BiggerPockets Real Estate Podcast

BiggerPockets Podcast 384.5: 10 Deadly Mistakes Real Estate Investors Make with Brandon and David

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After yesterday’s deep dive interview discussing two disastrous flip projects, we have a solo show for you today.

And the title says it all, really.

Brandon and David boiled down nearly 400 podcast episodes, countless forum threads, books, and real-life conversations—and their own missteps—to present to you: The Top 10 Ways Real Estate Investors Lose Money.

These aren’t the only ways to go wrong in this business, but at some point, you’re in danger of falling into at least one of these traps.

So, what did we miss?

Let us know in the BiggerPockets Forums, the comments section on our show notes, or in the Official BiggerPockets Facebook Group. And be sure to subscribe to the BiggerPockets Real Estate Podcast so you won’t miss an episode.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Brandon:
This is the BiggerPockets podcast show 384, part two. So, the number one biggest way people lose money is just by not doing anything, by just taking no action, ever, and living the life that they’ve always lived just because that’s easy and they can just get up and live reactively. So, my advice for people is, don’t look at this stuff as fear-based, but look at this as, “How can I use this to arise to a new level?”

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Speaker 2:
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Brandon:
What is going on everyone? This is the BiggerPockets podcast. Here with your host Brandon Turner, with my co-host Mr David Green. What’s up, David Green? How’re you doing, man?

David:
I'm amazing. We're talking real estate. What can be better than this? It's springtime. This is pretty much the time when the real estate market heats up the most and people keep talking about this recession that we're supposed to have, and man, my phone is blowing up every day, it is awesome, with people that want to sell their house and want to buy a house, so from where I'm standing, I'm not preparing for a recession. I'm seeing that there's a lot of demand for real estate still. What were you going to say?

Brandon:
Well, as I said, you said a report just came out yesterday. Josh Dawkins sent it to me. According to some company that came up with their data, they basically pulled data of sales comps. Like yesterday, or last week I think it was, was the highest point of the market in history. Now we’re a month into this Covid thing, we’re still at the highest real estate price market in history. It’s higher than it was two months ago, three months ago, so it’s still cranking.

David:
That's what I'm seeing. If somebody wants to buy a house and you live in a hot market, my advice to you is to go talk to an agent about how to get … If your job is safe, first off, let me say that. If you might lose your job, that's not a good time to buy a house, but if you're personally in a good place, you should look at trying to get something going now, if you're on the fence, because if you wait another month, when everything opens up, I think the hordes are going to descend upon the market like locusts on a field. It's going to be very, very hard, and if you want to sell your house you should start preparing it right now, so when those locusts ascend, or descend, or whatever I'm saying, you're ready to go, because I'm anticipating a very big, big wave.

Brandon:
Interesting. Well, we shall see.

David:
And we get to talk about some real estate today to save people money. This is going to be part two of a show we did with Spencer [inaudible 00:02:31]where he talked about what he did wrong that lost money, because we often talk about people that do well with real estate. There’s, what do we call that, survivor bias or something like that?

Brandon:
Yeah.

David:
You only hear the stories of people that did good, so we wanted to bring some people in that didn’t do good, so that we can learn from their mistakes and learn about this art that we’re studying even more deep.

Brandon:
That's it. So yesterday, if you didn't listen to yesterday's show make sure you go back and listen to that. You can do it after this episode or you can do it right now. Episode 384 part one, with Spencer, and again he just goes through two deals that he lost a ton of money and we dive deep into why he did that, what happened on those, and so make sure you listen to that one. It was really good. But then we thought, we actually want to go through more ways. His was one specific example, or two specific examples, but David and I came up with a list of another bunch, I think we have 10 total, maybe, to go over ways people lost money so that you can avoid losing money, because we want you to make money, be successful and have financial freedom and independence and quit your job and sail around the world on your yacht with your four children. That's what we want for you.

David:
Making rap videos like Will Ferrell and-

Brandon:
Making rap videos.

David:
What’s the other guy’s name in Stepbrothers? John C Reilly. That guy.

Brandon:
That’s what we want for you.

David:
That’s the life, right there.

Brandon:
That’s the life, and we want that for you, and so that’s what we’re going to help you guys to today, but before get to that, let’s get to today’s quick tip.

David:
Quick tip.

Brandon:
Quick tip. Very short. Are you guys checking out the BiggerPockets forums? They’re really good. You should check them out. There’s really good stories, like yesterday’s show on Spencer, we learned about that from the forum, so go check it out. That’s today’s quick tip.

David:
Quick tip.

Brandon:
That was a quick tip, to make up for yesterday’s really long quick tip. Without further ado, let’s get into the top 10 or the 10, I don’t know if they’re ranked in order of biggest to smallest or anything like that, but just 10 mistakes or errors or ways people lose money in real estate in all different forms. So number one. David, do you want to lead us off?

David:
Number one. Lack of focus. When you take on too many projects at once, or too many different types of projects, you spread yourself very thin. You're more likely to make mistakes, and most importantly you start taking too much time, and for newer investors, or maybe less experienced investors I'll say, they tend to under-recognize how expensive time is when it comes to real estate, whether it's holding a loan or the holding cost, the cost of capital that you can't put into something different, it is very easy for projects to get out of hand when you're working on them, and time equals money in this business.

Brandon:
Yeah. It’s true, and people want to do so many things because they’re ambitious and they’re excited, just like Spencer was yesterday. We talked about when people are excited they want to get into this thing, but it’s really important to stay focused. Don’t build too many bridges over to fantasy island. Build one bring [crosstalk 00:05:12].

David:
Share that example. Talk about your bridge analogy. It’s a good one.

