BiggerPockets Podcast 106 with Mike Sumsky Transcript

Link to show: BP Podcast 106: How to Do 100+ Deals Without a Bank (While Raising Unlimited Funds) with Mike Sumsky

Josh: This is the BiggerPockets podcast, show 106.

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

Josh: What's going on everybody? This is Josh Dorkin, host of the BiggerPockets podcast here with my cohost, Mr. Brandon Turner. What up Brandon Turner?

Brandon: Josh Dorkin, how are you today?

Josh: I’m good. I’m good. I’m good, right now I’m talking to you while you’re sitting on the beach in Hawaii, must be nice.

Brandon: It is really nice. Look at me sitting on—no we recorded this ahead of time people, but while you’re listening to this, I’m probably sitting on the beach, maybe.

Josh: Wow. Wow. Well, yes, yes, must feel good huh?

Brandon: Feels real good, yes, look at the hot girl over there. Whoo.

Josh: Wow, can’t wait for Heather to listen to this show.

Brandon: That’s my wife, what are you talking about? Alright.

Josh: Oh that was the hot girl that walked by. Okay, just making sure. Just making sure.

Brandon: Oh, no, no, things are good. Things are good. Things are good. It’s going to be—I’m really looking forward to this week, getting away from you. I mean getting away from life and.

Josh: Wow.

Brandon: My tenants and stuff.

Josh: The abuse I take, it’s horrible. It’s horrible. Well listen man, things, things are moving along here at BiggerPockets and you know we’re plugging along on the shows here today. Today’s show is awesome.

Brandon: Awesome.

Josh: Got a really really really cool show and I’m super excited about it, you know, today’s guest. Should we talk about him or should we?

Brandon: We could talk—well maybe it was—well hint, so today’s show the guest because I did not plug all in the interview. Today’s guest is a perfect example of what people can do if they just follow simple creative investing ideas like the ones you can learn in my book. You like that?

Josh: There you go, well done. Well done, okay. Now.

Brandon: No, he’s a creative guy, creative guy.

Josh: Very creative and he’s got some amazing advice for folks so we definitely encourage you to listen up. Before that, why—you know, we’ve got this new little segment that we’ve been doing on trivia, don’t we?

Brandon: BiggerPockets Trivia.

Josh: Yes.

Brandon: I want to do that.

Josh: Yes, like I said last week, we need some kind of jingle guy so.

Brandon: Yes, alright.

Josh: You know, send us an email, [email protected] or just send it to him. I don’t want to get flooded.

Brandon: Yes.

Josh: If you’ve got any jingles that you want to put together for us.

Brandon: Alright.

Josh: We can test them out.

Brandon: Since we don’t have a jingle, I’ll just go ahead and say the trivia here. Alright, so as we announced last week we are going to be doing weekly trivia questions here on the BiggerPockets podcast about the previous show so if you think you know the answer to today’s question, email it to [email protected] and you might win a copy of The Book on Investing in Real Estate with No or Low Money Down. That—you will get the digital and the audio version so, yes, do it, today’s question is on the last show, we chatted with Ophelia Nicholson about how she went form minimum wage to flipping numerous houses as a fulltime gig so the question today is Ophelia mentioned that she partnered with a certain family member on her first few flips, what family member was this?

Josh: I know.

Brandon: You do, good job. You paid attention?

Josh: What?

Brandon: You paid?

Josh: What? Look out for the plantains in the bed.

Brandon: Oh yes, thanks. Alright, if you think you know, email us the answer to [email protected] in the next week and our assistant will get in touch with you and if you want, you’ll win that cool price so with that let’s get to the show, you want to? Actually, we got an ad real quick, right?

Josh: Yes, we’ve got an ad.

Brandon: Alright.

Josh: Why don’t we?

Brandon: We’ve got a sponsor of today’s show.

Josh: The sponsor, yes, absolutely.

Brandon: Alright, here we go.

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Brandon: Alright, right on, right on, Yellow Letters.

Josh: Awesome. Good job. Good job. Good stuff. Definitely check out—check them out and big thanks to our sponsors at Yellow Letters for helping us support the BiggerPockets podcast.

Brandon: Yes.

Josh: Thank you. Thank you. Alright, well, today’s show, Brandon, features a man named Mike.

Brandon: Yes, it does.

Josh: Mike Sumsky, alright, Mike is a real estate investor from Kitsap County, Washington who’s done pretty much everything under the kitchen sink in real estate. Most of it is using none of his own money. In fact, he only used his own money for his first deal so today we’re actually going to talk about, you know, how he kind of kicked things off, how he’s done over a hundred deals only using the bank on one of those and it’s really powerful, really exciting and we get into a whole lot of depth on private money, finding private money, using private money, and something that we actually haven’t talked about at all, which is if you’re considering becoming a private lender, what do you need to do? You know, if you’ve got money sitting in the bank and you don’t want to be a landlord, you don’t want to deal with tenants and toilets, and you’re just trying to figure out, hey, you know, how do I make some money on that cash, what do I do? Well, being a private moneylender is a really good option and the great thing is Mike is just such as smart guy and he gives us a ton detail on this so definitely pay attention, whichever side you’re on here. With that, why don’t we bring him on, Mike, welcome to the show it’s good to have you here.

Mike: Hey, it’s good to be here guys, how are you doing?

Brandon: Doing well. We’re doing well. How about yourself?

Mike: Ah, pretty good. I see Brandon you survived the big flood of 2015.

Brandon: I did. I did. You know.

Josh: That was crazy.

Brandon: That was crazy. Did you guys see my video?

Mike: I saw—you had two videos.

Brandon: Yes.

Mike: One of them you’re like rescuing a tenant or something like that in the middle of the water or.

Brandon: I did. It was awful.

Josh: I didn’t see that one.

Brandon: Yes, well it was—yes we had a good time. It was a.

Josh: Was it like some old lady you were carrying over your shoulders?

Brandon: No, I was on the way to my tenant’s house. He was on his bed. Here’s the fear. Here’s the quick 30 second story so we had this massive flood and one of my tenants called and said, “You know, I’m stuck on my bed. I can’t get off my bed.” Because he said, “I’m in basement apartment, there’s about a foot of water. It’s covering the baseboard heaters and I think they’re still on.”

Josh: Ouch.

Brandon: Now, I would assume that the breaker would trip, not a problem right? However, just the one in a million chance that the breakers didn’t trip, I’m not going to tell him, yes, just jump into the water, see what happens?

Josh: That’s right.

Brandon: Like, I called the police and they said, “We can’t get over there. Sorry.” That’s—the police said that. I’m like.

Josh: Wow.

Brandon: Oh, I was like well, what do I do and they’re like I don’t know, just have them stay there for awhile and I’m like that’s not a good idea so anyway, my wife and I went bought boots and we got into the water and we walked over and shut his power. Actually, broke into where the water heater or I mean—where the—cause I didn’t have my key with me, broke into where the electrical panel was, shut the heater off and then moved him out so. Yes.

Josh: Well, I know rubber like kind of protects you, but like if you’re in rubber boots that are up to your knees or waist and you’re walking through water that’s electrified, oh.

Mike: I don’t think that matters, does it?

Brandon: It was.

Josh: Yes, I don’t know. I’m not an electrician so I’m on the phone, but you know.

Brandon: I don’t know, but I was okay risking myself. I just didn’t want to get sued by telling him to jump into the water.

Mike: Exactly.

Josh: Yes, that’s crazy.

Brandon: Normally—normally I don’t do that kind of—that was the first time in probably the only time landlord activity, but anyway.

Mike: Yes.

Josh: Hey, well so Mike, you’re yet another Washington guy. Interesting how we’re completely over represented by Washington guests.

Mike: I know.

Josh: I wonder why that is, Brandon?

Mike: We’re ru—we’re overrunning this podcast with Washingtonians.

Brandon: Yes we are. Well, you know I meet people at local meet ups and stuff.

Mike: Yes.

Brandon: Just like Mike here and we met and hit it off and I told him at the time, I said, we need to get you on the show and that was like, what? A year or a year and a half ago.

Mike: Yes, I was—I was pro—I think it was about a year ago.

Brandon: Yes, yes, so anyway, I’m glad we finally got to coordinate this together so today we’re going to talk about creative real estate investing because you’ve done a lot of stuff. I know you’ve done pretty much everything that there is to do in real estate it seems and you’ve done most of it without using the traditional methods.

