BiggerPockets Podcast 127 with James Wise Transcript

Link to show: BP Podcast 127: How to Use a Partnership to Acquire (and Manage) 100+ Units with James Wise

Josh: This is the BiggerPockets podcast, show 127.

James: I see so many people come on the website, “Hey everybody, I’m new to real estate investing. Anybody have any tips for me?” And that’s it. That’s the last time you ever heard from that person.

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Josh: What’s going on everybody? This is Josh Dorkin, host of the BiggerPockets Podcast, here with my cohost Mr. Brandon Turner, live in Denver. What up man?

Brandon: Live in Denver! Yeah, it’s good to be here. It’s raining. It feels like home.

Josh: It is miserable.

Brandon: It is miserable. I don’t know how you guys live with this. I mean, in my area it’s sunny like 300 days a year, and you guys have rain all the time.

Josh: Yeah. Amazing, amazing. The world has turned upside-down, the world is turned upside down. Well, welcome to Denver man! How’s your road trip going?

Brandon: It’s good, it’s good. Except for the three hour or four hour adventure out of the way yesterday, or a couple of days ago, which we will talk about in the podcast. Listen up!

Josh: We will, we will yeah.

Brandon: Other than that, it’s good, it’s good. I saw a lot of the country. Met a lot of BP people and heading back home next week.

Josh: Outstanding, outstanding. Well cool man! Well today we got a cool show, we got a cool show, very excited about it.

Brandon: How excited about it are you?

Josh: I’m so excited! Ohhhhh! I almost want to do a Shia LaBoeuf. Huwaaahhh! Just doin’ it today!

Brandon: Yeah!

Josh: We’ll link to that reference. If you don’t get it, there’s a Shia LaBoeuf like motivational video that will make you pee your pants, so we’ll link to it in the show notes at BiggerPockets.com/show127 This is show 127 of the BiggerPockets Podcast. You know what, before we jump into the show, I want to thank every body for listening, you guys are amazing. I just want to read a couple of quick reviews people have left us. You know people leave us all these great reviews and we thank them so much for it, but let’s read some because, you know it’s awesome.

Of David Goose “An excellent resource! I listen to this podcast on the way to work every Thursday morning. Josh and Brandon ask just the right questions so that both beginners and seasoned investors can take away something useful. I find the guests knowledgeable and overall I enjoy the show.” Thank you David! That’s awesome.

Brandon: Yeah! I feel all warm and fuzzy inside.

Josh: Yeah man! Nate from Blackwell, “Josh and Brandon have given real estate investors something to look forward to each week. The information and guests they provide give so much insight and I appreciate everything I’ve learned from them. Thanks a million!”

Awesome. You guys, this kind of stuff is first of all, it like honestly, it really does touch us. If you have not left us a review and rating on iTunes, on Stitcher, on these other listening devices that you listen in to the podcast, please do! It helps us. It helps the show grow and climb in the ratings and it helps get us exposed to more people and so we can help educate more folks. So please leave us ratings and reviews! We really do appreciate it!

Brandon: There you go!

Josh: With that, should we do today’s…

Brandon and Josh: Quicktip!

Josh: Today’s quick tip. Talk about value. Talk about value, Brandon.

Brandon: I don’t want to talk about value.

Josh: Ok, fine, I will.

Brandon: You talk about value!

Josh: All right, guys! We decided to cut off some of the money that’s coming in our pockets. We said, “You know what, what should we do? We should be even less successful as a business. We’re just going to kill ads on the dashboard for BiggerPockets users.” We realize at the end of the day these ads can be kind of a distraction for what you want to do. What we did, is we killed off ads on dash. So yes, it hurts us, but at the end of the day, it helps you, our users, and really that is our end-all be-all goal. So hopefully you guys enjoy that! And that’s today’s quicktip.

Brandon: Quick tip! All right. Moving on!

Josh: Let’s get to this thing! Today’s show, we’ve got James Wise. He’s a wise guy from Cleveland, OH.

Brandon: I’m sure he’s never heard that one before!

Josh: Yeah! There’s going to be some battling on this one! We’re going to be talking, real estate, sports, unfortunately.