Brandon:
I feel like I share that all the time. Thanks. It’s like my one analogy. You live on an island called Reality Island. I didn’t make this up, either. I totally stole this from a YouTube video I saw years and years ago.

David:
Thank you for giving credit to that.

Brandon:
Yes, you see? Look at that. In fact, it was even James Wedmore that I learned this from. I even give the credit to the person because I remember, it was James Wedmore teaching about business. He's got a thing called Business by Design. Anyway, you live on Reality Island, then there's Success Island and you've got to build a bridge to get there. In this imaginary world there are no such thing as ships, and so you have to build a bridge over there, and so people build a little bridge, and then they build another bridge, another bridge, and each one gets a few feet out in the water before they start building another bridge, so they're trying to build 10 different bridges at once, and so as a result no bridge ever makes it to the other island. And so, build one bridge, stay focused, don't [inaudible 00:06:01]focus, don't try to take on, "I started this project, now I'd better go do this project. Now I'm going to do this flip and this rental and this wholesale and this BRRRR, and I'm going to do it all because I'm going to die next year."
That’s most people, they act like they’re going to die when they get into real estate, but this is a long game. I’m not saying go slow, but I’m saying go careful. Focus on what you’re doing and become an expert at that thing before you add on new things. Agreed?

David:
Love it. Totally. Okay. Number two, trusting that the contractor, or really any professional that you bring into this job, will do a good job just because that's their job. That's a big mistake that people make. You have to actually manage the person, and one of the things I've heard people say is inspect what you expect. If you have an expectation for something, you'd better be inspecting to make sure it was done.

Brandon:
That is true. Yeah, I can’t tell you the number of people I’ve hired. I once hired this contractor because he had a hat that had his logo on it, and he had a truck with his logo on it, and I was like, “I don’t think I’ve ever seen a contractor in Grays Harbor, Washington with a logo on their truck and on their hat. It just doesn’t exist, because most people are kind of shady, and I was like, “This guy is legit,” so I paid him five grand up front for work to be done a project. He just took the five grand and left. Just never showed up again. I trusted him because he was a contractor and because he had a hat and a truck he must be legit, and he wasn’t legit. So, yeah, inspect what you expect. I like you said that. Number three?

David:
Very good, so don't assume that because they're a real estate agent and they're licensed that they're good. Don't assume because they're a contractor that they're good, and here's another thing, don't assume that because they were good for someone else, they'll be good for you, right? If you're the one trying to pay your agent 4% and somebody else is paying 6% and they only have so much time, they're going to give it to the 6% person, so don't shoot yourself in the foot. What I tell people is winning battles to lose wars. Make sure you're inspecting what you're getting.

Brandon:
Here’s a quick tangible thing on that. We say, “Inspect what you expect.” What it means is you also have to continually manage that person. We have this thing that people do. I’ll give you the example of property managers first. They do all the work needed to buy a property. It’s a hassle, they have to do the rehab, they get the loan, they get all that done, and by the time they’re done with it they’re like, “I’m so tired of this property, I just want to …” And what they do is they hand it over to property management and then they run away, and they close their eyes, they’re like, “I don’t want to deal with this any more, I don’t want to see it, I’m done. I hired a professional.” But at the end of the day, the professional is only going to manage as well as you manage them, and so are you checking up on their numbers? Are you following up with them? Are you making sure their communication’s good? Are you firing them if they need to be fired? You have to really look into that.
The same is true for your contractors. Are you looking at the work they’re doing? Are you actually verifying that it was done correctly and it looks good before you pay them? One thing that I do is I have a thing called a contractor bid form, and I actually have this form. You can actually download it for free, it’s in the BiggerPockets file place. You just type in “Contractor bid form”, you’ll find mine. I literally take whatever they said they were going to do, I put it on my sheet, and I say, “This was the scope of work you just said you were going to do. This is the price you said you were going to do it for, right?” They initial it, or they sign it, and then I say, “This is when you get paid this amount, this is when you get paid this amount, this is when you get paid this amount,” and I list all the benchmarks that they get paid at. They sign that. So, now, we are all on the same page, and I am now not paying them until they’ve done the work, so now I’m inspecting what I expect at the end of the day. That’s just a couple of tangible examples of what we mean by that.

David:
Great advice B-money. I really, really like that.

Brandon:
Thanks, D-money.

David:
All right. That was a lame nickname by the way, repeated what I said. Okay, number three. Don’t be, what’s the word I’m looking for, when a magician fools you into something? Is there a fancy word for that?

Brandon:
Hoodwinked. I like hoodwinked.

David:
Don’t be hoodwinked by spreadsheet magic. A lot of deals look really good when you put them into a spreadsheet, into a calculator, like ooh, look at that, I’m going to get a 29% return, so I’m going to go invest in whatever this area is, or I’m going to buy this class of property, and then it doesn’t work out like that. As we learned from Spencer, it’s very easy to plug things into a spreadsheet and say, “That’s the way it’s supposed to go,” without looking at what your responsibility is to make sure it goes that way. For instance, my rehab is supposed to be 50,0000 and not think about which contractor I hire, or inspecting them to make sure that it does. This often comes up with things when you ignore the location of a property, maybe the median income of that area. If the median income is significantly lower than everywhere else around it, you’re probably dealing with the people that have more life issues going on, and they’re less likely to value things like paying their rent on time.
They're also less likely to care about things like evictions, foreclosure, stuff that hurts their credit. If you go to that area, you're going to be drawing, like Brandon said, weird houses draw weird people. It doesn't mean you can't invest there. I means you have to understand the risks of doing it. You need to underwrite more vacancy, more repairs, much bigger contingencies into your plan than just saying, "Well, if I bought in Beverly Hills it would look like this, so let me just take that same formula and apply it to a different market and assume it's going to work the same." Spreadsheet magic can get you burned.

