BiggerPockets Podcast 382.5: Surviving When the BRRRR Hits the Fan with Josiah Smelser (Part 2, Post-Coronavirus)

BiggerPockets Podcast 382.5: Surviving When the BRRRR Hits the Fan with Josiah Smelser (Part 2, Post-Coronavirus)

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What happens to a no-money-down BRRRR investor when a pandemic breaks out, lending standards suddenly tighten, private money lenders get skittish, and property values quickly drop?

Today, Josiah Smelser returns to the show and tells all.

In Part 1 yesterday, we learned how Josiah built a $4M portfolio by buying, renovating, renting, refinancing, and repeating using both hard money and private money.

Coronavirus hit him hard. And if he didn’t have cash reserves, credit options, and the right mindset, it might have totally wiped him out.

When the virus hit, Josiah had 10 properties he needed to refinance. It was a perfect storm: His private money lender immediately pulled funds, his refinance bank changed their terms, and property values dropped—all at once—meaning he would need to bring way more cash to the table.

What happened next? Listen to this episode to learn about how Josiah made it through the nightmare and came out on the other side… with more equity and reduced interest payments.

Real estate investing isn’t all sunshine and rainbows. But if you keep your mind right, plan your exit strategies, and maintain cash and credit lines, you too can survive the curveballs thrown your way.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Brandon:
This is the Bigger Pockets podcast, episode 382 Part 2.

Josiah:
You may be thinking, how did you come up with 200,000 bucks. We didn’t have that much money in reserves, and we had kept one property completely paid for that we talked about long before this happened, but what that is, that’s insurance, that’s reserves in the case that some kind of black swan crazy thing, crazy even happens, we can tap into that money and that will save us. That’s what ultimately got us through this.

Speaker 3:
You’re listening to Bigger Pockets radio. Simplifying real estate for investors large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place. Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing online.

Brandon:
What’s going on everyone Brandon Turner, host of the Bigger Pockets podcast, here with a followup second half to yesterday’s show, with my co-host, Mr. David Greene. David, welcome to the podcast again man. What’s going on?

David:
Thanks Brandon. It’s been awesome. I sold a flip that I was working on with a partner. We did pretty good on that. Each of us made money, and then last week I put three buyer clients under contract, all house hackers, and two listings under contract, both over asking price. So real estate is still trekking along in the midst of this pandemic.

Brandon:
Yeah, it’s moving along. Can I read something? This is not about me, this is about somebody else, but I wanted to read this story, I put it on my Instagram, because I thought it was such a cool story. Somebody sent me a message on Instagram, and it said this. It said, this has nothing to do with what you just said, I just want to make sure we read this. This is my quick tip for today. Ian T. Vard [inaudible 00:01:40] “When I started in real estate I hoped I could do what Beardy Brandon did for his daughter to buy this small multi family unit as the kid’s college fund. End of February 2020, I bought a 4plex for 44 grand with zero down.” That’s a cool story in itself.
“One unit was vacant and needed massive rehab, I turned a one bedroom into a three bedroom, rented it a week ago, the rest of the units need small rehab. Today my son was born even in the current climate he starts his life with more advantages than he’s ever had, and I had quite a few. Anything in life is possible if you believe in yourself and relentlessly pursue it. Despite all the houses we’ve had and the projects we’ve done, this is the most special. So rest up little guy, you have a family that loves you more than anything in the world, a world of limitless possibilities and an amazing adventure to come. You also have a lot of painting and some yard work, but until you’re ready I’ll look after that for you.”
Anyway, I love that story, because it just showcases what real estates really about. It’s not about you just swimming in piles of coins like Scrooge McDuck. It’s like this is generational wealth. This is future. This is our kids and our grandkids. This is about having a more abundant and successful life. And so my quick tip for today, our quick tip is don’t let fear of the current world, what we’re going through take you out of the game. Don’t let it stop you, slow you down, because you got a strong reason for getting there, so I just want to encourage you all with that, is remember your reason. Why are you doing this, and hold tight to that in tough times. Tough times are what today’s show is really all about.
Anyway, cool man.

David:
You know what I really love about that story that you just shared before we get into the interview?

Brandon:
The Instagram one?

David:
Yeah, your Instagram story. Is it highlights the power of a big why. We refer in real estate to your big why as the main thing that motivates you, and you will find that when you start off with real estate investing, most people in general want to build wealth, and the majority of them I would say is to get out of their day job. They just want a better life, they want more money, and they know this can get them out. And you will hit that point, where you will make enough money through real estate to replace your income, you quit your job. A lot of people just get into this no man’s land. They’re like I don’t really know if I really want to do this. They lose motivation and then you actually become unhappy. You can be very, very wealthy and not happy with your life when you’re not making progress. Tapping into your big why is really one of the ways to make sure you’re always content and satisfied with life.
So Brandon knows his big why is his daughter Rosie, and his new son Wilder, and his wife Heather. Everything he does that he doesn’t want to do, he thinks about them when he’s doing it, and it gets him through it. I kind of shifted my big why to helping my clients build wealth, so I don’t have a family, but I’m not investing in real estate as much anymore, because I get a kick out of helping other people to build wealth for themselves and house hackings one way to do that. Just owning property itself is a huge way to build wealth instead of renting.
And this person on the Instagram story shared that he bought a house that was $44,000 no money down. That tells me that there’s a lot of elbow grease going into this deal, and most of us don’t like elbow grease, but when you’re thinking I’m doing this for my son, so that some day his college will paid for, he will be wealthy, whatever the case may be, that work doesn’t suck. And you’re way more likely to go do it. You’re way more likely to go take action when you tie it to an emotion that matters to you.
And that’s what’s brilliant about that story. They’ve tied this into their big why. That’s really our super power, all of us would be amazed what we can accomplish when we’re motivated enough and the key to what successful people do is they find that motivation and they tie it to whatever their goals are. I don’t know if anyone does that better than Brandon that I’ve met, and that’s probably why you chose that story, because you recognize oh this is powerful.

Brandon:
It is powerful stuff. It’s super cool. Thanks man. So speaking of motivation, and I said in the quick tip, you got to stick to your why, because again you’re going around in tough times, today we’re bringing back Josiah. Josiah Smelser, I hope I’m saying his last name right, I know I struggled with that last time and I’m horrible with names in general. So Josiah’s a buddy of mine, and Josiah we brought him on the show we recorded a couple months ago this episode with him, and Josiah a lot changed in the past two months. Obviously with the whole COVID thing going on and the lock down and the economy and everything changing. So his strategy, which was super cool, ran into some difficulties. In general just the BRRRR strategy is running into some difficulties right now, and I’ve been having a lot of people say this is why the BRRRR strategy doesn’t work, because this is why you shouldn’t do it. I know David wrote a book on it, and I know you’ve had the same comments on your Instagram and messages from people.
This whole show is dedicated to how to still make BRRRR work, why it still works, how to do low and no money down even in this kind of a market and why even when tough times come, how to get through them, and Josiah goes through his exact story of what he did over the past two months, and the crap hits the fan over and over and over for him, but he explains how he fought through, and you guys are going to love this story. Anything you want to add to that before I jump in David?

David:
No, I think people are going to love this. This is the first time we’ve really ever done it where we aired a person’s interview and then we came back on the very next episode this is what happens when everything goes wrong. I thought that was a super cool way of showing people the full story, but you learn way more about yourself and real estate in general when you look at what happens when things go wrong instead of always hearing what goes right.

Brandon:
That’s a good point.

David:
Oh, Brandon also comes up with a great analogy. I was very proud, it was like watching my child ride their bike for the first time. I thought you did really good.