Mike: Yes.

Brandon: That’s what we’re going to kind of focus on.

Mike: Yes, yes.

Brandon: Cool.

Josh: Awesome, awesome, alright well, let’s—I mean let’s just kind of jump into the story, what got you introduced to real estate? Why did you suddenly stop whatever you were doing or just you know, go from nowhere to real estate? What got you into this thing?

Mike: Well, you know, I grew up in a family of entrepreneurs. My parents—they owned a business. It’s actually semi-related real estate, it was in real estate publishing so they owned several of the homes, land, real estate magazine franchise.

Josh: Oh cool.

Brandon: Oh cool.

Mike: You know, just the magazine you see in the grocery stores, the realtors advertise their properties, and so you know, I kind of was raised with some of that mindset. I remember back when I was in high school or junior high, my dad gave me this book called Think and Grow Rich and it was a big—it was an old tattered copy. I think he’d had for decades and he said, “You know, I could charge you $10,000 for this book and it would be completely worth it.” You know, I just shrugged it off at the time, you know. “Come on dad, whatever, no one is going to pay $10,000 for a book, but.

Josh: Oh yes, they will.

Mike: Yes, I think I mentioned. That’s right. I think I eventually got to reading it sometime in you know, late high school or end of college and you know, when I was in college, I kind of—that was when the time when Rich Dad was coming out and my parents had a few rental properties of their own. You know, I kind of thought you know, investing is something I definitely want to do. At the time, I didn’t know I wanted to do it as a business, but I thought, hey, you know, if I can pick up a rental and you know, you do like talk about the house hacking, Brandon.

Brandon: Yes.

Mike: That was actually one of my first ventures into real estate. I had got a Carleton Sheets course.

Josh: Yes.

Mike: I know several people that have been on podcasts have mentioned and you know, that was—it was kind of a false start for I read the information, listened to the cassette tapes I think at the time and you know, you get all excited, you go out there. It’s like as far as implementing, you know, I just hit a brick wall and I thought oh, this doesn’t really work and so I decided to use a realtor, a friend of mine to go out and look for properties. At time I was living in Seattle. I was in University of Washington and I was dating my girlfriend at the time who’s now my wife and she was living in Bremerton.

Bremerton is a city, just about an hour ferry ride to the west of Seattle where property valuers were a lot, a lot cheaper than a Seattle area. I ended up finding a triplex that was on the market and it seemed like a pretty reasonable price. In fact, I think that after being able to—or after getting my mortgage and renting out the other two units, I think my total cost of living were to about $150 or $200 a month. I thought, you know, this is perfect. I’ll be able to have my first place, I’ll be able to rent it out and I actually had a plan at the time to convert one of the larger units and split that so I can make a fourplex. Got my offer accepted, was about a week and half away from closing and I lost my job.

Brandon: Oh no.

Mike: Yes, it was bad.

Josh: Bad timing.

Mike: It was bad timing and so I had to get out of that deal, unfortunately, you know, in hindsight, I wish I would have just found some way to, you know, to actually get the deal done. I don’t know if I could have you know, not mentioned that I had lost my job, but I figured, you know, I’ve saved up enough money I could probably handle $150 a month for awhile while I was searching for something new. I was an engineer at the time and my engineering, you know, since I lost my job, I lost that chance at that triplex. I kind of gave up for a bit, but I still had the interest in getting, you know, into real estate and that’s when I actually found the local real estate club that I belonged to now. It’s Real Estate Association Puget Sound and then it was there that I met people that were kind of into this whole creative real estate, wholesaling, you know, all the different, you know methods of finding motivated sellers and spent about a year and half kind of in that little circuit, getting an education, but not taking action.

Josh: Yes.

Mike: It wasn’t—yes, that was the big thing I mean I talk about this now when I have people that are new that come to me and it’s you know, that was the biggest trap to fall into is trying to learn everything before you take action because you know, you just never get started so a lot of it is on the job.

Josh: Yes.

Brandon: How do you think you overcome that I mean—how—what do you tell people, you know, do you just say, just go do something just, you know, jump overboard and do it or what do you—what kind of advice do you give to people who are facing that today?

Mike: Well, you know, I think that you learn enough to—to start taking action because you—you’re not going to know everything. Most of the learning is going to be done on the job so just for an example, when I finally got into action, I was doing a couple of things. One I bought bandit signs and I started putting those up everywhere I don’t do them anymore, but at the time I started getting calls so as soon as sellers started calling me I was forced into action. You know, I realized that everything that I learned in a book doesn’t really matter until, you know, you actually get that call and you start learning from actually doing.

Brandon: Yes.

Mike: The other thing I did was I started knocking doors and that was a really really scary experience for me. You know, going out, you know, people say that I look kind of young right now, but ten years ago when I got started, I looked like I was in high school so the thought of like this kid going up to a door and saying, you know, I want to buy your property was pretty scary so my first deal, actually came from a door knock.

Josh: Well so. I was going to say, yes, can you kind of tell us what you’re—what was the pitch. I mean what do you do? Who are you walking up to? What doors are you banging on? When you get there what were you saying?

Mike: Yes, well back then, I was—I had got a list of pre-foreclosure properties.

Brandon: Okay.

Mike: What I would do is I’d go to the door and I’d knock on the door and you know, basically, my pitch was something along the lines of you know, “I know there—there maybe an issue with the mortgage on the property and I can help you if you want to stay or I can help you if you want to sell, you know, so what’s your situation? You know, so what’s your situation?” I got a lot of weird looks and some people slammed the door on my face, but this one woman answered the door and she said, well, you know, I—we’re letting the house go to foreclosure. You know, we can’t even sell it if we wanted to because we owe more that it’s worth and you know, the one thought I had was you know, I know there’s this thing called a short sale, but I really didn’t know how to do a short sale. I just mentioned what I knew about. I said, “You know, your bank may be willing to let you sell for less than what you owe. You know, is can I get a little more information? She said, “Well, my husband, he’s at work right now. He’s going to come back later. Can you—maybe come back this afternoon?” You know, as soon as I left that house, I ran home, this is you know, long before I discovered BiggerPockets, but.

Josh: Hey mom!

Mike: I need some help. Can you make me lunch?

Josh: Yes.

Mike: You know, it’s actually funny I—I think I might have—that’s back when I—I think I had moved back with my parents at that point after college so yes, that might have been accurate statement, but at any rate, I went online and there’s—you know, I found a real estate forum that I used to post to every now and then. I just put it out there. I said, “You know, I have this seller and they want to do a short sale. You know, what do I do?” I got a lot of help and I was able to get enough information to go back with a purchase and sale agreement and you know, get this house under contract at a price that I thought would work as an investment. I really didn’t know anything about private money or how to finance. In fact, that first deal was the first and only deal that I’d ever done where I actually got bank financing.

Brandon: Really?

Mike: Yes so I stumbled through the short sale process. I asked for a lot of help from, you know, local real estate investors when I come into a problem and I actually got this deal accepted and then I proceeded to do, you know, the cardinal sin and these types of transactions, which I didn’t know it was a bad thing at the time, but I thought, hey, you know, these people didn’t want to move so I thought well, best of all scenarios, I’ll keep them in the house and rent to them and then give them the option to buy it back, which.

Josh: You’re talking about the people who stopped paying their mortgage?

Mike: That’s right.

Josh: Oh those people? Okay, I’m just—I’m just—I just want to clarify—just want to clarify that’s all.

Mike: Like I said, I was young. You know, I thought I was doing the right thing.

Josh: Yes.

Mike: You know, I thought, you know, this a good thing to do. Now, fortunately, everything end up being great with this transaction so I got my bank financing. I had a low mortgage so my rent that—the rent that they paid me was much lower than their mortgage was so I had good cash flow. They actually did buy the house back from me.

Josh: Really?

Mike: After about 18 months.

Josh: Oh wow.

Mike: When they bought it, they had about $50,000 in equity and you know, when they bought it back from me and I made about $40,000 on the deal so I was very fortunate to actually have it work out well, but it was shortly after I started this transaction when I was talking to other investors about why I did. They said, “Well, you should not have done that.”

Brandon: Yes, I can’t say I’d recommend it, you know, but that’s cool though that it worked out like that. That’s awesome.