Brandon:
Ooh. Spreadsheet magic can get you burned. All right. Yeah, and just another way of explaining that I’ll just throw out there is, we said this earlier, there’s a math, like a logical way of looking at real estate deals and then there’s an emotional way of looking at deals, and so we just have to make sure you’re looking at it from both those angles. Just because the numbers look like they make sense on paper doesn’t necessarily mean it’s a good deal. You’ve just got to look deeper than that, don’t just rely on this is what the numbers say. So, kind of relating to what we talked about yesterday. All right, number four, and before we talk about number four I’m actually going to play a quick clip here from a BiggerPockets member and a previous guest on the BiggerPockets podcast, show 287, who talks about where he lost money on one of his recent flips and what he learned.

Shiloh:
Hey everybody, this is Shiloh Lundahl from Gilbert, Arizona, and I was asked to share about one of the deals that we did that did not go so well. So, a couple of years ago when we had first gotten into flipping properties we bought a little property in Mesa, Arizona for about $105,000. It was the cheapest property in the area, and we decided that we wanted to flip it and make a profit. So, we'd been watching a lot of the HGTV shows and we decided we wanted to fix it up really nice, make the kitchen cute and the bathrooms cute, and we ended up putting in about $35,000 into this deal, and then when we put it on the market it took a while to sell because we priced it high. Then, eventually we got an offer for $155,000, and then we found out that there were some un-permitted additions that needed to be fixed, or even brought up to code. We had to put a parking, what do you call that, a carport in the back, because it had to have parking that was covered on the property according to the city code and everything.
So, basically, when all was said and done, we lost about $5,000 on this deal, and some of the lessons learned was one, you don’t want to over-improve the properties for the neighborhood. When I look back, we probably could have put about $10,000 into this deal, fixed up a couple of things, made it nice and clean, and then we probably could have sold it for either 135, 140, and we could have made maybe $10 or $15,000 on the deal, but we wanted to make it really nice and so there was a cost to that, and we ended up losing money because we put too much into the property.
Another thing is we didn't have another exit strategy. Our only exit strategy was to flip it. We didn't run the numbers on what it would be if we were to rent it out, or lease option it, and looking back, if we had lease optioned it we probably would have earned maybe $20-30,000 over a three to five-year period of time on this property. Then, the last thing is, speaking of the numbers, we just didn't run the numbers really well. I didn't look at what it was going to sell for in the end, and then back out from there, and so I was just excited and threw myself into this deal, and I ended up losing money because I didn't run the numbers really well. So, those are the three lessons that I learned from that deal, so I hope that you guys are doing well, and that's everything.

Brandon:
All right, thanks man. Shiloh, like I said, you guys listen to Shiloh’s whole story at BiggerPockets.com show 287, but we just wanted to bring that up, because it really emphasizes this point about not over-rehabbing projects. I mean, I have definitely done that. There’s this thing, it’s like the HGTV bug. It’s like you watch these flipping shows and they just do amazing flips, because for TV you’ve got to do that. Nobody wants to see a flip that’s like, “There’s the same basic carpet, the same wall color you did in every other flip, the same laminate counter tops.” You don’t want to see that. You want to see, “We tore out the kitchen wall and we put in this 18-person slab of granite.” That’s the problem. You get sucked into it, and I’ve definitely made a mistake where I just made it so nice, the neighborhood didn’t warrant it.

David:
I never thought of it. It’s similar when you and I are speaking somewhere and we don’t want to give the same speech that we gave at the last place because it feels like cheating, but that people have never heard that speech, and you’re probably weakening it every time you change it. We talked a little bit about the art of knowing yourself. Know thyself. If you know you are the type of person that gears towards aesthetically pleasing things, this is an area where you can get bit. There’s other people that lean towards spreadsheets and liking interesting spreadsheets, so they can get bit by spreadsheet magic. Get another person involved in your deal. Have a budget, give them the authority to make you stick with it, and make it as nice as you can within that budget, because it is so easy to get caught up over-rehabbing a house in an area where the comps do not support it, and by the time you realize you made that mistake it’s too late.

Brandon:
That is one thing that flipping shows and Chip and Joanna Gaines and all that do really well, is that they gamify the budget thing, so they’ll be like, “Well, we just ran into this project with the foundation, it’s going to cost $18,000 to fix, so we’re going to have to take that out of the budget somewhere. What do you want to cut at?” They do that a lot on those shows, because it adds this drama, but that in reality is not a bad way to look at … Obviously you don’t want to skimp on things just because something went wrong, but you have a budget for a reason, and you need to stick to that budget, so don’t over-rehab just because you want it to look good. Stay on budget.

David:
Yeah, and get an expert to give you an opinion on how much you should rehab. In a market like mine where we’re selling million-dollar houses, that extra nice counter top or backsplash will absolutely get you your money back, but when every single house sells for 80 grand, you have the nicest of the $80,000 houses, it’s still an $80,000 house.