Brandon:
Okay, well I did and then Kevin our producer tells me, he sends me a message saying actually J. Scott had that exact same analogy on a recent episode of some video he did, which I did not watch, but apparently I used his analogy, and I thought I was pretty clever, whatever.

David:
Coincidental I’m sure.

Brandon:
Let’s get on with this. Let’s get on with this. This is part two of our episode with Josiah Smelser. Josiah man, welcome back to the Bigger Pockets podcast. It’s been a whole 24 hours since you were on the show.

Josiah:
Man, it’s great to be back, even though the first one hadn’t aired yet.

Brandon:
Yeah, I know, crazy. All right, here’s the deal guys, as we mentioned in the introduction we’re bringing Josiah back on today’s show because the pre COVID and post COVID there is a change that will happen. We want to update you guys and really today’s show is all about BRRRR investing and what works and what doesn’t work in today’s world. We want to wrap that within Josiah’s story. So go back to listening to show 382 part 1, but if they didn’t and they’re not going to, because they’re stubborn like David Greene here, tell us your story.

Josiah:
To summarize episode one and kind of get us into this episode on the BRRRR strategy during COVID-19 and I guess during difficult times this would also apply, we basically tried to step on the gas and build a portfolio of four million dollars worth of investment properties in about two years. We did this by finding private money and hard money, and layering private money in on top of the hard money, to buy distressed properties, to get those properties renovated, then to use the BRRRR strategy, refi get our hard money and private money loans paid off, and hopefully be in the property for 75% loan to value or less with no money out of pocket. That in a perfect world is a perfect BRRRR.

Brandon:
So let’s just say, so people are clear, let’s just say $100,000 property, it’s worth 100,000 ARV, so when it’s all fixed up it’s worth 100 grand, how much are you borrowing from hard money? How much is private money? What would a hypothetical $100,000 deal look like?

Josiah:
Yeah, so what we’re shooting for is to be all in on that property for 75 or 80,000 or less, depending on the loan to value requirements on your refinance. The lender we were working with had an 80% loan to value requirement on the refinance. We would say, we want to be all in on this, and we’re talking holding cost, closing cost, everything at $80,000 on this $100,000 property. We would back into our numbers. We would say, “Okay, we can get this for 50 if there’s going to be 20,000 in repairs that would put us at 70, and then holding cost and closing cost is another 10, that gets us to 80.” Our hard money lender would say, “Okay, we’ll lend you 90% of that 80.” So 72,000 and then the private money would lend us the other 10%, which would be the 8,000 and then we would do draws and be reimbursed for that. In theory, that’s going to cover buying and renovating the property and then getting the property refinanced.
And so to make a long story short, we had 10 properties completed and have refinanced those over to Fannie Mae, we did that successfully. That was pre-COVID-19, pre-anarchy of all this pandemic stuff. We had 10 more properties in the pipeline and when I said we stepped on the gas, we said we’re going to do a lot more of these at the same time to try to speed this up. We had five that were completely renovated and rented, and they were going through the refinance process with our lender.
When the COVID-19 thing hit, I’m talking the lender had already told us, you’re approved to close your refinances, 80% loan to value and on these properties we only had to bring $25,000 to the table to close it. So that’s like five grand a property, it was five properties. That’s a successful BRRRR in my opinion, these are high quality properties in Forth Worth, Texas, B class. The closing costs alone are about five to $7,000 a property, so we’re talking about we made our 80% goal, we’re just paying out of pocket for the closing cost, we were happy with that.

Brandon:
Okay, let me jump in real quick here. Let me make sure I understand what you’re saying. So you bought 10 properties, is that right?

Josiah:
Yeah, we have 20 total properties, 10 were already refinanced over to Fannie Mae with this process already taken care of. We’ve got 10 in the pipeline now.

Brandon:
So with those first 10 you borrowed money from a hard money lender to buy the property and finance part of the rehab, you borrowed the remaining money from private lenders, probably for the rehab portion, so you have these short term loans that are more expensive, but the goal is to get the properties worth more using this more expensive money and then refinance out of that expensive money into cheaper money in what you describe as a Fannie Mae, Freddie Mac loan, is that correct?

Josiah:
That’s correct.

Brandon:
And you did this successfully with 10 properties, either all at the same time, or one after another, but some combination of this method of I buy properties, and I fix them up, and then I refinance it. You were doing this again with a second group of properties, and in the middle of that fixing houses up and then planning to go refinance them COVID-19 hit, and it basically threw a huge wrench in all your plans because lending standards changed, and the world just kind of froze, is that right?

Josiah:
That’s correct. That’s correct.

Brandon:
Okay, awesome. Go ahead and jump back in.

Josiah:
Yeah, yeah, and the first thing that happened that was like, “What’s going on here?” The lender that had approved the five, we had the 10 that were already on Fannie Mae, those are taken care of, we’ve got 10 more, five are renovated and rented, ready to refinance and five are being renovated. So we’ve got 20 total, 10 are in this refi process, five are ready to refi, we had gotten those appraised, we’re ready to close, we got approval to close those five, all we had to bring was $25,000 to the table to close, the terms on that, I took some notes here so I make sure I don’t leave any of this out. The terms were 5.5% on a 30 year fixed. So not the cheapest interest rate, but we’re also at 80% loan to value, which doesn’t require us to bring as much to the table to close.
That lender, after the Coronavirus stuff happened, and the market started having some trouble, that lender said, “We don’t want to close these loans.” So I’m like, “Well, we’ve been approved.” They didn’t want to close. You maybe think, why would they not want to close these loans? I’ll tell you what they said. What are your thoughts? Why would you think a lender in this situation wouldn’t want to close these?

Brandon:
One reason could be they don’t want to put their capital out in a loan, because they’re not sure if the stress assets are going to come out and they’re going to want to lend on those. Another would be they’re worried that you’re an investor, and if you can’t get a renter because the world stopped, you won’t be able to make the payment and they’ll have to foreclose right after the give you the loan. Another reason could be maybe they were planning on selling those notes in the secondary market, and now they can’t go sell it in the secondary market, because the secondary market is frozen, because the mortgage back security market is panicking.

Josiah:
That’s it, that’s it. You nailed it. The secondary market issue was the main issue, and then a layer on top of that was they were worried that the tenants were going to stop paying, they would have to foreclose on these things, and they’d have a bunch of properties, but there’s no income coming in with tenants living in them, that they can’t evict these tenants. Because there’s stuff about you can’t get tenants out of these properties, you got to give them x number of months in the property, so yeah. The reason they did not want to close these, even though they had approved us, was they were worried they were going to get these five properties, package them up, try to sell them off on the secondary market and nobody was going to buy them. And then they’re going to be caught holding the bag trying to collect money from tenants that won’t pay from owners that don’t have money to pay them, and then they’re going to be in a bind. They didn’t want to take that risk.
So they came back to us and said, “We’re not going to close your loans.” So we’re like, “Okay, great.” That was our plan, our plan all along has been to refinance these at this 80% loan to value rate with these guys, we had been approved, we’re like the first thing I think of is now we’re going to have to try to go through Fannie Mae. We already had 10 properties through Fannie Mae. I already had 10 properties, so I’m like okay, we’re going to have to get creative with this. By the way, the worst time to refinance properties through Fannie Mae is going to be during a pandemic, when they’re raising capital requirements to close, being extra careful on all the loans they’re making, so I’m like great, and then on top of that people are putting their properties up for sale, because they’re now concerned about being able to get tenants or flip or whatever they’re doing, there’s more properties hitting the market, which is driving values down temporarily, maybe even slightly. So I was automatically concerned being an appraiser the appraisal values on these stand a chance of coming in a little bit lower than they did before temporarily.
And then here’s another layer, okay. So we’ve got this problem of we can’t close these five refinances the way we were planning. My private money lender also says, “I’m really concerned with what’s going on in the markets right now, I’d like to get my private money back.” So we’ve got hard money that’s ticking. We’re not going to be able to do this refinance like we thought, and we’ve got the private money involved there, that now we need to repay, and we’re under the gun to repay that. There were terms on that, none of the terms were expired on that private money, but we wanted to honor the lender, because they took a chance on us, we had a good relationship with them, and try to get them paid back as quick as we could.
We’re scrambling. So we came up with … And y’all stop me if you want to ask questions. I’m just-

David:
I just want to know, did you end up going to the emergency room for hypertension? This sounds like the perfect cocktail for.