Brandon: I try to steer clear of those convos.

Josh: Yeah, well you know. Anyway, James is a great guy. He’s built a pretty awesome business. The guy’s got well over a hundred rental units. He’s built a really cool business, and we pick his brain from everything on tenant screening to property management to finding deals and you know, to Cleveland of all places. Which I have no problem with, but you know I got to give somebody a hard time! So, here he is, the man, Mr. James Wise! Welcome to the show! Good to have you here!

James: Hey how you guys doing?

Josh: Doing great!

Brandon: I’m well, I’m well. It’s nice to get out of the car finally. I’ve been in the car for 30 some odd days now, so this is, it’s nice to be on solid ground.

Josh: Not only has he been in the car for 30 days now. This guy yesterday, had his wife driving four hours in the wrong direction. Basically he said “Just don’t listen to the GPS! Go straight! I don’t care what happens, go straight!” So he ended up in Mexico!

Brandon: Not quite Mexico! But almost Mexico. It was a very Dumb and Dumber moment you know? When Harry and Lloyd was it, went in the wrong direction, for, they went like eight hours or whatever, I only went four-ish. Long story, I won’t get into that.

James: If it makes you feel better. I’m a horrible driver as well.

Brandon: Good! Good.

Josh: All right, James, man. It’s a pleasure to have you! As we were talking about before, you are probably one of the more prolific guys in the greeting committee, unofficial, of BiggerPockets. So anyone new who joins probably has spoken with you, or at least, had you speak to them. Thank you for doing that, and let’s talk about you man! How did you get into real estate? How did you get started?

James: Well, when I was younger, you know, the idea of renting never seemed like a good idea to me, you know? I like that fact that when you get a mortgage, you pay it off and you build up that equity. I knew if I were to buy a house at a credible young age, like the first house I bought I was 21, so in my mind “Hey when I’m 51 I’ve got a free house! This is awesome!” So, I guess, my first house I actually house-hacked it, I had no idea what BiggerPockets was, or what that term meant, but I could say it was probably a house-hack. I bought it, and I actually got paid $8,000 to buy it, which was pretty cool.

Josh: Do you want to explain that? And sense everybody listening may not know what house-hacking is, do you want to just kind of briefly explain that?

James: Yeah, you know you guys kind of coined the term, you go out, you buy a house, you live in it, but you later turn it into an investment property. So what I did, I bought this house, and I actually got paid $8,000 to buy the house, which was pretty cool. I was a younger guy. I was 21 years old. I had about $500 in my checking account and I had a decent credit score, a decent job. I was managing Radio Shacks at the time. It was about $30,000 a year, but you know for a 21 year-old guy, I guess I was doing ok.

So the city I live in is called Parma, and it has first-time home-buyer grants, if you’re making under a certain amount of money. I believe at that time it was $40,000. So they gave 10% down payment assistance, so the house was like $85,000. I used an FHA loan, which only needed 3.5% down, so I walked away with a little bit of money. And then that was 2009, so at that time, the federal government was also giving a down payment grant, so a couple of months down the road, I got another $8,000 check. It worked out pretty good! I used that money and I built a bathroom, a kitchenette and a bedroom in the basement and ended up renting out the basement to my brother for a couple of years.

Josh: Nice! That’s awesome man!

James: Yeah! It worked out pretty good as far as I was concerned, as far as my brother was concerned. My fiancée on the other hand… He doesn’t live with her anymore, and she’s pretty happy about that.

Josh: Okay, I was going to say, she’s still your fiancée so that’s good! Or your wife, so there you go!

James: She is, and he no longer lives there. I actually sold him a house on the street over. I still kept him close.

Josh: Nice!

Brandon: House hacking definitely works better for people who are you know, not married, or engaged or whatever, you know. It can work for anybody, and it does work, but it definitely works better for those who don’t have, I don’t know. Is baggage a bad word?

James: Well it worked for 66% of the household! But the other 33% happens to make the rules, so you know, he moved out.

Josh: Nice. Nice nice nice.

Brandon: Okay, so you bought that house, and then what happened?

