, you want something, you better go get it.

Brandon:
That’s a very good point. All right. I love that. What are some of your favorite hobbies?

Lee:
So I really love nature and the outdoors. That’s why I became a field biologist. And if we ever go hiking together, I can tell you the scientific name of every plant, bird, butterfly. And I absolutely love the Eastern Sierra, and so I’m really excited that I just bought this rental property for myself up there in the mountains, and it’s already been really fun. And then I love backpacking, so I like to go on a couple big backpacking trips per year. So this is like niching in, right? I really like temperate mountain landscapes between 40 and 45 degrees latitude that are above the treeline.

Brandon:
Wow.

David:
That’s knowing your niche for sure.

Brandon:
That’s funny. Crazy. All right, last question from me. What separates successful real estate investors from all those who give up, fail, or never get started?

Lee:
If you’d asked me this a couple years ago, I would have said action. But what I realized is that mindset is the mother of action, and so it’s really just all about your mindset.

Brandon:
That’s deep, but I agree 100%, 100%. It’s not about tactics. I mean, we can all figure out tactics. It’s like, “Why aren’t you making those phone calls?” And that usually has something deeper. That’s a mindset issue. Why aren’t you analyzing that deal? Deep stuff.

David:
I know it is because Brandon and I, as we sit here and mastermind trying to figure out, “How can we help more people,” it always inevitably comes up to mindset, not real estate, not tactics, not numbers.

Brandon:
Yeah, it does every time. Yeah, every time. Well Lee, this has been fantastic. Thank you so much. I think Dave has got one final question for you, and then we’ll get out of here.

David:
Yeah, this has been awesome. You are a very intelligent investor, and I learned a lot listening to you. So thank you for sharing.

Brandon:
You should write a book, Lee, called The Intelligent Investor. I think that’s been done.

David:
Yes. That’s a wonderful name. I wonder why that sounds so familiar.

Brandon:
I wonder if that book has been written. Anyway.

David:
So, where can people find out more about you?

Lee:
Yeah, so I’m actually pretty active on BiggerPockets. I don’t really use a lot of other social media, although maybe through this maybe I can be motivated to get on Instagram. I think I’ve posted like three photos ever.

Brandon:
Tik Tok that’s where all the kids are going these days. I want to see you do some dancing on Tik Tok. That’s where all the kids are, so-

Lee:
I know, I’ve really got to get on Tik Tok. Yeah, I don’t know what I’m doing. So BiggerPockets is actually a great place to hear me about me. And then I have my own websites. You can see it in my signature on BiggerPockets. It’s called Redhair Holdings. That’s just the name of my company. And I’ve got some before and after photos of my projects and things. And honestly I haven’t totally kept up with it, but I have a couple cool blog posts where I talk about passive losses and understanding some of these concepts in real estate that have been really transformative to me.

Brandon:
Very cool. Very cool. All right. Well, Lee, this has been really, really, really good. I can’t wait to see where you head in the future. Maybe we’ll have you back in a few years, and we’ll … when you’re at the next level. It’s exciting.

Lee:
Awesome. Thank you so much.

Brandon:
Thank you.

David:
Thank you, Lee. This is David Greene for Brandon Tik Tok Turner singing off.

Speaker 3:
You’re listening to BiggerPockets Radio, simplifying real estate for investors large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place. Be sure to join the millions of others who have benefited from BiggerPockets.com, your home for real estate investing online.

Brandon:
By the way, David, did you finish your book yet?

David:
Zoom Out?

Brandon:
Yeah. David’s the kind of guy … He’ll start a book at like 2:00 in the afternoon. And by like 3:30, he’s got 150,000 words written. It’s just done.

Lee:
I know he texted someone while he was on the podcast, and then now they’re writing it actually.

Brandon:
Yeah, they’re writing the book. That’s actually probably true. He texted his ghost writer, and they’re writing it.

Lee:
Yeah, exactly.

David:
Katie was super worried about that. She thought I was getting a ghost writer. It’s like, “No, I’m not going to get a ghost writer. I just need an editor.” But yeah, that’s funny. Everybody probably assumes. This isn’t even David. This is a person I hired to pretend like I’m David. None of you know what David Greene really looks or sounds like.

Lee:
Yeah.

Brandon:
Yeah. Hey. Thanks, Paul, it’s been a good episode. Please tell David hi when you see him later. That would be actually the funniest thing, is an entire podcast is all like outsourced.

David:
And the big real reveal was I’m not actually David Greene. David Greene hired me to prove that his method works for outsource. You can outsource anything. Yeah, that would be really funny.

Brandon:
Yeah. That’s really funny.

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In This Episode We Cover:

  • Why she abandoned the idea of building a tiny house empire
  • How her career as an environmental consultant prepared her for real estate investing
  • Why innovation can be overrated
  • How she screwed up her first deal and still made 28% cash-on-cash
  • Why choosing a “submarkets” is more important than the general market you choose
  • Why she shifted from BRRRR to value-add multifamily investing
  • How she unlocks value in rundown apartment buildings
  • Finding “boots-on-the-ground” partners for out-of-state deals
  • How she learned the development game by apprenticing under an experienced investor
  • How real estate development creates money out of thin air
  • Tearing down single-family homes and building 4-unit apartment buildings
  • How she moves projects more quickly by using “prefabricated construction
  • Why “value-add” drives the biggest returns on investment
  • And SO much more!

Links from the Show

Books Mentioned in this Show:

Tweetable Topics:

  • “All days jobs are dead-end jobs.” (Tweet This!)
  • “If you’re moving forward, you can always pivot later.” (Tweet This!)
  • “Equity is the big driver of your return on investment.” (Tweet This!)
  • “Your cash flow is your margin of safety. It makes it so you don’t lose your property.” (Tweet This!)

Connect with Lee

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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    Don Spafford Investor from Idaho Falls, ID
    Replied 18 days ago
    This was a really great episode which brought up a lot of excellent points on BRRRR investing;