Josiah:
I’ll tell you what, I almost maybe want to go to the emergency room when they closed the schools down and I was like okay now my kids are at home, my wife’s running her business from home, I’m running my business from home, and the kids are trying to run me out of my home. That was pure anarchy there.

David:
This is good. So if I understand you right, what you’re saying is that you borrowed this money from hard money and from private money.

Josiah:
Correct.

David:
Hard money is typically a little bit more expensive than private money, but it comes in more formalized payment structure. You usually have a year to pay it back, it’s predetermined interest, private money is typically a little bit more loosey goosey for lack of a better term. That’s a Brandon Turner, term right there.

Brandon:
Loosey goosey.

David:
You’re borrowing it on good will, you’re paying it back, but when they come to you and they say, hey I want my money back, you probably don’t have a note that’s been written up that says I get your money for this long, and even if you do, you pay bad, you want to pay it back. To pay it back you go to the bank to refinance into your long term solution, and now they’re telling you we don’t want to do that right now, because we don’t know if we’ll be able to sell this note. So all this pressure is sitting right on top of your chest, and you don’t really have any way in the beginning to get it off.

Josiah:
Right, that’s exactly right. That’s a good summary. And our private money lender had seconds on all of our properties, so they had some collateral, but of course they don’t want to foreclose on the property. They’re not in it to get the property, they’re in it to just make a good return on their investment and get their money back and we wanted them to have that outcome as well. We’re like, “Okay, what are we going to do?” First thing I thought was these five properties are already rented, we’re just going to have to refinance those. That’s our best option there. The other five properties, we had renovations going on. I said, we got to get these renovations finished as fast as possible. I put the heat on our guys to get these renovations done. A lot of them were almost done. We got those renovations finished quickly and we put those five properties up for sale, okay. Those that didn’t have tenants in them, I’m like we just need to dump these properties, that way this doesn’t bleed us when we go to do the refinance.
We had one property had three full price offers fall through. So we would go under contract, we’re like we’re going to make 40 grand on this. Making 40 grand on a flip during the pandemic, that’s a home run for me. It would be under contract for two or three weeks, then it would fall through. The first person said, “We’re just too uneasy with the environment right now to close on this.” They left. The second person went under contract, two or three weeks in they said their mother died. We didn’t ask any questions, just gave them their money back, said, “We’re sorry for your loss.” But it was a huge bummer. The third one came in, got it under contract for two or three weeks, and then they bolted as well. They didn’t even tell us why. I said hey I’m not putting this up for sale anymore. This is wasting our time, we got to get these refinances done. This private money lender, they need their money back.
And so second thing I thought of was another way to get rid of these properties quickly would be to wholesale them. I called my wholesaler that I bought a lot of stuff from and I said, “Hey, I got five deals, four of them completely renovated, ready for tenants. One of them we haven’t started renovations on yet.” We had just closed on this thing when the pandemic happened. And he said, “Okay, I’ll take it to my boss and see what I can do.” He took the one that had no renovations on it, and he called me and said, “I can’t take these other four that are renovated.” And I was like, “Why? Because we’ll give you a good deal on them.” He said, “I don’t want to blast these out to my list, and the people on my list get the impression that if they buy stuff from us at a discount and renovate it, that they’re not going to be able to sell it, they’re not going to be able to flip it.”
So the wholesaler wouldn’t even take four of these and try to wholesale them. I was surprised at that, because I thought these were turnkey, people would get a good deal on it, we just didn’t want to have to go through the refi process. So anyway, the guy blast the property that we had that wasn’t renovated out to his list, doesn’t get any takers on it, even though it was a good deal. We were like okay, we’ve exhausted trying to sell these, we’ve exhausted the wholesale route. We can’t refinance them with our first lender, so we’re just going to have to go through Fannie Mae.

Brandon:
By the way, this feels like every Disney movie ever made. This is the part where the musics coming in. This is one sucky getting punched in the gut after another. This is like Elsa dying in Frozen II.

Josiah:
Yeah.

Brandon:
Yeah, you know. Everyone’s like, “I haven’t seen it yet. Brandon just ruined it.” Yeah, she’s never coming back, it’s over.

David:
Side note, Brandon is totally validating the talk we had before the show about how when you become a parent everything becomes about your children. How old are you now Brandon? 36? 35?

Brandon:
34.

David:
34 and you just quoted Frozen II on the Bigger Pockets podcast.

Brandon:
Well, I could tell you about gas prices as well.

David:
New Balance tennis shoes.

Brandon:
Yeah, if you want to know about that stuff. I got a really good dad joke I could leave you guys with. Let’s keep going. So anyway, musics going, this is the dark part of the hero’s journey right now. We talked about the hero’s journey on a recent show. This is the depth of despair. This is when Frodo gets wrapped up in the spider web. Right? Remember he gets wrapped in the spider, which coincidentally also happened on Trolls. Poppy gets wrapped up in a spider web in Trolls. So you can take either the PG-13 example or the G example, depending on if you’re a dad or not.

David:
Brandon wandering his way into the realm of analogies. Look at this.

Josiah:
I think the difference in Trolls is she break dances her way out of it or something, you know.

Brandon:
That’s true. And actually technically it was Branch, no, it was her. It was Poppy and yeah. There was a lot more-

David:
Okay, I’m totally regretting starting this rabbit trail. Sorry I need to bring you back to real estate.

Brandon:
A lot more break dancing and happiness happened in Trolls than in Lord of the Rings. But, tell us how you got out of the spider, you were wrapped in the spider web and you were getting eaten alive.

Josiah:
Yeah. So we’ve exhausted these first few options so we’re like okay, we’re going to have to refinance these through Fannie Mae. We start this process and we’re like okay, we’ve already got 10 of these. And this is an interesting thing that I’ve heard from a lot of investors. They have this perception that you can only do 10 properties through Fannie Mae. That is true for each individual. But if you’re married for instance, you can do 10 properties in your spouses name as well. My partner and I, we have the capacity to have 40 of these things. So then you start dancing around. Fannie Mae, I think it’s properties one through five, they have different requirements than properties six through 10.
My partner and I had already basically used up our numbers one through five, so we utilized our wives ability to have properties one through five, and did our refinances through their names. That’s kind of how we’ve attacked this. And stop me if you got questions as I go here.

Brandon:
No, keep going.

Josiah:
Fannie Mae has a different requirement than our first lender. Fannie Mae’s requirement was 75% loan to value. So we’ve already got a lower loan to value requirement than this 80 that the other lender had. On top of that, Fannie Mae has as of the application on my loan, I don’t know what’s going on right now, they’ve doubled the requirements for reserves. Where it was six months, now it’s 12 months.