Brandon:
Yeah. You know that house I looked at yesterday? Because, yeah, there’s the over-rehabbing problem and then there’s under-rehabbing, right? So you do either. I went and looked at this house, I was telling you on yesterday’s show, with the red door I didn’t go through? Anyway, so I went in that house, and the house was weird in that it was under-rehabbed. They did things like they had started their price at 2.1 million a couple of months ago. They’re down to 1.6. They’ve dropped their price a half a million dollars on this property. I walked through it and I was like, “This is a $2.1 million house, if it was just rehabbed correctly.” They did things like the stair treads, when they build the house 20 years ago, there were oak stair treads probably going up, looked really nice I’m sure. Then they were like, well, they got really worn down, so they took a saw and they cut off half of it, and put laminate up half of it, so half of it was laminate and then the rest of it was oak, and they tried to mix the two together. It was just ridiculous.
Then they painted the walls bright maroon and bright red, and it was severely under-rehabbed, and so you don’t want to make that mistake either, because then you’re going to drop your price by half a million dollars over the course of several months, and driving away everybody from that property.

David:
Yeah. It’s like the story of Goldilocks and the three bears. One porridge was too hot, one was too cold. It’s funny as you tell that story, I know exactly-

Brandon:
I thought you were talking about breaking into somebody’s house and eating their food, but that’s a better analogy, the porridge.

David:
No, I’ve moved on from that, that phase of my life. As you’re telling that story I know exactly what happened, is the agent went to sell the house. They showed comps. The seller said, “Well, that’s the most expensive comp so my house should sell for that.” The agent tried to explain to them, “Your house is under-rehabbed,” they sensed that the person was being offended, and they were not strong enough to stand their ground. Agent backs down, agrees to sell for the higher price, probably reduces their commission, because if that’s their personality, that’s what they do, and then the house goes on the market and everyone goes to look at it and no one wants it. Or worse, no one looks at it because the pictures look bad. They then reduce their price to where it should have been in the first place, two months later, three months later, maybe you have spend money to get the house ready for sale. The [inaudible 00:18:14]market is really high, so less people are seeing it. The whole thing just becomes a disaster and it ends up selling for what it should have sold in the first place. I’ve seen that play out so many times.

Brandon:
Yeah, it’s true.

David:
What actually helps is I target, like when I’m helping my clients is I look for the ones where they made that mistake.

Brandon:
Yeah, so we’re looking, not that I want to do a multi-million dollar flip right now, because of the, I don’t know … I get a little nervous about that, but I’m like, “Man, if I offered them 1.4 right now and put in 200 grand worth of work on that, being at 1.6 with loan cost 1.7, is it worth the 2.1 then? Sure it is,” and now we’ve got a profitable flip potentially. The house is financeable right now. I wouldn’t even need hard money, because it’s not bad, it’s just weird. So I don’t think I’ll do it, because it’s a little bit too risky for my blood right now, but man. I mean, there’s opportunities with things like that, so crazy.

David:
Amen.

Brandon:
All right, moving on.

David:
All right, number five, the next on our list, buying in areas that do not have diverse employment. I talk about this one quite often. If you invested in real estate any time in the last eight years, more or less you probably did well unless you bought in Detroit. Detroit go hammered, and the reason Detroit got hammered is there’s only one source of employment there, so when that one industry went down, which is the auto industry, there was no reason for anyone to live there, and the one Achilles’ heel in the entire real estate investing system is you have to have a tenant in order to make money. It reminds me of this old Seinfeld episode, where Jerry Seinfeld’s apartment gets broken into, and so he gets this super expensive door locking mechanism with 19 pieces so that the door can never be broken down, and then Kramer forgets to close it and his new stuff all gets stolen right afterwards, and Jerry’s screaming at him, and he’s going over every feature the door lock has, and then at the very end he says, “There’s only one possible flaw. The door,” and he slams it, “Must be closed.”
That’s the same thing, right? If you don’t have tenants it doesn’t matter all the work that you did and everything we taught you, so avoid buying in any area that’s dependent on one thing, like touristy areas. You’re getting hammered right now if that’s where you bought your property, or the auto industry. Bubbles will come, and they will go, and you don’t want to be in an area where everybody only works in one industry.

Brandon:
Yeah. I will give some for those people living in Detroit and around Detroit, I will say they have turned that around quite a bit. They’ve diversified their employment base quite a bit over the last decade, and so I actually wish I would have bought Detroit.

David:
Yeah, a lot of mortgage companies moved their headquarters there. That's one of the reasons that turned it around. The really, really big players are all there.

Brandon:
Yeah, Quicken moved there, and Dan what’s his name-

David:
[crosstalk 00:20:39]Mortgage is there.

Brandon:
Yeah, they’re turned around.

David:
All right.

Brandon:
All right, number six.

David:
Number six. Spreading themselves too thin by keeping criteria too wide is a big mistake that a lot of investors make. Look, we all start out with FOMO, fear of missing out. What if a great deal comes along and it’s one square foot bigger than what I put in my search criteria, and that’s how our brains think. It’s always fear-based. Well, the experienced investors know, my problem is not missing out on a great deal, it’s being overwhelmed by all the deals I see so that I miss out on what I should have recognized. You actually have to filter information out of your life, and I realized this when I was a police officer. In the beginning I’d be like, “I want to know everything. Give me every single detail I could possibly know about this person,” but when you’re in the stressful situation, you’re breaking into the house, you’re chasing the suspect, you’re in the fight, you don’t want extra info. It makes it harder to focus on what you’re doing. In fact, your brain starts filtering things out, like, “Quit telling me this. Stop talking. I’m focusing.”
That’s what happens when you’re in the moment, so don’t make that mistake of giving into the temptation of saying, “I want to have this ridiculously big criteria, to where I have to sift through 200 properties to find the one or two that might be a good deal.”