James: Yeah! We bought that house, and that was great! And a couple of years later I bought my first duplex. At this time, I got licensed as a real estate agent. You know, my thought was “I want to buy a lot of rentals, so I may as well be a real estate agent. I don’t want to wait around for another guy to schedule appointments with me and I’d like to get a commission when I buy it.” So, I bought a duplex, also in Parma, and I still didn’t know about BiggerPockets at this time, so I broke literally every single rule you can break.

Josh: We all do. We all do.

James: Every rule you can break. I just knew that I buy a house and somebody else pays the rent on that house, and it’s more than what I paid for the house, that’s what I want to do for the rest of my life. So I ended up purchasing a thing for $36,000 it was a bank-owned…

Brandon: Real quick, where are you located at?

James: I live in Parma, OH.

Brandon: Oh that’s right! Oh, Ohio.

James: It’s a suburb of Cleveland. Everybody knows Cleveland. You guys rag on Cleveland.

Josh: Yeah, it’s like Detroit, right? Same thing.

James: Yeah, it’s kind of like Detroit, except for not as bad.

Josh: You guys have a losing basketball team, don’t you?

James: Whoa, whoa, whoa, whoa! We had a winning basketball team three days ago!

Josh: Let’s go, California? Come on!

James: That’s not even fair! We’re missing all of our guys, and we’re still tied two to two! You know, you guys, it’s a pretty deep team over there, but we still have the greatest player of all time.

Josh: Of all time? Wait hold on! This is a real estate podcast, but that’s absolute insanity. I may have to just stop the call right now. I mean, you can’t even claim that LeBron James is a better basketball player than Kobe Bryant or Michael Jordan. You’re not even close to doing that, so we’re just going to stop, since this is my show. I’m going to overrule you.

James: Josh! You’re right, I apologize. I would feel bad if I was wrong on my show as well.

Josh: All right, so you’re in Cleveland, where basketball is terrible.

James: Yeah, so I’m in Cleveland, greatest location in the nation, great basketball team. And so, back to real estate. So I buy this duplex, it’s $36,000. I literally scraped every penny I had to purchase this thing. Six months of reserves? Absolutely not. I did the rehab, I did half of it myself and the other half I brought in John Holden, who is now my business partner, who owns my company. We own 50% of the company with each other. He was a contractor. I’m a realtor. I wanted to buy rentals. I knew he had a rental. I didn’t exactly know what the business model was going to be, but I figured that was a great place to start. So I had him do a little bit of work there, which, just to show you how little I knew at the time. What I had him do was install carpet, which was the first and last time I ever did that in a rental property!

Josh: What do you do now?

James: A lot of the houses are older, so you can pull whatever’s on top of the floor and there’s usually hardwood. So we do a light buff, and then you know, coat them, so in case the dog pees it doesn’t seap into the wood. So, he renovated that property. He finished it off for me. I was a little over my head, I’m not the greatest contractor, that’s for sure. And after that, I told him what I wanted to do, and he discussed what he wanted to do, and we started buying properties together.

Since then, we’re really cooking, we’re just buying rental after rental after rental. We both at W-2 jobs as well, so we had a good amount of money coming in. After that, we got pretty involved with BiggerPockets and we started telling everybody what we were doing. There’s a lot of guys on BiggerPockets that were really interested in what we had going on, probably because we were in Cleveland, greatest location in the nation.

Josh: You know, maybe if you keep repeating that, it will come true in your own mind, but you know…

James: Well they say you have to say something seven times for it to set in. I’ve only got five more to go!

Josh: Right, okay. I want to circle back a little bit. So you’ve got this first house-hacked. Then you get this duplex. You got this guy who is kind of your partner, the contractor. You put stuff on Home Depot credit cards. You kind of bounced around, said you made a thousand mistakes. So you’ve got a show, we’re sitting here, we’re talking to 50,000 or more people, what would you have done, if you knew then what you know today? What would you have done differently? So you started, you know, you just jumped in, you decide you’re just going to go for it right?