Brandon:
12 months to reserves.

Josiah:
Yeah. 12 months to reserves. It has been the most difficult loans we’ve ever closed, but we’ve been through this entire process and we just closed these loans, these refinances at 3.5% on a 30 year fixed conventional loans, and we pulled out all the stops. And you’re probably wondering how much cash did you have to come up with to close these 10 deals. We had to come up with $200,000. The interesting part about that is, the closing costs on each deal, on these 10 deals, the closing costs alone were 10,000 bucks, so there’s $100,000 of closing costs. And so you got to think at 75% loan to value on these properties are worth two million bucks, you got to be at 1.5 million. We essentially built in from our BRRRR deal, we built in $400,000 of equity and we had to put in 100K ourselves. Does that make sense?

Brandon:
Yeah.

David:
Okay, so let me see if I can piece some of this together, because this is really, really good stuff. You had 10 deals that you thought you were going to get 80% loan to value on, you only got 75% loan to value when you finally found a lender, so that means you’re not able to get as much out as you thought. Meaning, instead of getting all your capital out, you left $200,000 in over 20 properties, correct?

Josiah:
That’s correct.

David:
And that’s about 20 grand a property. So let’s reduce it to per house, because that’s easier to understand. Of that 20 grand that you left in, 10,000 of it was a closing cost.

Josiah:
That’s correct.

David:
For that property. So 50% of the capital that you left in the deal was actually the closing cost that you needed to refinance you’re saying?

Josiah:
That’s correct. That’s correct.

David:
What would you say on average each of these properties is going to cashflow?

Josiah:
With the extra cash we put in, because they’re at 75% loan to value instead of 80, each one’s cash flowing three to $350 a property. That’s net of all operating expenses.

David:
So that means that if you left 20 grand in each property and you said you’re cash flowing between 300 and 400 a property is that about right?

Josiah:
That’s correct.

David:
Okay, I’m just doing some quick math in my head. You’re probably at around a 36 to 48% ROI on each of these properties that we are considering a failure, because you weren’t able to get out 100% of your equity, and in addition to a 48% ROI on each of these properties, you also gain $400,000 of equity. Here’s what I love about this story. A, we’re going to get into it more. It went badly. This is a perfect storm of what are the odds that this COVID-19 would hit, it would affect lending the way it did, your private money guy would want his money back. All these things, you got hammered. You got hit with a flurry of Mike Tyson punches here, and you walked out of that with $400,000 in equity, a 48% return on your money, if it wasn’t for closing costs being so high, which you probably wouldn’t have had them that high if you didn’t have to go with this lender, because you were just up that creek and you had no chance, your ROI would be even higher, because 50% of the capital that you left in was actual closing cost capital. You essentially traded 200 grand for 400, 200 grand of cash for 400 grand of equity and a 48% return on your money.

Josiah:
Yeah.

David:
This sounds like when one of those NBA executives trades a star player and they get back four first round draft picks and three second round draft picks and they turn that into four hall of famers over a long period of time, and this is on a deal that went bad. What you called the perfect BRRRR, which I think I’m going to try my hand at being Brandon Turner, call it BRRRR-fect. Like you just completely crushed it when you get all your capital back.

Brandon:
BRRRR-fect.

David:
That sort of goes BRRRR-fectly, that’s what we tend to hold up as what we expect. If I didn’t get all of it back, I did it wrong. But what you’re showing us is, if you could back in time-

Brandon:
That’s going to be David’s new book BRRRR-fect.

David:
Yeah. If you guys want to give me suggestions on what this new BRRRR-fect novel should be about, send them in and I’ll see if I can push that through.
If you could go back in time, would you rather do this deal where you get all these numbers or not? You probably would have said, “Yep, I will do that.” It’s still a great return.

Josiah:
Absolutely. Yeah.

David:
Okay.

Josiah:
Let me add one more layer to this of silver lining in the storm cloud, okay? Last night I built out a spreadsheet and I wanted to see how much interest we were saving by being forced to go this other route, because we were ready to close with this other lender. Over 30 years because we’re at 3.5% instead of 5.5% we’re saving $750,000 in interest. That goes straight to the bottom line. In my mind, not only did we have to cough up to 200 to build on another 400 of equity, but we coughed up 200 to generate an extra 750,000 in profit over the life of these things. It’s not all bad. The loan to value requirement of 75% by Fannie Mae forced us to put a little extra money in the property, but the things are cash flowing better and we’re saving a ton of money in interest over the life of the loan. That’s the good part about all of this.

Brandon:
Josiah, what was your mindset like during all this? Were you always pretty upbeat, like yeah we’re going to figure this out or did you have some sleepless nights?

Josiah:
You know, the craziest part about all this is it’s been really exhilarating for me, and I in a very strange way enjoyed this because to me real estate is basically just an exercise in solving problems. Some of them are small, some of them are very complex and complicated and drawn out. You feel like you’re just getting the life beaten out of you. I’ve always thought, if you’re willing to stick with it, and you’re willing to keep working on the problem, you can figure out the crack in the rock and get through there. When our lender said, we’re not refinancing these, and the private money lender called and said we want our money back and then we couldn’t sell these things I’m like okay great man, this is the perfect storm. We kept at it, we kept at it, and then we had a rock star lender that helped us pull off these refinances, and he said those were the craziest sets of refinances I’ve ever done because of the timing of this and just what’s going on in the market. He said, “But we did it, we figured it out.” Honestly, it’s been a lot of fun. It’s been a lot of fun.
It’s definitely been hard and challenging at times. To me, if you’re willing to do this stuff, you’re going to win eventually. You got to hang on, you know what I mean?

David:
Part of what I think is really insightful about your story is when you were getting the news that we’re not going to refinance your properties at 80% loan to value, and oh by the way Josiah, I want my money back I’m really scared, everyone’s freaking out. Now you can’t sell your house. You could not see the solution that you’re going to end up right now. It was hidden from you, you could not see it. I’m sure Brandon can point out that at some point in Frodo’s journey he could also not see and the elf was coming to save him at some point. That doesn’t mean it’s not there, right. It’s so easy to get discouraged and overwhelmed by negative emotions and tell yourself horrible things like real estate investing is stupid, I never should have done this, I should go back to my cubical and Dancing with the Stars never let me down.
But if you just keep pushing, the answers come, and as we see the answers were really not that bad at all. If you had, had a heart attack at that time, that would have been really sad, because now you’re probably actually excited with how these deals worked out.

Josiah:
Yeah. Absolutely. Also, I looked at the stock market, and the stock markets crashing and I’m like, “I haven’t lost any money.” I’ve just got money invested that we weren’t necessarily planning on. And to go back to how we came up with the money, you may be thinking, how’d you come up with 200,000 bucks, we had money in reserves. We didn’t have that much money in reserves, and we had kept one property, completely paid for that we talked about long before this happened, you don’t get your highest cash on cash return or return on investment by having a property that’s paid for, but what that is, that’s insurance, that’s reserves in the case that some kind of black swan crazy thing, crazy event happens, we can tap into that money and that will save us.
We did a cashout refinance on one of those properties, and that’s the money we used here. That’s what ultimately got us through this.

David:
You know what, here’s what I love about that, you’re not asking the question, should I pay my property off, or should I max out leverage as much as possible like most people do. That’s how that debate typically gets presented. Should you pay everything off or should you over leverage everything that you possibly can? You recognize that there’s a balance. I want to be leveraged, but I also need a couple paid off so that in a worst case scenario event I feel safe, and what do you know, lo and behold, I don’t think I’ve ever said lo and behold. Does that mean I’m getting old?