Brandon:
Yeah, because at the end of the day, you need to become an expert. If you want to be good at anything in life you’ve got to become an expert at it, and when you’re trying to be an expert at everything, you’re not going to be an expert at anything. So, what I like to do is I like to define it by saying, I call it my crystal clear criteria. It’s five points of the crystal clear criteria, and go ahead and write this down everybody, if you want. I think this is super helpful. At least, when I put it into a framework I could understand and grasp. Here’s the five parts of the crystal clear criteria.
Number one. Define what property type you’re looking for. Are you looking for duplex, triplex, fourplex? Are you looking for a single family or a five unit? Get specific on that. It doesn’t mean you can’t change any of these in the future. Get specific on [inaudible 00:22:21]. What’s your next deal going to be? Become an expert at that.
Next, location. Where are you going to buy? Why are you going to buy there? What makes that location tick? What’s the employment like there? What’s the crime like there? What are the schools like there? Why is this street better than this street? That’s one of the problems with out of state investing, is that a lot of people don’t do that work needed to understand why this street is better than this street. Now, in Grays Harbor, Washington, where I lived for a decade, I could tell you exactly why that street is better than that street, but if you’re just randomly going, “I’m going to go buy in Cincinnati,” which I did and Spencer did yesterday, you don’t know those things, and that’s why you need to rely on an amazing agent who knows the location. They can tell you those things like, “Hey, that street is a school district nine out of 10, that one’s a two out of 10.” That’s why that matters so much.
Number two is location. Number three is condition. Define, do you want to buy fixer uppers or not? What level of rehab is too much? Do you want you'll do a full gut, or you'll do you want turnkey, or you want the baby bear, the middle ground, which is generally what I try to focus on. Get good at that. Stop looking at the gut rehabs, even though they sound like a great deals, they're not most of the time, because local investors would have snatched them up. People that are better and smarter than you would have already gotten those deals if they were actually good.
Fourth. Price range. Where are you buying at? Do you want $100,000 property, or a million-dollar property? Stop looking at things outside your price range, and you can work backwards to figure this out, by looking at how much of a down payment do I have, how much do I have for repairs, how much do I have for reserves that I want to hold on to, and closing costs, and then figure, "What can I actually afford here?" Then stick to that. Just stop looking at everything else. Zone in that one thing. Like David said, you don't want to get overwhelmed with too many choices. Price range can really narrow it down. Then finally, once you go through all those four, define what profitable means.
So, the fifth of the crystal clear criteria, the CCC is profitability. What makes a deal a good deal? Then stop looking at deals immediately when they no longer qualify for that, or find out what makes that a good deal and then go after it, but stop being like, “Well, I said I wanted a 12% return, but this one’s only a seven, but I really want this deal.” No. You said 12%. You’re not going to deviate from that number, and stick with it. If you just have these five points, again to recap, property type, location, condition, price range and profitability, that’s the CCC, you’re going to become an expert at that location, that property type, you’re going to be expert at that condition, and that price range, and you know what makes a good deal? You’re going to be an expert, you’re going to crush it, you’re going to be amazing.
So yeah, get real specific. Don’t worry about the FOMO, you’re not missing out on anything, there’s always more deals coming up. Get clear.

David:
That is so good, and I can support what you’re saying because I see it in other parts of life. When I used to work at a restaurant in Pleasanton where all the horse owners would come in after the horse races, I would listen to the guys that were sitting at the bar, and it was their job to decide what horse they were going to be on, and they would tell you, “This is what I look for in the horse. When I see it move this way or do this thing, I know that’s the one that’s the athlete.” Now, I would look at those same horses and have no idea what they were seeing. It all looks the same to me. They’ve looked at so many horses for so long that it immediately jumps out.

Brandon:
But they’re not looking at horses and sheep. They’re not dog [crosstalk 00:25:28].

David:
[crosstalk 00:25:28]that’s exactly right. They’re not learning all of animal husbandry, they’re focused on that one thing. You see that too with professional athlete scouts. They just look at either baseball players. “I look at outfielders, I look at pitchers, I look at in fielders,” right?

Brandon:
Yeah, so they can … It’s the little things that you notice.

David:
That’s exactly right. They know the difference between the way that a guy transitions from catching a ball and putting it from his glove into his shifting to throw it. They can tell right away that guy’s not ready, versus the guy that is. You and I would miss it, so that’s why you really to niche down.
An example of that is the market that I work in in the Bay area, the houses are more expensive, and we had a client that wanted a house that was listed at 1.2 million, but we had to go up to 1.3 to get it, which is obviously a hard thing for a lot of people to do, is, “You want me to pay 100 grand over.” It felt like he was losing $100,000. Well, we were confident enough from knowing that area and knowing the comparable sales that it was a great deal. It appraised at 1.4, which means it probably was worth even more than that, because appraisers don’t like to give you a higher value than what the house is worth. That person made 100 grand by going 100 grand over asking price, and that’s a perfect example of it could have easily went the other way. You can overpay and then it appraises for less, so get yourself an expert, if you’re not that person in your own world, that knows that market really well, and it’s okay to pay them.

Brandon:
Yeah, so good man. Right, number seven.

David:
Number seven. Impatience. Closing just to say you closed. Okay? This is a problem of lean indicators versus lag indicators, and Brandon and I have to be really careful of the advice we give, be we’ll often say, “Make up a goal.” “I want to close x amount of houses in a year.” “I want to close my next deal within x amount of months.” Those are lag indicators. “I want to lose this much weight in this much time.” That’s a good goal to make, but you don’t focus on that metric. You focus on the actions you take to make it happen, so what we want you to be thinking about is, “I’m going to analyze x amount of properties, write x amount of offers, run this many things through my analysis spreadsheet that Brandon just talked about, to know what a good deal is,” and if you do that you should hit your goal.
The problem is when you’re not focusing on the right metrics you will buy a bad deal to say that you made your goal, and we see people get into this problem all the time like, “Well, I’ve got two weeks to buy my next deal that I said I was going to buy,” so they go out there and they buy the wrong one.