Josh: Yes, I want to hear, you know, for those people who don’t quite understand how that whole thing would work, right? You’re an investor, you walk up they’re upside down.

Mike: Yes.

Josh: You’re trying to help them to kind of put together this short sale right? Can you just explain what did you do specifically, like what did you have to do? What did they have to do? How did you end up getting owner—you know, a piece of the deal and how do all of that come together? Just you know, again, for.

Mike: Yes.

Josh: People don’t understand this stuff. It could be kind of daunting.

Mike: Well so, you know, I think that things have changed quite a bit since when I did and in fact, in Washington State, you know, they’ve since passed legislation, which limits you know, what you can do with pre-foreclosure properties and I know there’s other laws around the country for that and it’s meant to protect the seller, but you know, a lot of times what it does is it you know, hurts investor’s opportunity to do some of these deals. Back then, I actually, I did all of the negotiating with the bank myself so I got a purchase of sale agreement at a price that was less than what the seller owed, but it was at a price that I felt would work as an investment. You know, I don’t really know how I came up with that number, but it seemed a good number to me and the bank was you know, we submitted everything to the lender, they requested a hardship package, which was you know, the seller’s financial information and a statement about why they fell behind in payments. Then they did a broker’s price opinion so a broker came out to the property, estimated what the value was, and determined if the offer I was giving them would be better than what they might get if they took it to the foreclosure process.

That was kind of the—on the purchase side of things. Again, you know, I didn’t know anything about raising private money so I thought, well this—the next logical thing is to go get apply for a bank loan and at the time when I did this deal, I had started working again. Actually, I got a pretty good job selling surgical equipment. I was a neurosurgical sales person and so I had decent income. I was able to qualify for this loan and then when I purchased a property, I figured, you know, what price could I sell this to, which would be, I guess basically, market value in a year or so to this—this family that would you know, ensure that if—once they closed and bought it back from me, I’d be making some money and you know they—you know that was during the time when the market was really, you know appreciating a lot so the house values went up way more than you know, what I had actually agreed to sell it to them for so. That’s kind of how the process went, but again, you know, I would not recommend anybody do this now, especially the part of the you know, letting the person stay in the property because you know, more times than not, that doesn’t really end very well.

Brandon: Yes.

Josh: Yes. Got you. No that’s great—that’s great. Cool so you do this deal and you know, it’s kind of working. It’s going okay, what happens next? You know, do you have the bug all of the sudden? You’re like alright, I’m just doing this. I mean you’re doing the medical equipment surgical sales.

Mike: Yes.

Josh: Probably doing pretty well and you said that was last deal that you got financing for and there forward, you were doing creative, right?

Mike: That’s right.

Josh: I—why and my question is why somebody who actually has the financial where with all to use their money. Do you decide, hey, I’m going to just start doing this creative stuff?

Mike: Yes or.

Josh: Or I’m making assumptions about the.

Mike: Yes, well so one of the things that I—you know, obviously realized that is when I started getting other calls from sellers a lot of the properties that they were—that they had, what I wanted to buy would not be financeable by regular mortgage anyway. You know, so I realized that in order to build a purchase these I was going to have to get creative. I started learning about private money at the time. Shortly after I did this particular deal, I got a call on a bandit sign from another property. It happened to be another short sale so I had two short sales in a row, but this particular one, they had two mortgages, the first and a second. One of the investors that had helped me—given me some advice on doing the first short sale. I came to him and I said, “You know, I’ve got this other deal. I really—I don’t really know exactly how to do it, but if you can help me out I’d be happy to give you half of the profit.” You know, that was—that’s one thing that I’ve learned and I’ve actually, you know, kind of taken now that I’ve—I’m—you know, got more experience then people come to me. I realize that you know giving up half of this investment to an experienced investor that allows me to learn while I’m doing is you know, I’d rather do that than get all of nothing.

Brandon: Yes.

Mike: The second deal, we actually short saled the second mortgage and took the first mortgage over subject to so they had two loans, they were over financed, but the first mortgage alone was—you know, low enough that if we were to buy the house by just discounting the second and take over the payments on the existing first loan, then we could still—we could buy the property without very much cash out of pocket. I don’t know if you want me to describe kind of how that works a little.

Josh: I would.

Mike: Allowed us to get into the house with less than $5,000.

Brandon: Yes, sure let’s hear it. Maybe like maybe you can go a little bit more into that.

Mike: Yes, well I mean I don’t know the exact numbers. It’s been so long ago, but if let’s just assume that we have a seller who owes a property that—for round numbers is worth $100,000 and maybe they have a $70,000 first mortgage and a $35,000 second mortgage. Well, what I did at the time was I—the property was going into default. I contacted the seller and seller is not going to make any money from this no matter what. They’re basically, the only options they have are to try to reinstate the mortgage and keep the property, which that was an option for them financially or do a short sale and so with that particular transaction, we contacted the second lender who had saved like $35,000 second mortgage. If that was to go to auction, that lender would get nothing so.

Josh: Yes.

Mike: What we did is we negotiated so that instead of getting nothing they got—I think it was $1,500 so we discounted the mortgage over let’s say $33,000.

Josh: Wow.

Mike: Bought the property by cashing out the second loan and taking over the debt on the first mortgage subject to so the debt stayed in the seller’s name, but we bought the house. When I say we, it was me and the partner that I had—I talked about giving half the deal to.

Brandon: Can you talk about real quick—so you took it over subject and you know, I don’t know if we’re going to make subject to, you know, probably not a major focus of this episode.

Mike: Sure.

Brandon: What are the downsides of that? I mean that sounds really great, right? Like I oh I can just go take somebody’s mortgage and start paying on it.

Mike: Right.

Brandon: Like why is that not—more common than they are.

Mike: Yes, there’s—there.

Josh: Their name—their name stays on the note.

Mike: Yes.

Josh: You get all the benefits without any of the headaches, right? I mean so?

Mike: Yes so.

Josh: Yay! Win, right or.

Mike: Well, there’s definitely some things that you certainly have to disclose everything at transaction like that so, essentially what you’re doing is you’re buying the house, but the existing seller’s loan is not getting paid off at closing.

Josh: Right.

Mike: The biggest thing that needs to be disclosed is that if the loan’s not paid off that there’s a due on sale clause on that loan, which can give the lender the right to call that loan due if it’s titled transfer so the seller is basically is putting their credit in my hands at that point. You definitely have to disclose to the seller in writing that they completely understand this is what’s going on. You know, at the time I was—I don’t—I really do subject to anymore because I’ve had a bit—had a chance to be able to get a pretty good, you know, private money so I can pay cash for most of anything that I purchased now, but at the time, it was this—the reason that the seller would be willing to do that is they didn’t really have any other options. They’re probably going to lose the house to foreclosure and I was able to show them that you know we are going to be bringing in money into purchase this house. We’re not going to get paid until their loan ultimately gets paid off so you know, we have a—we have a high incentive to do everything that we say we’re going to do so that we can ultimately resell the house and get a profit.

Brandon: Okay.

Mike: That’s kind how that one transaction went down and I started learning about private money, you know, shortly after that one so I started doing more cash transactions rather than the you know, creative subject to type deals.

Brandon: Okay so for those people who don’t know what private money is I want to touch on that quite a bit because that’s one of the things that you know, I’ve heard you talk about before and I think it’s awesome so, but before we get there, Mike, can I ask you a couple of kind of set of questions.

Mike: Yes.

Brandon: First of all, how many deals since that point—since you’ve only done one with bank financing, how have you—how many have you done since then? Or do you?

Mike: I’ve probably—I know, I lost count, but it’s probably somewhere around 120 to 125 deals.

Brandon: That’s awesome.

Josh: Wow, okay.

Brandon: Only bank on one of them?

Mike: Only a bank on the one.

Josh: Wow.

Brandon: Yes.

Brandon: Okay so.

Josh: What kind of.

Brandon: Go ahead.

Josh: What kind of deals are those?

Mike: Yes.

Josh: You know, what do those include?

Mike: Yes, there’s a good mix in there. You know I’ve—I started wholesaling and I continue to wholesale so basically, that’s—yes, I mean you know, negotiating a good price on a property, but finding a you know, a rehabber who would pay me for the right for me to be able to sign that contract over to them. You know, I’ve done some quick wholesale transactions. You know, where obviously, I don’t need any money.