Brandon:
Lo and behold, that’s a grandpa phrase right there.

Josiah:
You’re officially a dad no David.

Brandon:
Yeah.

David:
It’s an uncle phrase.

Brandon:
Lo and behold. Lo and behold the gas up the streets one penny cheaper. [crosstalk 00:33:07]

David:
So what you did, was you said I’m going to have a property or two or three or whatever paid off with that line of credit I can tap into in case I need it, and you did need it. And you were able to use it, in order, this is irony, you used the paid off property in order to save the leveraged property. You did what millionaires do, you said how can I have both? You didn’t look at it from the dichotomy of it’s polarize one or the other. It’s a binary way of looking at it, should I BRRRR or should I flip? Should I go all in or should I never put anything down on any property at all? You used a combination of the strategies like Brandon talks about all the time, having these tools in your tool belt, so that you went in there with a screw driver and when you realized you needed a saw, you had one.
And that’s what we tell people that you should do when you’re investing in real estate. You’re a perfect case study in how this works. Is all these what ifs? What if that happens? What if this happens? It never happened, well they actually happened with you, and you still survived it because you were prepared.

Josiah:
Yeah, it’s not easy to basically have a property that you know is not giving you the highest cash on cash return, or your ROI isn’t maximized, but when you think what can put me out of the game, and it’s always reserves, it’s always lack of capital when needed. That’s what puts businesses out, that’s what puts real estate investors out. You got to have that dry powder somewhere and I look at Warren Buffet, he’s the king of this. He’s got billions of dollars sitting on the side lines, even when things are good you’re like why is he doing that? He could be buying all these stocks. Well, when things crash he starts buying up stuff. Consequently, I looked and I read an article on Warren Buffet the day before yesterday, Berkshire Hathaway lost something like 50 billion dollars or something like that. You know when Warren Buffet’s losing 50 billion dollars something’s going wrong in the economy. This isn’t just real estate investors getting hit, this is everybody. This is trying to figure out how to get through this kind of thing.

Brandon:
Yeah, yeah, that’s true. Let’s talk about what other people should be doing right now, or potentially. Obviously everyone’s situation’s unique. Should people, do you think, and I’ll ask both of you this question, right now here we are recording this early May 2020, should people right now be BRRRRing, or buying properties with the intention to BRRRR? What do you think?

Josiah:
David, you want to go first, or you want me to jump in?

David:
No, I want you to go first, because I just spent the last 30 minutes basically telling everyone why your story is great. I think my opinion’s kind of been put out there.

Josiah:
I’ll say this, I guess it depends on your situation. If you’re in a situation where you’ve got a lot of highly leveraged properties, then I would say it’s a time to work through what you got going on. I’ve got some friends that got a lot of cash, and they told me a number of times, they want to invest in real estate. I’ve even heard them say I want to wait until there’s a dip in the market. I’m thinking why aren’t you buying stuff right now? It was interesting, when we tried to sell these properties, I called some people that had cash that don’t have properties and tried to sell them to those people, and they looked at them, but they wouldn’t buy them. To me, that’s the perfect time to jump in on something like that. I would say with the caveat that you got to have reserves, and you also need to make sure and back into your numbers, and knowing that Fannie Mae is going to cap you out at 75%, I would want to try to be in these things for 65% or something like that. Just get more conservative on your numbers when you’re running your numbers, and you can still make it work.

Brandon:
Yeah, that’s a good point.

David:
What I would say about should I buy now or should I wait as opposed to is right now a good time to BRRRR. The first philosophy is you can always buy if you live beneath your means and you have a good amount of reserves, that’s just period. You take so much stress off yourself trying to time the market when you’re in that position where you can endure whatever flurry of attack comes at you.
The second thing is there’s this philosophy that you don’t want to be the one to catch the falling knife. What that means is when the market is tanking you don’t want to jump in early. You’d rather almost jump in late. Wait for the knife to go hit the ground and bounce up and that’s when you jump in. It’s better to go a little bit higher than you could have if you timed it perfectly than it is to jump in early and end up getting hurt. Everybody ran to that during this COVID thing. Like the economy is shut down, we have record unemployment, we’re plunging into a depression don’t buy anything. They assumed this is a falling knife.
I still haven’t really quite bought into that we’re into a depression right now. And part of it’s where I live. We all have different experiences what we see, but in the Bay area I’ll tell you I have a listing that we took off the market when the shutdown happened, because the seller just said, “I think I just want to wait.” We just had out here in the Bay area, we just had our shelter in place extended for another month, but we knew there was a chance it might be lifted beginning of this month. While waiting, just with the sign in the front yard, I’ve had three people ask to go see that house just based off the sign in the yard, or agents that have been searching for withdrawn listings, because there’s so little inventory and so much demand that they’re looking for houses that are not on the market to try to show their clients, because they can’t get anything that is on the market.
This is in the middle of record unemployment and a huge shutdown and the sky is falling and everything’s going terrible, and I’m now getting three offers on this property that’s technically not even listed right now as active on the MLS and it’s going to go for way over asking price. Had somebody jumped in and bought that property when it was first on the market, when everyone was like, “I don’t know I’m going to wait and see what’s happened.” They would have saved around $40,000 for what it’s going to sell for right now.
That is a perfect example of this does not feel like a falling knife whatsoever. Now I may eat my words. We may have something worse happen and the economy does plunge into a depression, I just don’t think that’s going to happen. I think we’re all going to go back to work and the economies going to come back really strong and people are going to start buying houses again and as long as there’s stability with employment they’re going to keep buying.
The question of should I buy now or not, it largely depends on your personal situation, is your job stable? If it’s not, it’s probably not a good time for you to buy a house. If your personal financial situation’s not rock solid, that’s usually not a good idea to do. And the second is geographical. What is your market like? If you live where I live a lot of people are working from home. These tech jobs, you can work from anywhere, we’re not suffering very much. But maybe where Josiah is is different.
The point I wanted to make is that when you had this opportunity to buy these houses and wholesalers didn’t want them, it looks now from where we’re standing like that was the best time to buy something. That you had that very small window when everyone was scared when you could get a really good deal and as consumer confidence comes back, when your individual confidence comes back with it, you’re now with the herd. Everybody feels that way. You’re now competing with all the same people to get the few number deals that are out there. Is that what you’re seeing too?

Josiah:
I mean that’s what I’m seeing. Our properties are predominately in Fort Worth, Texas. I’ve lifted the stay at home order there. I don’t know they’ve not opened everything up wide open, but when we had these 10 properties, five of them weren’t rented. We got those renovated and rented in record time. I’ve never had properties rent so fast as these properties rented. There is a good demand for rental properties right now in that market in DFW, I can’t speak for all over the United States. My theory is, I was like why are these renting out so fast? We had high quality tenants too. My theory is maybe A, people don’t want to stay in apartments as much, they want space. Or B, since we have B class properties, maybe these A class tenants are trying to get a discount, save some money that’s trickling down to B class. A lot of the tenants that are filling these B class properties have high quality jobs. They haven’t lost their jobs.

David:
But they feel a little bit safer getting a little bit cheaper of a home.

Josiah:
That’s right. And we collected, thank God, we collected all of our rent in March and all of our rent in April. No one missed a payment. And one thing I wanted to add is that we have 20 properties, two separate tenants had to end their lease at the end of April because of domestic violence. You read about domestic violence being up, we’ve seen that with our tenants, two different tenants had someone in their household threaten to kill them and had to break their lease because of that. This stuff is real. People being stuck at home, and people being affected. It’s the real deal. Domestic violence thing is real when you’re seeing those statistics. We had two of those tenants have to leave because of that. Everyone is paid. So we’ve been very thankful for that.