Brandon:
That’s true. I’m sure I’ve done it. There’s been moments where I’ve been like, “I need something. I’ve got to close on a deal,” and then I go out and do it. We have to guard against this within our fund. You know, Open Door Capital, we raise money, right? So we raised $10 million in our fund, or just about, and now I’m like, “We’ve got to go out and buy properties.” Now, we’ve got a few, but there’s this temptation to just like, “Well, the money’s just sitting right now. We’ve got to go do something with this so we can get investors and returns,” but we have to constantly tell ourselves, “No, we have to stick with the fundamentals,” because it’s better to have the money earning zero for a few months to make sure we land the right deal that gives us a 15% return long-term or whatever, than it is to try to do something that long-term we’re just going to be regretting.
So, it’s way better to miss out on a deal or to delay than to put your money in, so even at this level we all deal with that same problem. It’s not just new investors, it’s everybody has to guard against that.

David:
Sometimes you wait for three months and then two great deals come along, and you’re like, “Who would have known,” right? I’m going to give you this advice, Brandon, that offer than came in on your condo that was contingent on selling their house. Don’t fall into that, “I got to take it because nothing else [crosstalk 00:28:45].” It’s been a week and a half. Tell them no, let it sit there and you might get two great offers next weekend, and you can negotiate them against each other.

Brandon:
Yes, it’s true. I think it’s very, very wise advice.

David:
All right. Number eight. The big mistake people make. Inheriting the tenants that are in the property. This rarely ever goes well in our experience. Now, here’s the problem. Most landlords, if they have a tenant that’s paying on time, and is paying a decent amount of rent, and they’re not having a headache, even if they don’t want to own the property, they’re just going to keep owning it because who cares? “The money’s coming in, they’re not bugging me.” It’s not causing them any friction or pain. Most landlords don’t decide to sell a house until they have a problem, which is usually based in the tenant. It might be, “The house needs a new roof, I don’t want to buy a new one,” but even then, until the house started leaking they probably wouldn’t care.

Brandon:
Yeah.

David:
When the tenant causes problems, the landlord decides they want to sell it, and that's when you find that deal. So, mathematically speaking, the more properties you buy with a tenant in it, the more evictions you're buying. You are buying the problem that the seller did not want to solve. Now I, when I'm representing people, still recommend that they buy a house that has a tenant in there, but we make our offer contingent on it being vacant. I tell the seller, "I will give you what you want, but you're getting rid of that problem before I buy it," and if they say, "What do you do?" I might say, "Well, give them $5,000 cash for keys and we'll increase our purchase price by five grand, but you're still getting rid of them." If it's a good enough deal, it's a good enough deal. The selling agent or the seller, they're going to try to sell it to you like, "Oh, it already has a tenant. You'll have no vacancy."

Brandon:
Yeah, yeah.

David:
Right? And it never really works like that.

Brandon:
Yeah, it’s rare that it works, and we buy properties with people living in them. I mean, obviously at the commercial level you do it all the time, but on the smaller deals, I just account for the fact in my numbers that I may have to evict and have several months of lost rent. I would say half the time it just goes bad when I buy an inherited tenant because most landlords are terrible about tenant screening. They just put in whoever, and that’s why they’re having a bad time and why they want to sell. Again, at the commercial level when you’re buying apartment complexes or mobile home parks like we do, it’s a little different. Everybody’s inherited because you’re buying a business, you’re not buying a house.

David:
That’s a great point.

Brandon:
Yeah.

David:
Yes, because commercial sellers, they’re not selling because their tenants are bad as often.

Brandon:
Correct, they’re selling it because-

David:
They want a different use for the capital.

Brandon:
Yeah, they maximized the return right now, they’re going to move on to something else. Yeah.

David:
Yeah, it’s more of a business decision. Most residential investors are selling for a personal reason. It’s not a business decision, it’s emotional.

Brandon:
Yeah, there you go.

David:
Very good. Okay, number nine. Do not assume that all agents are the same and therefore choose the wrong one. Now, I know I sound biased because I am an agent, but let me explain. There is a lot of what we call disruption going on in the real estate space, because let’s be honest, everybody hates paying commission. Nobody likes doing that. I don’t even like doing it, so there’s a lot of tech companies that are coming out, I’ll try not to name any names, but their whole platform is to convince you that all agents are the same, therefore use the cheapest one. They’re trying to say, “All clothes are the same, so shop at Walmart. You don’t need to go to Nordstrom.” The problem is, it’s just completely untrue. Most agents are bad. Very few are good. The good ones are not going to work for cheap, just like the best lawyers and the best doctors and the best mechanics, right? They don’t work for free. The best contractors don’t work cheap because there’s so much demand for them.
Don’t make the mistake of assuming that all agents or all anybody are all the same. They’re not, and if you hire an agent and then you’re upset because they didn’t do what you think they should do, you’ve got to look at yourself. You hired the wrong person to guide you on that journey. Learn what good agents do. Learn how to recognize one. Learn how to bring value to your agent, and then you can expect them to bring value back to you, but don’t buy into this hype that just because they have a license they know what they’re doing. In fact, real estate, the profession of sales, it draws some of the worst people into it. They’re not committed. They don’t want to excel at what they do. A lot of them just, they want a part time job that makes them feel like a professional. They like the idea of having a business card and wearing fancy clothes, but they don’t actually ever learn what they’re doing at all, and it’s very easy to fall for the slick talking sales person that doesn’t know their stuff.