Which I think, to some extent is the right idea, because it’s the complete opposite of what a lot of people listening do, which is they sit and they think and they contemplate and they worry and wonder and never ever take any action, right? They get frozen, they get paralyzed. I’m assuming, you would say, starting today, I would still take some kind of action, but I would do it more prudently. What kind of advice would you give to those new people who are sitting on the sidelines, wondering should I do it, and make those mistakes? Should I just go for it? What would your advice be?

James: Well, believe it or not, if I could do it all over, I think I would have done everything I did. Did I make mistakes, and do I do the same thing going forward? Absolutely not. But, every single mistake I made, I guess I just got lucky, because it all totally worked out. The upstairs tenant where I put the carpet in? He actually still lives there to this day. I didn’t even run a credit screen on that guy! I met with him, and I went purely off of gut. Will I do that now? Absolutely not! That’s a horrible idea. I just got lucky. Would I go into buying a property where I barely had enough money to cover the acquisition costs and the rehab was a complete after though? No! Of course not. But it worked, I connected with a partner, and I grew it into a business. But a lot of that was off of luck.

But you know I learned a lot. I prefer to learn by doing. I’m a trial by fire kind of guy, so you know through then, I went there and I made mistakes, and I learned from those mistakes and I try to improve on the third deal, and the fourth deal and the fifth deal. And you know, I made mistakes on those deals too, but gradually the mistakes went lower and lower. But, going forward now? Make sure you have enough money to cover all your rehab costs. I went in there, and the utilities were off. Miraculously, they all ended up working. That couldn’t have been the case though, you know? Everything could have broke. When I turned on the water, every one of those pipes could have burst, you know? I don’t know where I would have came up with that money. The tenant that I put in there, well I put two tenants in there, because it was a duplex, both of which I didn’t do a credit screen. They worked out pretty well! They could have been horrible! I could have been in court two months later. That worked out pretty decent though!

Josh: That, you know, that one thing, you know I just want to harp really quickly. Anybody listening, of all the mess ups that you can make, don’t ever do that! Don’t ever, ever do what James did! Screen your tenants. Period. Non-negotiable. If you do that, I will come find you and yell at you. Do not do what James did! That’s the absolute worst thing that you could possibly do! I don’t care how good your gut feeling is! James got lucky, and I’m really happy for that. But listeners, please! Do not go on gut! You have to, have to do this the right way!

Brandon: Well, how do people, uh?

Josh: You know what! I was just about to go there!

Brandon: How do people do a tenant screening?

Josh: You know what? We wrote the Ultimate Guide to Tenant Screening.

Brandon: Oh my gosh! We did, didn’t we?

Josh: We did! And there will be a link to that in the show notes at BiggerPockets.com/show127

Brandon: Even better!

Josh: You can also go directly there, by…

Brandon: BiggerPockets.com/tenantscreening

Josh: Wow. Very obvious. Very helpful. Definitely go there, definitely read it guys and please, sorry James to cut you off, but this is like a really important point for new landlords, new investors. Do not go on the gut feeling! You have to methodically screen your tenants. Period.

James: I could not agree with you more. I am fully aware that I got 100% lucky on that deal. And of course that’s not how we operate today.

Brandon: Let’s actually talk about that real quick. I know we’re going to get into that a little bit more later, but how do you screen? Because you own a property management company today right?

James: Yes.

Brandon: Okay! So how do you screen tenants nowadays? What do you look for in a tenant? What’s a red flag? What’s a good thing? I’m applying for a unit of yours, what do you do?

James: We do full credit screening. We do criminal background screening. We check with previous landlords. Just speaking with that tenant, you know you can get a feel for their personality, but then after that. Credit screening, criminal screening, checking with the landlords, three times rental income.

Brandon: Let me ask you this then. I had an eviction. We did an “Ask BP” about a week ago, you know because that’s the other podcast. For people who don’t know, you should listen to the “Ask BP” podcast. It’s an awesome daily podcast from BiggerPockets. Anyway, one of the daily question was, “Would you rent to a tenant who had an eviction from seven years ago?” So I answered that question, but I want to know your thoughts. I’m a tenant and I applied to work, you know…

Josh: What was your answer, Brandon, by the way?