David:
So Brandon, what Josiah just said is very similar to how you have sort of formed Open Door Capital where you recognized hey if the economies going to get back, I don’t want to be at the top of the chain when everything’s moving down, I want to be at the bottom where it’s all coming and you’ve been buying these mobile home parks. What have you been seeing as far as rent being paid, rent not being paid, challenges that have come up during the crisis?

Josiah:
Yeah, we hit almost across 600 units, we hit almost 100%. We’re like 97, or 98% rent collected in April. Here we are now in May, we’re recording this on May fourth the Star Wars day and as of yesterday, we already had in my person, not my mobile home parks, that’s a little bit slower to report to me, but in my personal collection of the 25 units roughly I have in Washington, we’re already at 90 something percent collected, and we’re not even at the fifth yet. I don’t think we’ve ever actually been this far ahead. I’m seeing a lot of positive signs for May as well. Obviously when this episode comes out we’re well into May. Hopefully I’m not eating my words there, but overall I’m pretty optimistic.

David:
What about with your flip? Have you seen values changing on your Maui flip?

Josiah:
Inventory’s down dramatically, because everyone’s pulling their listings in Maui. I think Maui’s going to be hit harder than most places in the world, just because no one’s moving here. I shouldn’t say no one’s moving here. One of my team members, Mike, just moved here last week. If you come here, you can’t leave your house for 14 days. They lock you in quarantine, like you cannot leave.

David:
Yeah, anyway, crazy.

Josiah:
So I think Maui’s going to be a little bit slower coming back. I’m 50/50 on whether I’m going to have to rent that or sell it, but we’ll see. There’s not much inventory, so my house is going to be the cheapest and one of the only houses on the market. It might actually work just fine.

David:
And a lot of people buy Maui real estate from outside of Maui. That’s another thing to think about. Their economy is what makes their decision, it has nothing to do with what’s happening in Hawaii.

Josiah:
Correct.

David:
For context, we put three house hackers under contract last week, and I put two listings under contract, both for over asking price, so there’s zero indication that anything where I am … It’s slowing down to the point where if you’ve been thinking about buying this is a great time to get in, because the competition isn’t as crazy as it was, but we’re not seeing prices drop. Houses have to sit on the market for a long time before that happens, and that’s not happening at all.

Brandon:
I have an analogy. This is good. And it’s not a Disney one, it’s a Warner Brothers one. Do you remember Wile E. Coyote always chasing the, what’s it called-

David:
Road Runner.

Josiah:
Road Runner.

Brandon:
The Road Runner, right. And he’s always run off a cliff and then he would stay in midair and below him is a cliff.

Josiah:
But he didn’t know it until he looked down, right?

Brandon:
He didn’t know it until he looked down, and then he fell. Let’s say the cliff was 100 feet across, he could have run right across that cliff, and made it to the other side of the cliff, right? It’s only if this thing goes on for six months, we will all realize we’re on a cliff and we’re all going to fall, but if not, we’re just going to run right over the cliff and not even realize … In other words, the market, I think I’m with you David, I think if this ends soon house prices, inventor will go back to where it was before, prices will go back to where it was before, because it’s going to be like oh wow, that was scary. But we’re on the other side now, we’re fine. We’re past it.
The fear is if this continues, that’s when it starts … You’re like oh shoot, we’re standing over mid air, and that’s when we’re going to collapse. Scale of one to 10, how was that on an analogy?

Josiah:
That’s like a nine and a half, I thought that was solid.

David:
It’s a 10, solid 10.

Brandon:
All right, okay, thank you, thank you. Let me make a point, bringing it back to what we talked about a minute ago, but I wanted to make this. One thing when we talk about no money and we talk about BRRRR investment, we talk about creative investment, we talk about using partners and hard money and all of that. This is the point that I make in the book that we released a few years ago, the book on investing with no and low money down and we have a second edition coming out soon and I make the point again in here. Investing with no money down is not about having no money. This is why you survived Josiah, this difficulties. Because you had the equity in your property. You had something there you could tap into.
A lot of people, they’re just broke, just nothing whatsoever, and they can’t even put food on their table, and they’re like I’m going to get into real estate and try to do this for no money down. There are strategies. You can go and partner with somebody maybe, or be like the boots in the ground for somebody, but just understand the way you survive difficulties when you’re doing more aggressive or creative financing is by having some financial resource to use. So if you don’t have that, just go find somebody you can partner with that does have it, but don’t put yourself in a stupid position where you’re just like, “Well, I got no money whatsoever, no credit no ability to get anything and now I’ve got all these loans and now I’m going to be screwed.”

Josiah:
Totally.

David:
In fact, if you think about no money down investing at on its face, it does sound riskier, but would you rather have the money in the property as equity, where you have zero control over what happens, so when the property value drops, your money disappears, or would you rather have that money out of the property in your bank account where it stays safe and you can use it to pay rent when your tenants aren’t paying and to pay your expenses when you need it, or to buy a property. You’re kind of taking it out of the area that you can’t control it when you leave it as equity and putting in an area where you can control it when you put it in your bank account. Is that the same way you see it Brandon?

Brandon:
Yes. Exactly.

Josiah:
Yeah, reserves are everything. And just like in a business, if you got no money in the bank and something happens you can’t make payroll. You got to have the reserves there. This thing could have gone a lot worse. Fortunately these appraised where the did and we didn’t screw the BRRRR up as well and have to come to the table with three or $400,000 to close two million dollars of properties. It could have been much worse.

Brandon:
All right, so let me ask you this, are you still looking to buy?

Josiah:
So my goal has been … My partner and my goal has been to have 20 properties, about four million bucks in real estate investment properties in one to four family, and then my goal this whole time has been to move into multi family from here. My goal right now is to get all this stuff taken care of, get through this time, and then I’m going to start trying to hack away at doing apartment deals. That’s where I’m headed.

Brandon:
I have a question for you. I love your strategy, and I love when we interviewed you on the other episode that came out yesterday and we talked about how you brought in the private money lender to fund kind of almost like the down payment essentially, but the chunk that the hard money lender wouldn’t finance. I love that strategy. Looking back at the situation now and how this went, do you still like that strategy, and then also as another half of that question, what would you do differently now to be maybe more clear or to have a more … Where will you take a relationship with a private lender differently now than you did before based on what happened? So would you do it, and what would you do differently if so?

Josiah:
You know, it helped us so much to work with the private money lender, I don’t think I would do anything differently other than maybe try to have a more clear set of parameters around that money. Like I said, we had a term to it, but I didn’t really feel like I had a lot of leverage to say no when they said they wanted their money back. You kind of feel like you took a chance on me, you felt me, I need to do right by you and get your money back as fast as I can. I would just say just to be cautious with that. I guess in hindsight, the best thing to do would be to be much more conservative with your BRRRR numbers. Try to have all your BRRRR deals done at 60, 65% loan to value, then on your refi you’re not having to come to the table with money.
Again, as an appraiser, on the back end of this, the x factor in all of this is your appraisal value. And these deals, we got these deals appraised with the first lender, they appraised for x we got them appraised with a second lender, the Fannie Mae deal, they appraised for about five to 10% less. So that also hurt us. That was a temporary dip, people were putting properties on the market, and discounting the prices and stuff, and I think the appraisers were being conservative, because they don’t want to have some foreclosures that they did appraisals on that somebody comes back and sues them later. So that was another factor in this.
I would say, yeah private money, I think private money is a great way to go, and I think it can really open the whole thing up for you as an investor. I would just say be very clear, have a lot of detail around your commitments with private money lenders and that kind of thing. What are your thoughts?