Brandon:
Yeah. It’s very true. Yeah, I’ve had great agents and I’ve had terrible agents in my life and sometimes it’s hard to know up front how they’re going to be.

David:
Very difficult, yeah.

Brandon:
Do you have any advice on how do you know a good agent?

David:
Well, I know them because I work in the business, so I can tell when I’m talking to somebody. I would say people put too much importance on how nice they are, their personality. That really doesn’t matter as far as the job they do, so don’t rely on how nice they are, how they make you feel.

Brandon:
That’s a good tip.

David:
That's the first thing. The agents who make the most money are not the best ones. They're just the most friendly ones, because that's what people go by. Number two is look at how many sales they've had. It's not the only thing that matters, but man, that's one of the best ways, because anyone who doesn't do something often, they're not going to be good at it. If you work out three times a year, you will not be in shape. If you sell three houses a year, you will not be good at being an agent. The more you do it, the more you learn, the more experienced you get, the more you value your time, the more you create systems to make you go smoother. The people that come to me, almost all of our transactions go by really smooth. They don't see what I'm doing behind the scenes. It's that example of the duck looks really calm on the surface, but the feet are going crazy underneath.

Brandon:
Yeah, moving.

David:
Yeah, I’m the duck feet, they’re the duck. That’s what you want to look for is a lot of business, a person who knows what they’re doing. When they talk you can tell they’re smart and they know the industry, not necessarily that they’re nice.

Brandon:
Very good, man. All right.

David:
Number 10. This is a good one, okay? Quit thinking that more down payments equals more safety. We talk about this with the BRRRR method, we talk about this with criticism of BRRRR. Brandon, I'm going to let you run with it and explain the fallacy of putting more down equals having a safer investment.

Brandon:
Yeah, the best way I can explain this is really just looking at an analogy, I mean an example. If you have $100,000 property, and you put down 20%, you now have an $80,000 mortgage, right? Because you have $20,000 you put down, you have an $80,000 mortgage. If I get that property. Let's say that's you. Now, I get the same $100,000 property, a property worth the same amount, but I get that property for $80,000 because I'm really good at finding good deals. I negotiated well, or maybe I bought it and it needed some work done on it, and so on, but I have $80,000 into it, but no money into it. Who's better off in that boat? So what I always say is look, we both have the exact same equity. We have $20,000 of equity either one of us. You bought your equity, I earned my equity.
I have no money at risk right now, no money in this deal whatsoever. You’ve got 20 grand, so I would argue that you are at far greater risk than I am, because I have no money invested in the deal. Now, it took more work for me to do it, it took more hustle, it took more knowledge and education, and I had to put that together, or to get a little more complicated I could have bought that deal at 60 grand and put 20 grand into it. Now I’m still at 80 grand, but I’ve all this equity now in the thing. So again, I didn’t have to put my own cash to get there. I didn’t buy my equity, I earned my equity.

David:
That’s a great point. Now on a balance sheet they look the same, okay? Money in your bank account, 20,000, money in the property, 20,000. It appears to be the same. The difference is that when the economy goes bad or when the market tanks, equity you can’t control. It goes down, right? That $20,000 cushion you thought was so great goes away. The 20 grand in the bank stays there. It’s not going to be affected, and Brandon and I have learned, it doesn’t matter if your equity goes away in a recession. The equity never really mattered in the first place unless you’re going to sell. If you’re not selling, equity doesn’t matter, but you’ve got to make that payment. You can’t make that payment with the $20,000 of equity that just appeared. You can make the payment with the $20,000 that’s sitting in the bank, meaning the capital in your bank is more valuable in that scenario.
If another deal comes along, you can’t buy it with the $20,000 of equity in that house. You can buy it with the $20,000 of equity that you have in your bank account, making that money more valuable. I could go on and on. If you have to rehab the house to make it worth more money, if you’ve got 20 grand in the bank you can put it in there. If you need reserves to get your next deal, and the bank says, “I need you to have this much reserves,” they’re not going to care what equity you have in a property. So, what we’re getting at is get as much equity out of your deal as you can and keep it in savings, where you can use it, where it’s safe, and don’t think that that means that you’re playing fast and loose and you’re paying too much for houses. Focus on getting the deal where you create equity and putting your capital somewhere else as opposed to … It’s trading in hard work for just, “I threw a lot of money at it,” and putting the money and transferring it to equity where you don’t have any control over what it does and how you can use it.

Brandon:
Yeah, man. So good. Well, can I add a number 11 here? Kind of a bonus tip for people?

David:
Yeah.

Brandon:
It’s a little less tangible but it’s something I talk about a lot on webinars and even in some of the books that I’ve written. I think one of the biggest mistakes that costs people the most amount of money in their entire investing life is not actually something that they’re losing, it’s something that they’re not getting. Here’s what I mean by that. Fear causes people to miss out on all the greatest things in life. You might be listening to this episode, you might have listened to yesterday’s episode with Spencer, and now you’re all freaked out. You’re like, “Well, all this stuff could go wrong, I don’t want to lose money. I’m not going to do anything now. I don’t want to lose 100 grand like Spencer did. I don’t want to lose money like Brandon said he did or like David’s …” And as a result you don’t do anything, but as I hope you understood from yesterday’s show, the reason we wanted to talk about this problem is because it’s not so much that things went bad, but the lessons that he learned are going to change his investing life forever. He’ll take those and apply it.
Yeah, he might have lost 100 grand, but he’ll make millions long term. If he let fear, though, stop him, if you let fear stop you, you’re missing out on millions of dollars. You’re missing out on potentially millions and millions of dollars. You’re missing out on years of watching your kids grow up, your grandkids grow up, you’re missing out on a great retirement, you’re missing out on travel, you’re missing out on time for your hobbies, time volunteering. You’re missing out on helping thousands of other people when you could start giving back, to build wells in developing countries or whatever. Whatever your thing is, you’re missing out on all of that if you let fear drive you.
So, the number one biggest way people lose money is just by not doing anything, but just taking no action ever, and living the life that they’ve always lived, just because that’s easy and they can just get up and live reactively. So my advice for people is don’t look at the stuff as fear based, but look at this as how can use this to arise to a new level.