I’ve also done complete full you know, seller finance deals where the seller owns the property free and clear and you know, I may make a cash offer at a big discount where for the seller, that price would be too low for them to be willing to sell. If they might be taking that money and sticking it at a bank, anyway. I would say well, you know, if this cash price wouldn’t work, I can pay you more if you’d be willing to carry a contract and basically, the seller would be a bank to me so instead of me paying a bank or a private lender, I make monthly payments to the seller.

That is another way that I was able to do a transactions without you know, any of my cash, you know, or getting you know, bank financing. You know, I own quite a few buy and hold rentals now. Let’s see, I’ve done, you know, seller financing, short sales, subject to, wholesaling. You know, I do a little bit of everything, but it’s not a lot of any one thing. I wouldn’t say that I’m a big expert at just you know, one particular strategy. I guess I kind of learned to be somewhat of a transaction engineer so you know, I go into a situation where a seller has a problem with the house and I figure, how can I solve that problem and make a profit? It may mean buying cash at a big discount or it may be—it may mean getting the seller a higher price if they can have more flexible terms.

Josh: That’s great. That’s great and I think you know, to everybody listening, that’s your job, you know.

Mike: That’s right.

Josh: As a real estate investor, your job is to solve the problems of the sellers and you pick it up and deal with it however you know, what you’re going to do with it, right? Yes, that’s that’s awesome.

Mike: Yes.

Josh: I know, Brandon, I know you wanted to kind of dig in on the private money stuff.

Brandon: Yes, I mean, you—why don’t we just do that? I mean what is private money and how does it work?

Mike: Private money is where you get to use other people’s money in order to purchase real estate, okay so when I say private money, it’s a—I have a distinction of private money versus what some people call hard money. You know, hard money is typically loans that are made by people that loan money for a living, you know, professional moneylenders.

Josh: Yes.

Mike: With hard money, you’re usually paying a higher interest rate and you’re often paying points and those loans tend to be short term loans because a hard money lender’s job is to be able to churn that money as fast as possible and if they’re getting four points and 12% interest, you know, that money will make more money for them if they can relend that, you know, that amount out, you know, frequently so say every four months or every six months. Generally, those types of loans, you know, they’re very valuable I think for an investor to have in their arsenal to be able to just pay cash for a place by using a private or hard money lender, but there comes a point when you know, you’re limited on the types of deals that you can do if you are—are just limited to high interest, high points, short term money.

Josh: Yes.

Mike: Private money in my opinion would be more classified as money that is other people’s money. It’s usually lent by somebody who’s not in the business of lending money. You’re usually able to get that money at a lot lower interest rate and usually a lot longer time frame. You know—in fact I found that it’s sometimes easier to get low interest private money than it is to get high interest private money.

Josh: Interesting.

Brandon: Interesting.

Josh: Interesting so you know, private money could be your mom—it could be your uncle, it could be the postman.

Mike: Yes.

Josh: It could be the guy at Kinko’s right?

Mike: That’s right.

Josh: Okay.

Mike: That’s right.

Josh: I’d love you to explain that last thing, why have you found it easier to get low interest private money versus high interest private money.

Mike: When you.

Josh: Or how—how are you doing that?

Mike: You know, if you don’t mind, I can give you a little story about how I got my first low interest private lender, which might explain some of this.

Josh: Okay.

Mike: You know, I did borrow—I did find some initially some kind of more hard moneylenders. These are say the 12% interest folks and when the market was kind of booming in the—you know, mid 2000 or so or 2004-5-6, I was using, you know, 12—I was buying money or properties with 12% money with the intention to fix them and flip them. It works pretty well if you’re fixing them and flipping them, but if for some reason you can’t sell a house, it’s really hard to cash flow a property with a 12% interest, you know, loan so.

Brandon: Yes.

Mike: I happen to have one of these properties that I intended to flip and you know I got a 12% loan with a—you know—a six month balloon payment and this was back in 2007, which was kind of right near the top of the market. This particular house, I fixed up and was, you know, tried to sell and I couldn’t. You know, I lowered the price and still couldn’t sell it and so you know, this—I think I had you know, $210,000 at 12% interest, which basically, that’s a $2,100 a month payment plus taxes and insurance and the place could maybe rent out for $15 or $1,600 bucks a month. I was in a little bit of predicament and you know, coincidentally I—you know, I knew a person through my wife’s side of the family who I’d met and talked about real estate quite a bit and he had a lot of rental properties.

He was a retired you know, he was still landlord, but he was retired from his main business and he just basically managed his rentals. You know, I had a sincere in learning from this guy and I ended up asking him if he—if I could buy him lunch and kind of pick his brain about real estate and while I was—when I met with him, I was starting to talk about, you know, what he was doing with his properties. You know, his history as a real estate investor and I found out that he owned a lot of rentals and you know, a lot of times, he sold houses on contract. You know, I think when an investor sells a house on a contract, they’re usually longer-term notes and they’re usually at lower interest rates.

Brandon: Yes.

Mike: It was pretty clear that he—he was happy with a little lower rate. You know, I didn’t really discuss any particular deals with him at the time, but you know, I’d stayed in touch with him and I think a few weeks after this meeting, I sent him a letter. I thought, you know, I’m wondering if he would be willing to invest on this deal so I can refinance out of this 12% money and I thought you know, if I could get it down to say 9%, I’d probably be okay. I’d have a little bit of a negative cash flow, but it would be enough that I could probably sustain until I sold it. You know, in this letter I wrote, I thought, you know, I need to leave a little room for negotiation so I asked him if he had, you know, $210,000 that was not earning a 7% return and if he’d consider you know, investing with me on this property. Well, instead of you know, renegotiating, he came back and said you know 7% seems about right and he said, “When can I see the place?” You know, I about stumbled out of my chair when I heard him say that.

Josh: Nice. Nice.

Mike: You know, I though—gosh there’s—you know, in the past, you know, the way I was taught about private back at the time is it wasn’t the cost of money that that matters. It’s the availability. You know, back then, it was, you know, a lot of the old timers that were teaching real estate, the gurus were saying, you know, I paid 12%. I’d pay 15%, five-ten points. It didn’t matter as long as I was making money. You know, it didn’t matter what I paid. I kind of had a fear of asking for a lower rate because I thought, there’s no way that this smart person here is going to accept it, but you know he did and I—a week later, I had you know $210,000 at 7% and refinanced out of this—this other loan had allowed me to now rent that property and have essentially a break even cash flow.

Josh: Yes.

Mike: The biggest lesson at that point was you know smart investor with a lot of money think 7% is a great return.

Brandon: Yes.

Josh: Yes.

Mike: It is.

Josh: Well, you got, you know, you got money in the bank making 0 point what percent.

Mike: Absolutely.

Brandon: Yes.

Mike: Absolutely.

Josh: I mean 7% is a give me.

Mike: That’s right and.

Brandon: The stock market in 2007 wasn’t you know, wasn’t’ going to have a real future.

Mike: Yes, yes.

Brandon: For the next couple of years so

Mike: The biggest lesson in you know, Josh, when you were asking you know, why is it sometimes easier to get low interest money than it is high interest money. What I found is that for the folks that you want to borrow money from, you want to invest with you. They often equate high return with high risk so the—often a double digit interest rate return is a little bit scary because for most of us, especially if you know, you’ve not been doing this for a long time, as far as, you know, the hard moneylenders, they understand real estate. They understand secure—they invest money at a low loan to value. They can ask for those high returns and it’s good investment for them, but for the folks that want their money just to kind of sit there for a long time earning a consistent return. You know, when you hear double-digit returns you think, ooh, high return, yes, it’s cool, but you know, that’s also comes at a high risk.

Josh: Yes.

Mike: 7% and you know down—now I’m basically down to 6% for most of private lender.

Josh: You’re a thief.

Brandon: I love—I mean I love that—like that—that low. I mean relatively low interest rate, private money is what every real estate investor would love to have.

Mike: Yes.

Brandon: That is the golden goose or whatever, I mean like that’s amazing so maybe you can offer some advice to listeners and to me. I mean how do we—I mean how do you? Did you just ask the guy? I mean is that as simple as sending a letter. I mean is there method you would recommend for people approaching people about the private money?