Brandon:
Yeah, I agree, and I think that this is where attorneys come in really, really handy. And I’m not saying you have to go sit down with an attorney if you’re going to borrow private money necessarily, but here’s a good example. So one time, this is a couple years ago, you guys have probably heard this story before, but I bought a big mobile home park. Not big, it was like 50 units. In Bangor, Maine with Ryan Murdock who now helps run Open Door Capital. And also Mindy Jensen who’s the host of the Bigger Pockets money podcast and her husband Carl. The three of us, or four of us, partnership, the married couple and the two of us, bought this property. We sat down with an attorney in Bangor who helped us work through the what ifs. The if this goes wrong guys, what are you going to do? If this happens what are you going to do? He asked so many … We sat for an hour on this call with him, and he probably asked 50 questions of if this happens, what are you going to do? And a lot of times it was like I didn’t even know that was a possibility. I didn’t know I had to be worried about that.
But that’s where a good attorney can come in really handy if you’re partnering or your bringing in private money, because then you’ve had those conversations. What do we do if the market does tank? What do we do if we can’t pay this back in time? Then you have those conversations, they get worked into an operations agreement, and then hopefully things like fear and emotion don’t cause private lenders or partners to suddenly react and try to pull their money back. I’m not saying that’s exactly what your person did, but I’ve had that happen before. I’m a nice guy, you’re a nice guy, we want to be nice to people, even if the contract says one thing and they’re like I just want my money back, we’re going to give them their money back if at all possible. It makes it less likely when you have things really officially done. Attorneys already gone over it, here’s the paperwork, it says right here, they may not even ask then at that point, because they know it was so officially done.

Josiah:
Sure.

Brandon:
Anyway that’s just my two cents.

Josiah:
Yeah, and our private money lender, I guess another layer of complication on all this is we had 10 deals, some of them the private money was almost up, the term, and the private money lender wasn’t going to renew it. And the private money lender didn’t say I’m foreclosing on you if you don’t give me my money tomorrow, it was more of just I want my money back, I can’t renew these for you, things are bad in the market, I need to get this back ASAP. It lit a fire under us to go figure out how to get this money back to him and pay it off.

Brandon:
Yeah, there you go. Cool guys. All right, let’s see, before we move on, this show is going to be a little bit shorter probably than the usual ones, and we’re probably not going to repeat the all the deal deep dive fire found, etc. I wanted to do a couple more general questions that we didn’t get to last time that I had written down to ask you last time. A first one, greatest day of your investing life, worst day of your investing life?

Josiah:
Greatest day of my investing life.

Brandon:
Yeah, or what memory makes you smile and what memory makes you shake a little bit?

Josiah:
Honestly the greatest day of my investing life was signing the documents to close these refinances right now. Just because it was like this is the most complex problem that’s been thrown at us, and we got through it. And it’s not over yet, all kinds of stuff can happen from here, but just literally getting them refinanced over to Fannie Mae, and the reason we’re so happy to have them over there, if our tenants stop paying us, which they haven’t done yet, but if they do stop paying us, Fannie Mae will work with you. This other lender we had, the private money lender, the hard money lender, they don’t have that same set of rules. They’re not required to give you forbearance on your loans if that happens. So now we moved these over, now we’ll work with Fannie Mae, which is a much different thing. That was probably, I feel like I’ve accomplished something by working through all this.
Worst day as an investor, I would say probably in the middle of this whole thing that’s happened recently when the flip, the full price flip fell through for the third time, and I’d just gotten off the phone with my private money lender saying we’re not renewing you, we need our money back, and then the initial lender said we won’t close you, it’s like okay nothing’s working right now. It’s like okay, I got to figure this out. It’s all been pretty recent, these highs and lows. It’s been a roller coaster.

Brandon:
That it has. All right, next question, how has your real estate journey been different than what you imagined?

Josiah:
You know we didn’t plan to do the BRRRR strategy and be coming out of pocket with the money we have. That being said, we’ve created about … We have a portfolio of four million and by my estimation, we have about 1.2 million in equity, so I feel like it’s been a big success, it’s just not been … The BRRRR strategy there’s a lot of money in closing costs, there’s a lot of money in holding cost, and then the appraisal is the x factor. You can get two appraisers to appraise the same property, one will come in 10 grand higher than the other, and you’re coming out of pocket with money based on which appraiser you ended up with. So sometimes you don’t completely BRRRR out of your deals, and you have to be okay with saying okay I’m leaving this 5K or 10K in this property, because my cash on cash is what I want it to be, this property is going to appreciate, it’s being paid off, there’s a lot of tax benefits that kind of thing.

Brandon:
Yeah, but it’s important to point out, you’re not making the decision of do I want to leave 5K or 10K in a property or not, it’s do I want to leave 5K or 10K in a property with a BRRRR that didn’t go perfect, or do I want to leave 45K in a property using the traditional method.

Josiah:
Exactly. Yeah.

Brandon:
Yeah, so even when it doesn’t go right, it’s still usually or almost always better than the alternative.

Josiah:
Oh yeah, yeah. On average I would say, if we’ve left 10K in a property, there’s 60K of equity there. That’s a win.

Brandon:
I bring that up, because that’s the criticism you hear at BRRRR. What if this goes wrong and what if that goes wrong? It’s always phrased like if something goes wrong and it’s not perfect, you shouldn’t have done it. But those problems happen when you buy a house without doing the BRRRR method. When you just put a whole bunch down and then spend a bunch on the rehab, you have the same issue, you just leave more in the deal than a BRRRR that goes wrong.

Josiah:
Yeah, and to use an appraisal term, what’s your highest and best use of that money? What’s your opportunity cost. If you could put 10K in this, and it were worth 60K, but you couldn’t sell it immediately, would you be okay with that? Most people would say yeah I’ll jump all over that. That’s what’s happening on these BRRRR deals sometimes. You’re putting 10K in, you created 60K of equity, and oh by the way this thing when it’s paid off is going to be worth half a million bucks, a million bucks. So you put 10K in, you’re going to get a million dollars out. You just paid 100 times your money on that 10K. Or you could put it in the stock market, and you might get 8% a year and run the future value on that. That might turn into 25,000, 30,000 I don’t know. Your opportunity cost of taking this 10K and turning it into 500,000 your opportunity cost is taking that 10K and getting 8% a year and turning it into 25 or 30,000. It’s a massive difference.

Brandon:
It’s such a good point.

Josiah:
You’re not losing by putting the money in. It’s actually a great way to go about doing things. It’s not necessarily the goal, but it’s not a loss.

Brandon:
It’s such an important thing for everyone listening to remember, when you compare a possible outcome versus the perfect outcome, it is very easy to look at it, and see the downside and say this is why I shouldn’t act. When you compare this possible outcome, it might be 10K in a deal versus what if I put that money in the stock market, it becomes very clear that this is a really good move. This 10K now could become a million later, or $100,000 later if I just wait. It’s not going to do that anywhere else.
That data that you bring into the algorithm in your brain affects the gut feeling that you get that helps you make the decision of where you want to move, and that’s what I’m always telling people is it’s not just about should I do this or should I not do this. It’s about what other options do I have? Let’s look at the four different options that I have, then usually the right one will become clear, and that’s how you win at the real estate game. You are patient, you get rich slow, you consistently make smart financial decisions and keep your personal finances low, and put the extra capital you do have into real estate. You do that as efficiently as possible, which BRRRR helps you do and investing with other people can help you do, and then you just wait for inflation to do its job and renters to pay your mortgage off for you, and then you look really smart.