Brandon: My answer was, if I had no other options and if my market was really bad and everything else checked out fine, I might consider it but I’d probably charge a double security deposit. What would you say James?

James: I would say no! I would say no. The reason I would say no is, you know for every one rental property, you know there’s 10, 15, 20 tenants that want to rent that property. If she was evicted seven years prior, it’s a relatively low-risk, but if there’s another person who was never evicted, why not take the easiest path.

Brandon: That’s what I said. If it was going to be a matter of me losing three months of rent, because the market was so soft, I would take that risk over losing the $2,000 in lost rent, if I had a tenant that in every other way had checked out.

Josh: You guys are terrible people! What about these poor people that got kicked out of their property for not paying rent? I mean, what about them? Don’t they have rights?

Brandon: No. No. That’s kind of like the machete article, all right. There’s an article on the blog right now that I wrote last week. It was about a tenant who was evicted and they went after their landlord with a machete.

Josh: Reasonable. I mean, if my landlord kicked me out for not paying, machete would be the first thing that I would grab.

Brandon: I would wait to rent to you for at least two years after the machete incident, then I would rent to you.

Josh: Okay, well. There you go! Nice, nice.

Brandon: So you would not rent to them because you’ve got lots of tenants to choose from, that’s, I agree wholeheartedly.

James: You know you said, you’d rather rent to them than have three months of vacancy? Me personally, what I would rather do, if my two choices are renting to someone with an eviction or a three month vacancy, I would probably just lower the rent.

Brandon: Sure, yeah. I agree. I think that’s smart too. But yeah, I think for me I actually had a tenant who had an eviction like five years earlier, and she moved to my property, and this was before I really knew what I was doing. I wouldn’t have actually rented to her back then, probably, because five years is not that far. Anyway, she lived at the property four years, so it’s been now nine years since her eviction with a previous landlord, and we just had to evict her. People don’t change! You know, nine years later, history just repeated itself! I think I lost like $4,000 or $5,000, in rent, and damages, maybe like $3,000. I don’t know. It’s terrible. That was a total of nine years difference. Some people just never change, so, yeah, I don’t know. I would have to be convinced pretty hard that I should rent to them, in kind of a worst case scenario. Anyway, moving on.

Josh: And then really quick, your screening criteria, James, is great stuff.

Brandon: It’s exactly what I do, and exactly what we promote in the tenant screening guide. So, if you’re able to check that out. So you mentioned your partner. I want to talk on that for a little bit. That’s something that I’m a big fan of, generally using partners, but they can be dangerous, but how did you? Did you get lucky with that? Was that another one of those lucky things? How did you pick the right partner? Because you’re still with him today, right? You guys are still buying stuff together, right?

James: Oh yeah, oh yeah.

Brandon: How did that work out? Was it just luck, or did you know what you were doing when you were picking that partner?

James: Well I knew him for a long time. I was working in a gas station when I was in high school, and my assistant manager had lived in one of his rental properties, so I’ve known this guy for almost ten years now. So we have a great friendship, and a good trust. It’s not like I’m just going on Craigslist and picking partners at random.

Josh: Is that a bad idea?

James: It can and it can’t be. You have to do a lot more due diligence if you are picking partners from the general public. I mean, our company partners with a lot of people from the general public on specific deals. Do we build a complete business together, where everybody’s in the same office, operating the same company, working hand in hand every single day? You know, to do something like that, you really need to get to know a person. It’s almost like a relationship, it’s almost like a marriage, really.

Brandon: Yeah, I agree. I use that analogy a lot. So what do you look for? If I’m a brand new investor, or even not brand new, but I’m an investor who wants to partner with someone, what should I look for? What are good qualifications of a good partner?

James: Every partner needs to add value. That’s the very first thing that you as a partner, me as a partner, Josh as a partner, anybody needs to do, is present the value that they can add and then talk about the value that they’re looking to receive.

Brandon: Love that. Love that.

Josh: That’s great, that’s great.

Brandon: Okay cool. Okay, so partner that worked out well. How do you guys split things? You said earlier, I think 50-50 right? Is everything 50-50, including everything you put in and out? How does that work?