Mike: Yes, well, you know, I think with my first low interest, private lender, it was a matter of you know, he’d been doing it for a long time. He’s obviously—he’s retired, but he was buying real estate when he was buying real estate when he was my age. You know, I think that at that—by meeting with him and kind of picking his brain and talking about my business and asking him about what he did when he was my age, you know, maybe he saw a little bit of him when he was younger in me.

Brandon: Yes.

Mike: I was genuinely interested in learning from him and asking him questions and getting his advice and you now, I think that he saw that—you know, somewhat of a go getter I—you know, I could recognize a deal. He obviously understood—he understood real estate, you know, if fact, most of my private lenders, you know, almost all of them, actually, I think all of them—they’ve owned a lot of rental real estate in the past. They’re kind of to the point now where they love real estate, they’re interested in it, but they’re not interested in managing the tenants or dealing with toilets and you know, all of that stuff, but they know that an investment that’s secured by real property that’s purchased at a discount that is an income producing property is a pretty good bet when it comes to security, okay.

Josh: Oh yes.

Mike: Part of finding those private lenders is to kind of get an idea of who’s—what is that demographic? You know, so you know, like I’ve found you know, retired folks that own real estate in the past. You know, it’s about getting to know a lot of people and having them understand what you do and then at the same time the other switch from me was kind of turning the tables on that whole private money negotiation from something where I don’t feel like I’m borrowing money because when you’re a borrower of money, you feel like you have to—the person who has the money is the prize.

Brandon: Yes.

Mike: That’s what I’m after and whenever you have that—that dynamic in a negotiation where one thing is sought out—sought after more than another so if I’m prizing that money where it’s very scarce and I got to convince this guy to lend to me, well, I’m not going get the money.

Brandon: Yes.

Mike: What I’ve learned is, you know, money right now is—it’s abundant, there’s millions and billions of dollars out there, that’s not earning a good return, but there is not a lot of avenues for those folks to invest at that provides a good consistent, secure, rate of return. By me having to deal, I have the prize.

Josh: Yes.

Mike: I have what’s wanted so it’s less of me asking or trying to convince them to lend more of—it’s more of, “Hey, I have this opportunity and I use private lenders and you know, folks like you. Do you mind if I ask you a few questions to see if you know, your money is right for my deal?

Brandon: Yes.

Josh: It’s great. Flip it. Flip it.

Brandon: I love that. Me and Josh both read this book last year and it was in like one of my top five business books of the year, that post I put up and it’s called Pitch Anything by Oren Klaff.

Mike: Yes.

Brandon: It was very much one of the focuses of that entire book was, you know, they are not the prize, you are the prize.

Mike: That’s right.

Brandon: Yes and you know, a couple of years ago that same thing happened to me there was like switch in my head where I realized that and it completely changed my business forever.

Mike: Yes.

Brandon: I mean where all of the sudden, I realized I didn’t need to beg for money. I had a good deal. I knew what I was doing. I mean like most people don’t know what they’re doing in real estate, I kind of knew what I was doing so.

Mike: That’s right.

Brandon: I was the prize and it’s an amazing place to be so.

Mike: Yes, so.

Josh: That’s great.

Mike: It’s clear that you know, obviously, I’ve got that book on my bookshelf here.

Brandon: Nice.

Josh: Aw.

Mike: It would not be a book I’m not going to recommend that one, it the end, but it is probably one of the best books that someone can get on raising private money.

Brandon: Yes, I totally agree.

Mike: Highly, highly recommend it.

Josh: I’ve got a kind of a reverse question.

Mike: Yes.

Josh: Say I’m somebody who’s got some money. I’m listening to the BiggerPockets podcast and I’ve got you know, a couple of hundred thousand dollars sitting around in the bank and you know, I don’t know, I’ve toyed with the idea of becoming and investor. I don’t want to be a landlord and I’m like, you know, I want to lend private money.

Mike: Yes.

Josh: You know a guy like comes to me. What’s my job? You know, how do I go about?

Mike: Yes.

Josh: Making sure you’re the real deal, you’re not full of it, you know, how do—you know, so flip for us if you would.

Mike: Sure.

Josh: Because I think we don’t really talk about that enough. I think we usually hit the other side, like how do you find those guys?

Mike: Right.

Josh: Well, if I’m one of those guys, now what?

Mike: Yes, I think you have to vet the deal and the person, okay so it’s important as—if you’ve got the money that you’re looking to lend on a deal. You know, you can’t just trust everything that you hear from the investor, you have to be able go out and do some of your own due diligence. You know on that—on the property, so you know, if investors says, “Hey, this place is worth $200,000 and I’m buying it for $110.” You know, you’re going to want to see some information at the either investor can provide that you can vet and double check. You know, I would definitely want to have a real estate agent on my team as a private moneylender so that you can get a good idea for values. You know you want to be able to make sure that investor is prepared with you know, their research on the properties so do they have a good, you know, firm written estimate for repairs from a licensed contractor? Do they have a time frame for how long this property is going to take? I mean market conditions can change. Does this investor have a plan B? You know, a lot of times, people go into a deal with a plan A only.

Josh: Oh yes.

Mike: Hey, if I—I’m going to buy this with the intent—all I’m going to do is flip it and then they found out that a f—they might—plan A doesn’t always happen and so they have to go to plan B. If everything fell apart, what’s the worst that could happen? You know, so if you’re a private lender, can you—would you be able to recover your principle, get your investment out? The other thing I would want to make sure as a private lender is—you know, is this—do I have first mortgage?

Is there any other investors that are investing in this deal? You know, I’ve heard stories of people that have second mortgages that were behind large first mortgages where the investor stopped paying on the first and you know, they—in order for them to protect mortgage, they’d have to actually cash out the first lender. They might not have enough money to do that so you want to understand, you know, who’s investing in the property? Is this a first? Is this a second mortgage?

Obviously, you know, first mortgages are the safest. You also want to kind of get to know the experience of the investor. Now, I would not say that in order to be able to borrow private money, you have to have a lot of experience because you know everybody has to start from ground zero. You know everybody has to do their first deal and you know, if that brand new investor is able to have enough, you know, good experienced people on their team and they find a great deal that—the deal itself, you know, is that good security and so one of the things if the deal is good, you want to make sure that if everything goes wrong in this deal.

Can that—is there money still protected? What’s the worst that can happen and so some of things that might be the worst that could happen is you know, the investor thinks that this property worth $200. You want to be able to lend money at low enough loan to value where if you had to discount that property to sell it to like a fire sale, you know, if you discounted that house 20% would you still be able to get you cash back? You know, for instance, you know, one of the rules that I have is whenever I buy a piece of real estate, I will not fund it more than 70% of the fixed up value. If that house is worth $200,000 fixed up, I’m not going to borrow more than $140,000. What that does is it protects me as an investor and it also protects the private lender so that if I got hit by a bus or if I stopped paying, you know, would that lender be able to liquidate that property and get their investment back?

Brandon: Yes. I had coffee with a guy a couple of weeks ago who was a private lender. On his first deal, he lent on a private loan, but it was—he lent a second mortgage and he lent on the rehab budget on the property, not just like so like first mortgage was the entire purchase then he lent all the repair money for the second, well the good took the money and ran.

Mike: Aw.

Brandon: Now, he’s out—he’s got this property, he’s out of his money, the property is not fixed up.

Mike: Right.

Brandon: Yes, and he’s un—he has just nothing he can I mean like they can foreclose, but his second mortgage is not going to get anything and those are the dangers that when you don’t necessarily know what you’re doing when you get into it. I mean, everyone makes and I actually think he’s be able to turn it around like we talked for quite awhile on how he can—you know, probably rehab it himself and at least get most of his money back, but yes. I mean there’s a lot of dangers in private lending and that kind of shows what could happen.

Mike: Yes so it is. You bring up a good point so you know, when I borrow private money, I do borrow the rehab funds and you know, my lenders have been doing this long enough that you know, I can borrow the full amount of the rehab.

Brandon: Yes.

Mike: At closing, but if you’re about—if you were to lend private money to somebody, you know, for the first time, I would not recommend giving that investor all of the money for the rehab, you know, the first time around. For instance, if it needs $30,000 in fix up, you can arrange it so you’re going to be doing draws. You do enough money to close the property and enough to get started on the remodel. You know, then be able to have someone that can inspect the work that’s being done so that when it comes time for doing the second draw that you can monitor that and release that money over time. That’s how hard moneylenders do deals.