Josiah:
Yeah, I mean some people might think he had to put some cash in this. I would do the same thing all over again because what these properties are going to turn into value wise when they’re paid off. To me it’s still a great investment.

Brandon:
Yeah, if you put that same 200K into the stock market, would you have got 400K of equity?

Josiah:
No.

Brandon:
No you wouldn’t. Would you be getting a 48% ROI? No you wouldn’t. Would you have nearly as much control over what happened? Would you be able to refinance later if the values go up and you can get Fannie Mae financing or that other lender will let you refinance again. In fact, the people I know that invested in the stock market, they’ve been taking this a whole lot worse than real estate investors have.

Josiah:
Exactly. Yeah, that’s what I was going to say. I would be much more nervous about my 200K if I put it in the stock, I’d be on there checking it all the time being like oh no, is it going to dip down, I just lost 20 grand. That’s the thing I don’t like about the stock market. It’s flashing a price in your face constantly, you’re having to manage your emotions of the rollercoaster ride, whereas in real estate, it’s not flashing a price in your face constantly. You can put your 10K in that property, your 20K in there and ride it out, make it through and sell that thing and it’s worth four or $500,000. And you can manage your emotions better. That’s what I love about real estate.

Brandon:
Yeah, so true man. So true. All right, last question before we start to wrap things, what can people listening to this show, how can they bring you value? What are you looking for right now? What do you need right now? What kind of value can people provide to you if they want to?

Josiah:
I want to start buying apartments. If you’ve got an apartment deal you’re wanting to do, and you want some partners to help you manage the whole process and raise money and that kind of thing, I would love to partner up with you. So yeah, I want to get into multi family investing. I also love mobile home parks, but Brandon’s your man on that.

Brandon:
I own it. I own it. I have a patent on it actually. Just by using the word mobile home park you owe me $30.

Josiah:
Oh, what’s your term, what’s your phrase. Okay.

Brandon:
I don’t have one.

Josiah:
Isn’t there another term that people use for mobile home parks that people get offended by?

David:
Trailer parks. Yeah, trailer parks.

Brandon:
No, we don’t call them-

Josiah:
Yeah, we don’t call them trailer parks. That’s a no-no.

Brandon:
Mobile home communities gentleman. They are mobile home communities.

David:
M&M grew up in a trailer park in 8 Mile. Brandon Turner invests in mobile home community.

Brandon:
Manufactured housing communities. That’s even the next level up. Anyway. All right dude, this has been awesome. Of course, everyone go back and listen to yesterday’s show if you didn’t, which would be kind of weird to listen in reverse, but it would still make sense, you’d enjoy it. And Josiah goes through his famous four and all that there, so we’ll leave that there.
I am curious though, I know I said last question, but any books or anything you’ve been consuming in the last months since we recorded the other episode a couple months-

Josiah:
Oh man.

Brandon:
Anything you’d recommend?

Josiah:
I’m always reading. Let me look over here. Let’s see. I talked about some on the last podcast, but of course highly recommend everybody read Rick Dad Poor Dad. If you listen to his podcast, hadn’t read that I don’t know how you’re sleeping at night. I’m a big C.S. Lewis fan, Screwtape Letters and I’ve been reading the 4-Hour Body by Tim Ferriss, I don’t know if you’ve read that. Being stuck at home and trying to figure out the whole workout thing has been challenging.

Brandon:
Oh, dude, this is stupid toy purchase, but I bought an Oculus Quest. You know like the virtual reality goggles. I’m obsessed with them, it’s the funnest invention ever. But the workout programs in it are phenomenal. They’re so fun. You get done and you’re just dripping sweat. You’re fighting things that are coming at you and doing, but really what you’re doing is squats, lunges, jumping, hitting, it’s crazy. You get a massive workout, it’s like a 45 minute workout and you’re just sweating and the whole thing was a game. I would highly recommend anybody stuck at home that wants to work out pick up, it’s like 600 bucks, but an Oculus Quest is a well worthwhile investment.

Josiah:
Have you knocked over lamps in your house and hit the wall and stuff during this?

Brandon:
They do a pretty good job. You create a fence around where you are. It’s actually really cool technology. 20 years from now it’s going to feel like Nintendo, like how horrible the graphics were, but today this is pretty incredible.

Josiah:
I’m picturing the kid on YouTube with the light saber swinging the light saber around in the garage.

Brandon:
Yeah, that’s pretty much what it is. The Star Wars game is pretty phenomenal. You literally are holding a light saber and you feel like you’re holding the light saber, and your mind is like this can’t be real, but I’m holding a light saber in my hand and I’m fighting bad guys with it. It’s crazy.

Josiah:
Sweet.

David:
This shelter in place has turned Brandon full Frodo. He’s gone from Lord of the Rings and exercising with a light saber, I never saw, I never thought I’d see the side of Brandon. I think it’s hilarious that you live in Maui and you’re looking at this virtual thing to take you to other places. I need to escape my reality.

Brandon:
We can’t go to the beach. You can’t go anywhere.

Josiah:
Dude, Brandon’s beard were great, be Gandalf beard man. That thing is-

Brandon:
I know.

David:
He’s half a step away bro. If this lasts for another month we’re going to see. Brandon’s going to change his Instagram name to-

Brandon:
You shall not pass.

Josiah:
Brandon, let’s get the hat man. Get the hat, die the beard gray for Halloween. It would be awesome.

Brandon:
I’ll work on it. I’m doing it. I’m doing it. All right gentleman, let’s get out of here. David Greene, you want to close up the show?

David:
Yeah, Josiah, thank you very much for coming on and sharing the not so BRRRR-fect side real estate. I thought you did a great job. We don’t hear about that very often, so it’s great when we hear about how things can go wrong and how we can salvage them when they do. I think that’s going to give a lot of people a lot of confidence so, props to you for doing that, and thanks for coming on twice.

Josiah:
Yeah, absolutely.

Brandon:
Okay, Josiah. For people that want to reach out to you to talk about investing in apartments or all the other stuff that you do, where’s the best place to get ahold of you?

Josiah:
Yeah, so I’m on Instagram at Daily Real Estate Investor. That’s a great place to connect, shoot me a direct message on there. My email address is also on there. You can email me. And I love for you to check out a copy of my book Dream it and Build it: How to Crush Your Real Estate Investing Goals. That’s on Amazon and stuff. I talked about that on the last episode. Would love to connect with anybody in this world who’s looking to do apartment deals.

Brandon:
Awesome man. Thank you. David Greene, you want to take us out?

David:
Yep. This is David Greene for Brandon don’t look down Turner signing off.

Speaker 3:
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In This Episode We Cover:

  • What happens when private lenders want their money back
  • Why Josiah’s bank changed the loan-to-value ratio on him
  • Tapping a cash-out refinance in an emergency
  • Trying to sell a property you had planned to BRRRR
  • Taking out loans in your spouse’s name to get around loan limitations
  • Key to pulling off a BRRRR in a down market
  • How Josiah saved $750K in interest over 30 years by getting a lower interest rate
  • How an attorney can help you arrange a great partnership
  • Why Josiah looks at this stressful time as a highlight of his real estate investing career
  • And SO much more!

Links from the Show

Books Mentioned in this Show:

Tweetable Topics:

  • “Lack of capital when needed is what puts businesses and real estate investors out.” (Tweet This!)
  • “A property that is paid for is insurance.” (Tweet This!)

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