James: Everything is 100% 50-50.

Josh: 100%? Or 50-50?

Brandon: Do the math Josh, come on! Now between the, no go ahead.

James: He’s still hating on me about the Cavaliers comment.

Josh: Bust your chops!

Brandon: Between the two of you, do you mind me asking, how many properties do you two as a partnership now own, or how many units do you guys have together?

James: We together own about 100 rental units?

Brandon: Are those mostly single-family, multi-family, or all over?

James: We have a combination of single-families, multi-families, mostly duplexes and then we have a handful of apartment buildings, 6 units, 11 units. The biggest one is a 21-unit.

Josh: Right on. Okay. So if I’m listening, write this down for the listeners. I’m listening and I’m sitting and I’m saying “Hey I want to get into this game! Wow. 100 units! I mean that’s not an insignificant number. How do I get there?” You know, I stop and I say, that’s huge, but how do I go from one to two to three to 100! It’s a big leap. Is there, did you have a formula, did you have a strategy that you came up with, did you say hey, we’re going to buy three properties a year. Next year we’re going to buy six, then nine, then 12. Or did you just kind of start going one at a time, one deal at a time and just kind of winging it?

James: Well, I’ll be honest with you. BiggerPockets actually helped us get to that number quite a bit. We started buying them just ourselves. You know, he would own half of it, I would own half of it. Together from a couple cash-out refinances, me and him together put together $150,000 and you know, where we live, homes are not that expensive, you know we’re buying $25,000 bank renovation houses, we’d be all in for like $40,000. We started off doing those, and we had some pretty good success. We found some houses that were pretty undervalued, so we flipped a couple of them, made a 20 or 30 grand here or there. That was never our model, to be house flippers, but you know we did find some good deals, and that helped us build some capital. We continued to buy more and more buildings, at that time, I had found BiggerPockets and was pretty active on the site, and we were just discussing our deals and what we were doing. We found a lot of other members on the site who were living in more expensive markets and they wanted to get involved, and that’s when we started buying the apartment buildings. They were putting up a relatively large amount of the down-payment. John and I were putting up a smaller amount of the down payment, but of course, providing a good amount of the sweat equity. But once we started doing that, it really accelerated our growth.

Josh: Hey James, I want to talk about that obviously, because I have a complete vested interest in you talking about this. So, you know. I’m not going to hide the fact that clearly BiggerPockets has been helpful to you and I would love for you to share how that is the case. First you said you know, you’ve met other people, I’d love to hear, how did you meet other people? What are you doing on BiggerPockets to kind of get the word out? Because listen, we’ve got a lot of users on the site who have been doing deals for a long time, and they’re like, you know, I don’t see any value in participating on BiggerPockets. I know everything, why do I have to post? I know everything, why do I have to help other people out? And they don’t realize that by doing so, you gain a ton of value yourself. So I’d love to hear it from the horse’s mouth, so to speak. What exactly are you doing, and how does that translate into potentially money partners, you know you name it!

James: Well as you two said earlier, I am one of the most prolific welcomers on the entire website. I’m sure every single day someone logs on to BiggerPockets. They see my mug on the dashboard every single day.

Josh: I’m sorry for them.

James: Moving on. You have to make it a part of your daily life! I’m literally on the site all day every day. I welcome new people. A couple of welcomes have actually led to deals. Whenever anybody asks a question that I feel I have the qualifications to answer, I go ahead and answer. You know, I try to provide quality content, you know I do a lot of the welcomes, but at the same time whenever there’s questions that I know the answers to that other people need the answers, you know I provide those answers. You have to make something part of your daily life. I see so many people come on the website, “Hey everybody! I’m new to real estate investing. Anybody have any tips for me?” And that’s it. That’s the last time that you ever heard from that person. That person’s not going to be able to network and to find relationships.