Brandon: Yes.

Josh: Yes.

Mike: You know if you’re a private moneylender, you may want to kind of look and say, “Hey, what do hard moneylenders look for?” Nowadays, they—they’ll pull credit of an investor a lot of times so you know, is this person paying their bills and you know, that think private or hard moneylenders will do that as a condition of giving the loan, not all of them.

Josh: Yes.

Brandon: Yes and to add to that, as a borrower would I typically have done when I’ve tried to get private money I’ll actually just go to like you know,

Mike: Yes.

Brandon: Which is like get a free credit report. I’ll print that entire thing out and I’ll give it to my private lender.

Mike: Yes.

Brandon: Like without him asking for it.

Mike: That’s right.

Brandon: Yes, just up front, like I want to be completely open. Here’s what my credit history looks like right now.

Mike: That’s right.

Brandon: That thing goes so far, I mean that goes so far just in that openness—to be able to attract money so. It’s just a.

Josh: Yes.

Mike: Yes and I do the same thing and I highly recommend that. You know and here’s the other thing, if you’re an investor, you’re borrowing money for a deal from a private lender, you have to do everything to make sure that lender gets paid even if it means that you’re not eating, okay so.

Josh: Yes.

Brandon: Yes.

Mike: You know I—that’s the one thing I—when the market was going up and it was easy to make money, things were great, but you know, I was through this market when the market crashed. I went from you know, doing two deals a month, making a ton of money to all of the sudden I was not buying nearly as many houses as I was in the past. I had a full staff and I had an office and a lot of expenses, but I always made sure that you know, if I had a payment due to a private lender, they were getting paid.

Brandon: Yes.

Josh: Yes.

Mike: You know.

Josh: Well, if you don’t the word’s going to spread and you’re never get the.

Mike: Absolutely.

Josh: Get anybody’s money ever again.

Mike: Absolutely.

Josh: Yes, yes so where would I, you know, alright, we talked about the reverse, let’s go back to looking for lenders.

Mike: Yes.

Josh: You know it’s all about relationships right? I mean, what’s the best to formulate a plan to get your first private money? Is it you know, take everybody on your Facebook and take every—all of your friends in you inner circle and say, “Hey, okay, who’s got money?” Hit those guys up and then you know, see if they know somebody who knows somebody or do you literally just you know, make sure to tell everybody that you know what exactly you do. Always make sure you’re talking about real estate and always make sure you’re you know, you let them know that listen, there’s a whole funnel of deals that are, you know, always available and I’m always seeking, you know funds to finance those deals. I mean is that kind of the approach you take.

Mike: Yes, you know, I don’t go and advertise for private money. I don’t hit my list of you know, people on Facebook or LinkedIn or that sort of thing saying, “Hey, who’s got money that they want to lend on a deal?”

Josh: Yes.

Mike: You know, I’m much more subtle about it. I typically—I like, you know, people know what I do. You know, I’ve been fulltime real estate investor for ten years. They know I flip houses. You know, flipping houses and rental properties and that sort of thing. It’s a sexy business. A lot of times, people have questions about it so you know if it comes up in discussion a lot of times, you know, people ask me questions about what I do because creative real estate investing and you know, people see all of those houses or shows online about flip this house. You know, they go, “Wow, that’s? You know so you’re like those guys on TV?”

Brandon: Just like them.

Mike: You know. Just like exactly, all the drama and everything, no, but you know, in the process of you know discussing this I mean occasionally that will come up where someone will say, “You know you do this for living?” You know, I didn’t think they were giving mortgages out or you know, I—you know, I heard that’s—how do you fund all of these, do you have cash and I say, “Well, no, you know, I—actually, I use private lenders. You know, folks just like might have money sitting in the bank or CD and not getting a you know, a secure return.” A lot of times, people will invest with me, you know, when I buy my real estate and you know it’s kind of like a push/pull type thing.

I never tried to get too eager. Again, it’s that Pitch Anything book where you know, you want to be the prize, you don’t want to be out there, you know, begging for someone to work with you so, you know, I usually play a little hard to get. I might say something if they ask about, you know, are you taking on other investors or something like that you know, I might say, “Well, you know, I’ve got a lot of investors and lenders that are waiting for other deals so you know at this point, you know, I probably wouldn’t. I’m probably not taking on too many other investors, but you know, hey, if something falls through in the future with somebody else that’s got a deal or somebody else that would normally would lend to me. I mean do you want me to contact you, you know, I can’t guarantee it’ll happen in the next year or so, but is that something you want me to touch base with you about?” You know, sometimes they’ll say, “Yes, you know, I’d like that.”

Brandon: Cool.

Mike: You know it’s about getting the word out of what you do. It’s not being too eager, not throwing up over somebody about you know, borrowing money and I think it’s also about putting yourself in location and situations where you’re around those type of people so you know Landlord Associations. You know I haven’t actively done this, but I’ve heard of some people say, you know, go to like charity events. You know go to charity events, you’re obviously surrounding yourself with people that have a lot of money and you know it’s about networking and you know just being yourself and expanding your network.

Josh: Is that kind of like you know going to a funeral to pick up girls? I mean is that like a Vince Vaughn, Owen Wilson or something?

Mike: Oh man, that’s a little un-kosher, but. Yes, I think that—I’ll give you another—another great source of private money is sellers.

Brandon: Funerals.

Josh: What did you say Brandon?

Brandon: Funerals.

Mike: Funerals.

Brandon: Oh geez.

Mike: No, I’ll give you.

Josh: You guys are doing a good job of raising the bar for real estate investors. Really, really, that’s what’s happening.

Brandon: Really, go to a funeral. Get some good money, anyway, you were saying.

Mike: Well, one of my best private lenders happens to be someone who sold me a house and when they sold me the property, it was on a seller finance transaction so you know, happen to be a landlord on the place free and clear, really, really, good guy. You know, he didn’t like my cash prize because it was low, but you know, he didn’t have a place to put the money. It was going to earn a better return so I paid him more and he carried the financing so what that did was it established I guess a business relationship with the sellers so every month, I had a payment to make to him. You know, I always made the—I always paid on time. In fact, most of the time I paid early and a lot of times in this, you know, early on, since he lived, you know, near my house. You know, on my way to go and looking for another property, I’d call him up and say, “Hey, I’ve got check, can I just go drop it off with you?” I—you know, I’d hand deliver the monthly mortgage payment so when I hand delivered the monthly mortgage payment, what it allowed me to do is to get five or ten minutes with him and just kind of chat about things that were going on.

Brandon: Yes.

Mike: You know, after about six months of doing this and you know he started asking me more about my real estate business that was one of the questions he’d posed. He said, “You know, I remember you saying something about you, you know, using private money.” He said, “How does that work and what do you pay?” Back at the time, I was paying 7% so I said, you know, I pay 7% and he literally looked at me and said, “Oh my god, I wish you had told me sooner. I’ve got money in the bank that’s been earning next to nothing. I want to just take it out.”

He said, “Do you have any other investments that you might be looking for private money?” At the time, I had kind of realized that you know I didn’t want to barf all over the guy and say, “Oh yes.” You know, I’m kind of freaking out because I think this is a great thing, but you know, I kept my cool as best as I could and I said, “You know, right now, I’ve got other lenders that are—I’m working with, you know, can I give you a call if I have something that comes in the future?” He said, “Sure.” Sure enough, after about a month I gave him a call on a deal and.

Josh: Nice.

Mike: He lent on that first one and we’ve had a great, you know, investor- lender relationship since so he’s lent on quite a few deals for me and he’s partnered up with me on a few now where I actually don’t have a payment anymore on some of these deals. That’s kind of another—like little cool little twist that I’ve had recently on some transactions so.

Josh: Nice.

Brandon: You worked together so you don’t have a payment because he’s going to get the back end instead you’re saying?

Mike: Well, he—yes so after the market crashed and I was doing a lot of flipping, but I wasn’t really, most of the properties that I was holding were not—I wasn’t intending to hold and I was just kind of like trying to keep them you know, my head above water so they didn’t have much cash flow. I realized I need to start buying houses and cash flow properties so that I don’t have to flip a house every month just to you know, pay the bills. I started buying small multi-family properties in Bremerton, you know, duplexes.

Brandon: Nice.