David:
Beautiful. I love that. It’s great advice.

Brandon:
Thanks man. All right, well, just remember everybody, do your math when you’re doing deals. Make sure you understand about the math and the logic side, we talked about that earlier. If you need help doing your math, of course BiggerPockets.com/calc has calculators that you can use, or just on BiggerPockets just go to tools up in the navigation bar. You can definitely check it out there. You could also run your deals by other people. Ask other people, “Hey, what do you think of this property? Do you think this is a good deal? Bad deal?” That’s the beauty of networking, one of the best parts about networking with other people is you get get other people’s advice. When I’m going to do a deal, sometimes I’ll run it by David here. Like, “Hey, what do you think of this thing?” When I got offer on a property that I’m trying to sell right now, I run it by David. I say, “David, what you think?” We have these conversations, like it’s the whole iron sharpens iron thing, right? You get sharper when you run your stuff by other people, so make sure you do that, and yeah, that’s all I got man. Anything you want to close with?

David:
Well, thanks for being my iron buddy. I appreciate that.

Brandon:
Thanks for being my iron. We should get matching tee-shirts that say, “I’m David’s iron,” and you can say, “I’m Brandon’s iron.”

David:
I feel like one look at our bodies and they can tell that we are clearly iron.

Brandon:
All right. I do want to tell you, if you’re interested in being a guest on the show, head over to BiggerPockets.com/guest, and that’s where you can apply. Our producer Kevin, who is awesome, he is quickly overtaking Joe Rogan’s Jamie to be the top producer in the podcast space, will go through the files.

David:
Hey Kev. Speaking of that, Kevin, can you hook us up with $100 million payout from Spotify for getting our show exclusive like Joe Rogan did? I wonder if Jamie arranged that? I’m going to assume he did, so we’re going to need you to step up, Kevin, and get us $100 million from Spotify, please. Okay. Thanks man.

Brandon:
I’m happy with 15% of that. I don’t need a lot. Anyway, yeah, if you want to be a guest, BiggerPockets.com/guest, and that’s specifically our show is focused generally on people who have done at least 10 deals, so if you’ve done at least 10 deals apply to be on our show. If you’ve got a great personality, submit a video there, let us know more about you, your story and your abilities, and what your strengths are, and yeah, you might be a guest on the show in the future.

David:
Yeah, and please like or subscribe to this one if you haven’t already done so. That’s what you have to do to hit Joe Rogan’s status, so thank you guys, we would appreciate that.

Brandon:
Clearly.

David:
Also, for those of you that listen to both episodes, kudos to you. I really love when people put an emphasis on education, when they actually make it a priority to learn. So go back, listen to this one. We went fast, but that’s because we wanted to give you a lot of information. There’s 10 things in there that you can make sure you don’t do to avoid losing money, then you can focus on the things you do do to make money in real estate.

Brandon:
There you go. All right guys, well thank you guys and gals. When I say guys, please don’t be offended. Me and David both use that to mean both. That’s all I got.

David:
All right.

Brandon:
You want to take us out?

David:
No, I’ll take us out of here. This is David Green for Brandon ‘the bridge builder’ Turner, signing off.

Speaker 2:
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In This Episode We Cover:

  • Focus vs. spreading yourself too thin
  • The #1 way to lose money that you haven’t thought of
  • Managing the people who manage your asset
  • What David calls “Spreadsheet magic”
  • Investing in areas with diverse employment
  • Over-renovating after watching too much HGTV
  • Inheriting tenants from a seller
  • Evaluating real estate agents
  • The myth of “more money down = more safety”
  • And SO much more!

Links from the Show

Connect with Brandon and David

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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    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied 2 months ago
    Please, provide a transcript of this podcast. I would love the information.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 2 months ago
    Good episode guys!
    Christopher Smith Investor from brentwood, california
    Replied 2 months ago
    I made big moves in the 2010 to 2013 time frame and trickling after that to 2016 because the pricing was to die for. I've been standing by because of all the Covid hype that prices are going to drop through the floor - "guaranteed". I'd like to cash in on that guarantee since I've seen none of it. Prices on all my properties haven't dipped a penny, if anything they have gone up. As bizzare as it sounds I think there are some folks who are actually hoping that there will be a crash as if it would bring a level of excitement or entertainment to there strange existence, but nothing in thier reasoning is fact based.
    Chris Irvin New to Real Estate from Troy, IL
    Replied 2 months ago
    Thanks for the great episode! Would love a transcript for notes!
    Katie Rogers from Santa Barbara, California
    Replied 2 months ago
    "Get a great agent." Since "most agents are terrible," how do you work with a mediocre agent, because that is likely the best you will end up with?
    Eric Boyer Rental Property Investor from Amherst, NH
    Replied 2 months ago
    Forget about anything else you’ve ever said on the show, David. Any wisdom and nuggets you’ve ever shared was far surpassed by your baseball scout analogy and gave you instant and legitimate street cred in my eyes. Now I’ll happily accept all advice you have to give. 😂