Mike: They were, you know, the benefit of being able to borrow at 6% and 7% is that when you borrow it—if you buy properties at a discount then you’re able to get those to cash flow at that interest rate so I started, you know, picking up a couple duplexes, a couple duplexes there where one side would pay the mortgage, the other side would be all cash flow so it basically bought $300 per door or about $600 per building. I was using the private lender money for that. That helped me to get, so you know, good recurring cash flow so that you know, it helped the smooth out the bumps from between flipping and you know, I had heard you know, some investors talking about doing deals where instead of borrowing where you’re paying an interest rate, you know, you work a split with a lender so instead of having a payment, you know, lender lends all the money. You put the tenant in after you do the fix up and as income comes in, you pay your expenses and you split the net profit.

Brandon: Yes.

Mike: What that allowed me to do was to really you know, smooth out the cash flow bumps because you know, when the time that you purchase the house and remodel it, your—the property is vacant, before you can find a tenant, I mean if you have to pay a mortgage payment every month on that and then you’re multiplying it by multiple properties, it can get pretty expensive so it’s nice to not have a payment and for the lender, it basically works out to about the same interest rate as I would otherwise pay, but now, we get to—he get’s to participate in the equity when we ultimately sell.

Josh: Yes. Got you. Yes.

Brandon: I love it.

Josh: The bottom line is if you’re smart about how you approach a relationships and you know, obviously, you’re not going to get there overnight, but.

Mike: Yes.

Josh: You know, in terms of working with these private moneylenders, I mean, theoretically, it’s an untapped source of unlimited funds for somebody who knows how to do it.

Mike: Sure.

Josh: I mean you know, you’re—you know, if you tap out your guy A then you know, you got B, C, D, and E and you know, you keep going until you find more guys and that’s really how the big guys are doing this—their business anyway. You know, these big huge deals are happening the same way right?

Mike: Yes and you know you don’t even need to have many private lenders when you find two or three good ones.

Josh: Yes.

Mike: Often times, they’re going to be able to do multiple deals where you know, you just know that you’ve got money for your next one and they’re interested and eager to participate because you know, the only reason they’re going to lend is because they’re making you know, better return or a safer return than or a more secure return than what they were getting in other investments. You know, I’d like to—I don’t like to use the word safe when it comes to real estate investing, especially when you’re borrowing private money. You know, there’s a lot of, you know, it’s pretty regulated and so you know, you want to be able to look up what you can and can’t do as far as you know, soliciting for private money. One of the kind of words that you don’t want to use is safe. You know you can’t say safe.

Josh: No of course.

Mike: An investment is safe or guaranteed or you can’t you know, so there’s some—I prefer the word secure because real estate you know, private money is secured against real estate and so you know for lenders that are looking for a regular consistent, secure, return, this is a good avenue for them to go out.

Brandon: That’s awesome. I love it. I love it. Yes, private money is probably I mean favorite strategy of anything like again, it’s kind of like the golden that you get to.

Mike: Yes.

Brandon: Very cool. I’m glad we got to cover that today. We could probably talk for like forever and all of these different strategies so we’re.

Mike: Oh yes.

Josh: Brandon and I are scribbling on our notes right here back and forth.

Brandon: Yes.

Josh: It’s really funny. We literally had like 30 more questions.

Brandon: Yes.

Josh: We are going to do a show on all these different things. We’re like, you know what? We’re just going to talk about private money. We’re going to keep digging, keep digging in.

Mike: Sounds good.

Josh: Awesome awesome awesome stuff.

Brandon: Cool. We’ll get you back to talk about more of this other stuff in the very near future, but let’s transition this thing and move over to the Fire Round.

Announcer: It’s time for the Fire Round.

Brandon: Alright the Fire Round, these questions come direct from the BiggerPockets forums, which people can get to by going to They can ask questions, answer them, whatever. First question I’m go to throw at you. How do I get the ARV or After Repair Value on a multifamily?

Brandon: On a multifamily, you know, I guess it depends on the size of the multifamily property because multifamily properties are appraised differently depending on how many units. You know, one to four units is considered residential. A lot of times, they are appraised on the comparable sales approach. When you start getting five units and up, a lot of times, they’re appraised on the income approach so you know, the first thing I would do when it comes to trying to determine the ARV, you want to have somebody that is on your team that can—as a professional, that can give you that solid advice.

If you’ve never looked up comps on a house, I mean there’s a lot of online tools that you can get free. You know, websites that you can start looking for properties, and comparable values, but you know, if you’re looking for a multifamily property, you might want to contact a real estate agent who is familiar with multifamily properties because you know, again they’re based off of cap rates and you know a lot of other equations, not just on what’s the nearest comp and how much did that sell for? You got to look at the income and expenses and all of that.

Brandon: Yes.

Mike: Always get help. Whatever you don’t know, someone else does.

Josh: Yes, there you. There you go. Awesome. Awesome. Alright, well, how do I know if a home I’m looking at is a good deal or not?

Mike: Well, I guess it depends on what your exit strategies—what’s your intent with the property so if you’re looking at something that might be—if your intent is to buy and keep for cash flow, then you’re going to be looking at things like, you know, after I buy this property, when it’s all fixed up and I have a certain payment, after paying my taxes and insurance and my mortgage and my maintenance and potentially management, how much money is left over for me? If you’re buying for cash flow, you want to make sure that that house actually cash flow. If you’re looking at the property from a buy and flip standpoint, you have to determine okay, if I purchase this house and I put all the money into it and I leave myself a little bit of a buffer in case I have to—my—I go over budget, how much equity will I have and if I sold the house, based on what I think the property would sell for and after paying out realtor fees and accounting for you know, holding costs, you know, how much is left for me? You want to be able to set guidelines for what you consider a deal. For me, if it’s a buy, fix and flip, I want to be at no more than 70 cents on the dollar after you know, after all the fix ups done, I want to have 30% equity so I can use a real estate agent, try to sell it quickly, price it right, and still have say about 20% profit.

Josh: Nice.

Brandon: Great, next question. I’m about to purchase a multifamily property and I’m wondering what is best a 15-year or a 30-year mortgage?

Mike: That’s a great question. I think that also depends on your goals as an investor. You know, if you’re one of your goals is to pay that property off as quickly as possible, 15-year mortgages will save you a lot over time on the total amount of interest that you pay on a building, but I think that if the 15-year mortgage because your expenses are higher then your cash flow is going to be lower so if a property that you’re buying on a 15-year note means that you’re going to have to feed it every single month, I don’t think that’s a smart way to go. I think it’s important to be able to make sure that the—the investment pays for itself so you have cash flow on that unit or that property from the day you buy it. That may mean going into a 30-year loan because it’ll allow you to have better cash flow now and you know so if you can get away with a 15-year loan and still have good cash flow, then I like the idea of paying that off as quickly as possible because that will ultimately will allow you to increase. You know, when that 15 years is up all of the sudden, your positive cash flow is enormous compared to what it was when you had that loan.

Josh: Yes, makes sense, makes sense.

Brandon: Cool.

Josh: Cool. Alright, what are the advantage of setting up my own management company to manage my own properties versus hiring it out.

Mike: Ah, well you know, I actually manage my own properties. What I don’t do right now is I don’t pay myself for management. I probably should.

Josh: Oh yes.

Mike: I might not be the best person to answer the advantage of doing that I will though say that I have started using Buildium to manage my properties. I think Brandon, you’ve maybe tried that out once.

Brandon: Yes, I haven’t like—I used them a couple of times, but I haven’t like fully committed yet so.

Mike: Oh man. I love, I love Buildium. Right now, I manage a little over 30 units and you know, I would consider myself, now I look back at how I did manage that property before and I think man, I was a horrible property manager. You know, because I started off and it was look you know, rent was due on the first, but late after the 5th so all of my tenants paid you know, closer to the 5th and you know when have mortgage is due on the first, you know you kind of create yourself a little problem when you have to float all of that money before you have all your rents in. You know, if a tenant pays late, I didn’t have a good way to track late fees and so it was like oh, I called this tenant up and say hey, you know you missed rents it’s supposed to be in yesterday so you’ve got $40 late fee and you know, maybe they pay me on that day, but they wouldn’t include the late fee so now that I had to remember to come after them like.

Brandon: Yes.

Mike: The following month to try to collect and that never worked out.

Brandon: Yes.

Mike: You know, what Buildium allowed me to do was to you know, let the system not only do the payment notifications, but also collect the late fees so you know, if the late fee happened, they would automatically get notified. It would go on their lease ledger. If they didn’t pay it, it would show up next month and five days before the payment’s due, they get a reminder. You know applications I mean they do a full credit report and background check. I don’t have to do, you know, all these little separate things. I’ll basically let the system help manage the property so now you know, myself, I’m able to manage 30 units with honestly not a whole lot of extra time out of my day because of using it. I really recommend it.

Josh: Cool.

Brandon: I need to dig more.

Josh: There are lots of other platforms as well.

Mike: Oh yes, yes, absolutely. You know, it’s—you got to—I mean.

Josh: You find what works for you.

Mike: Having on thing.

Josh: Yes.

Mike: It’s you know, the Excel method was what I tried before.

Brandon: Yes.

Mike: That really did not work.

Brandon: That’s what we’re doing right now and it—my wife holds it together, but you know I feel like we could do so much better and like I know we could so I just got to do it so. Cool, alright.

Mike: Awesome.

Brandon: Moving on to the end of the show, the world famous.

Announcer: Famous four.

Brandon: Famous Four number one, what is your favorite real estate book?

Mike: Ah favorite book. You know, Brandon I think that you recommended this one, Landlording on Autopilot by Mike Butler. Is that one?

Brandon: That is a great book.

Mike: Yes. That was a fantastic book. I read that this year so that’s one that helped me out on basically being a property manager because I’m not outsourcing that.

Brandon: Yes.

Josh: Nice, nice.

Brandon: Fantastic book.

Josh: You know what I love about this conversation, you’re somebody who’s been doing this for over a decade now and you’re still learning and you know.

Mike: I make tons of mistakes.

Josh: Oh yes, that’s I mean and you know we all talk about it. That’s the beauty of this whole thing. You know, the—and I always harp on this, but the guy who says, “Hey, I’m the expert. I know everything.” Please go the other way guys.

Mike: That’s right.

Josh: Do not turn to those guys for help because you know, they’re not telling you the truth.

Brandon: I actually came out—I came out and spoke at you know, Mike’s real estate club awhile back and that’s one of the things that you know, I really liked about you Mike is that you were so honest about like everything, about your struggles, about what you were doing, about what you’re.

Mike: Sure.

Brandon: What you need so that was great and so like I look up to you because of that you know and I see you as somebody I can learn from because you’re open and honest.

Mike: Yes.

Brandon: I wish more people realize that.

Mike: Anybody who says that they’re in this business and they don’t make mistakes or they, you know, don’t you know lose money on a property or something like that or you know, most of them are full of it.

Brandon: Yes.

Mike: You have to have some—you have to understand that there’s always something to learn and if you—once you—when you think you know it all, that’s when you’re bound for failure because stuff happens.

Josh: Definitely.

Mike: You always have to be learning.

Josh: Definitely, definitely. Alright cool. What’s you favorite business book?

Mike: Ah okay, so we—there’s a couple that I probably shouldn’t be mentioning because everybody else mentions them so you know, people talk about the E-Myth, I’m actually going to give another book that I read which is great for systematizing businesses and I think I saw Brandon, you wrote an article that included this is called Work the System by Sam Carpenter.

Brandon: Yes.

Mike: Work the System is—it’s similar to the E-Myth, I was able to—I found it a lot easier to digest and kind of take in so it’s about systematizing your business and working on your business instead of in your business and you know, I think that he still offers a free digital download of it too.

Brandon: Cool. Cool.

Mike: On his website so Work the System.

Brandon: Yes, I have that actually in my bookshelf right back here.

Mike: Aw, sweet.

Brandon: Yes.

Josh: There you go. There you go. Awesome, alright. Cool, cool. What about hobbies? What do you do for fun? I see the football behind you.

Mike: Oh yes.

Josh: The Seahawks.

Brandon: Seahawks, woowoo.

Josh: Yes, go Broncos.

Mike: Aw.

Josh: Wawa.

Mike: My wife and I are both huge Seahawks fans. You know, we were lucky enough to win the opportunity to buy tickets to the Super Bowl last year through because we were season tickets. That was incredible.

Josh: Oh you go there. I mean.

Mike: We didn’t do face paint, but we do. You know, we’re not—we don’t get all dolled up like some of the crazy fanatics, but you know, we’re there, you know, we’re both huge fans so you know. We go to most of the games and you know, just real excited about the Hawks, but you know, outside of that, outside of football, you know, in the summer, in the spring, I love playing golf. I love getting out there. It’s a great way to relax. I’ve been playing for quite a few years so that’s a great you know, fun hobby and then, you know I like the outdoors too. In the fall I like to—I fish and hunt and spend time in the mountains. That’s kind of one of my, you know, long time hobbies so.

Josh: Nice.

Brandon: You’re taking me golfing this summer just so you know.

Mike: Oh absolutely.

Brandon: I’m just going to put that out there. See I like invite myself.

Josh: By the way, there is absolutely nothing relaxing about the game of golf. I don’t know what it wrong with you, but you know, yes.

Mike: It’s—you know, it’s really hard at first. It is really frustrating and it’s even frustrating after you’ve played for awhile, but oh yes, I love it.

Brandon: Nice, nice.

Josh: Alright.

Brandon: Alright, my final of question of the day, what do you believe sets apart successful real estate investors from those who give up, fail, or never get started?

Mike: You know, I think without a doubt, it’s—kind of relates to what I said towards the beginning about taking action before knowing everything and you know, so getting yourself out of that education trap where you think you’ve got to learn the next Quick Tip or next you know, strategy to make money quick in real estate. You want to set yourself up so that you’re into action. You’re talking to sellers, you’re doing marketing to get sellers contacting you. Then when you’re—along the way, that’s when you get the on the job training and you’re not going to have all the answers, but what you can do is you can take action and you can check your work before you have to commit. When it comes to say, making an offer on a house, put the offer out. You know, you might have an inspection contingency and you can use other people, professionals in their industries to be able to check your numbers to make sure it’s a good deal.

Josh: Yes, fair enough.

Brandon: Rock on. I love it.

Josh: Awesome, awesome. Alright Mike where can people find out more about you?

Mike: You know, you can find me on BiggerPockets, Mike Sumsky and also you know I have a blog, Occasionally, I’ll post a real estate information so they can find me there to.

Josh: Awesome man, very cool.

Brandon: Awesome.

Josh: Listen, thank you so much for coming on, you know I think as Brandon said we’re definitely going to have to bring you back and talk about some of these other things. This is great. Tons of amazing bits of information so thanks for being here man.

Mike: It was a lot of fun. Thanks guys.

Josh: Alright guys, that was Mike Sumsky, big thanks to Mike for being on the show. That was awesome. Lots of cool stuff. I love how we kind of covered the other side of private money. I think it’s something that a lot of people have always wondered about. I thought it was awesome.

Brandon: Yes, yes, I think that’s cool. I think it’s nice to be able to see from both sides kind of how a private moneylender thinks.

Josh: Yes.

Brandon: How you can attract that because I mean half of our audience is probably is looking to borrow private money and the other half is looking to lend private money.

Josh: Yes.

Brandon: That’s the beauty of BiggerPockets, right? It brings everybody together.

Josh: It does, it does and if you’re not on BiggerPockets then you should be creating a profile, setting it up, it’s free, get on there, introduce yourself to the community. Let people know who you are, what you’re looking for, you know it’s like the world’s greatest marketplace for real estate everything so get out there and get involved and participate and share and let people know who you are and what you’re doing and Brandon is taking a photograph of me while I’m podcasting, unprecedented. Take the picture, take the picture. I don’t think he knows how to take a picture.

Shocking, alright, otherwise guys, thanks for listening to the show. If you have yet to leave us a review, a rating on iTunes, please do that. Those ratings really really help us. The reviews help us out. They help us expand the audience, get new people, listening, joining BiggerPockets, becoming a part of our world, and you know, obviously the more people that join us and get involved, the bigger our audience becomes and the more opportunities that we create for everybody so you know, get involved, come on down and thank you for listening to the BiggerPockets podcast. I hope everybody watches the Youtube video of this show when it comes out so you can see Brandon becoming a little photography diva here. Taking photos of us as we record for some reason, but thanks again guys. Show 106, on the BiggerPockets podcast, I’m Josh Dorkin, signing off.

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