But if you get somebody on the site day in and day out, you know you can tell that that person knows what they’re talking about. You kind of get to know that person. You’ve got a lot of guys on your site, like Joel Owens. I’ve never personally talked to the guy, but I can tell you, just based on being on your site every day that he does high end commercial real estate. I know that just from seeing him post every single day. Jay Hendricks. He’s on there every single day, and you can tell he’s the veteran. He’s done it all, it sounds like. You just kind of get an idea for what people are doing! Chris Clover, he’s down in Memphis, that’s what he does. So you have to get out there every single day. You have to be known. It’s not just a one and done thing. You can’t just put an ad “Hey I need to try and venture partners!” And then you try and do it again three months later, you don’t even have a picture on your profile. Your profile’s not even filled out, it’s just not going to work!

Josh: So is that, I mean, you’re saying basically, you’re building by engaging, by connecting on the forums, by participating you’re building a name for yourself, you’re building a reputation and people little by little get to know you, and as they do, they think of you and associate you with whatever it is that you’re an expert in. When they’re looking for somebody like that, or when you finally are like “You know what, yeah! I’m the next, everybody I think kind of knows me, I’m looking for money.” And you say “Hey I’m looking for partners or I’m looking for this.” You’ve built the reputation and they pretty much know that, and now are more willing to work with you?

James: Absolutely! That’s the secret sauce.

Josh: That is the secret sauce. And it works for a lot of people! And that’s why at the end of every show I always tell people to jump in and make sure they’re participating. This website, and we don’t do this, this show 127, you know we don’t sit here on the show trying to promote the site all day long about how you should be doing it. But it changes lives when you do and when you get it and when you jump in and you figure it out, you can have your life changed!

Brandon: Here’s the thing. We don’t encourage you to go get active on the forums because BiggerPockets makes more money, right? Membership’s free for BiggerPockets. We do it because we sincerely believe that by engaging on the forums you will become more successful. Both Josh and I just firmly believe that that is what is going to help you become more successful. It’s in our interest, because we want you to become more successful. You know, and I think that the people, over and over and over the people that are the most active tend to be the ones that do the most deals and the most real estate, both inside the network, with people in the site, and people outside the site. We see that over and over and over. People that aren’t jumping in, you’re missing out.

Josh: Yeah. All right. Cool. James, thanks for sharing some of those tips. Definitely appreciate it. So, you know your business, you’ve got all these units, you’ve got these rental units and you started a management company so you’re managing units for others, and you’ve got a turnkey company now right? So you fix up the condos, is that kind of?

James: It’s kind of different than what all the other turnkey guys are doing. The main business model with turnkey right now, is that guys go out they find really really distressed properties, they purchase them, they fix them, and then they sell them to the end investor. We actually don’t do that. Like I said, we’ve flipped a few houses here and there, but that’s never been the business model. What we do, because you know we’re real estate brokerage, you know right now I’ve got a few realtors working for me. We just go out and we search our specific market, the same market that john and I invest in, and we look for the best properties available out there on the MLS. And we act as the boots on the ground, the buyer-broker of the investor. So just like, a regular guy lived down the street, he would want to go buy a rental property. A guy in California could want to by a rental property and we treat him the same way.

Josh: Do you recommend that as a model for new real-estate investors? You know going to get your license, and you know if you don’t have the resources to invest yourself, you know start as a buyer-broker, start as an agent. Become the expert in one part of town, and then as you build up your resources, start using that capital to start building a portfolio?

James: Yes and no. I like the idea, absolutely. But it’s not cheap, it’s not free to start a real-estate brokerage and a property management company. I think what helped us, because right off the get-go, we had credibility, because we already were buying properties, so we already spent a ton of our own money, because we believed in this and we believed in what we were doing. We started managing other people’s properties just like they were our own. They knew we knew what we were doing. If you’ve never managed a property, to then, you know just start a real estate brokerage, you don’t really have any experience…

Josh: I just meant be an agent, less start a brokerage. I mean, just go get your license as an agent to help people.

James: That I 100% agree. We get a million people that come on BiggerPockets looking to get started in the industry with absolutely no money, and my advice to most of them is always “Hey, get your real estate license!” That will open the doors to many many connections and you can go out, meet investors, network with investors and you’re providing value. Your value is that of a real estate agent, and when you get enough capital to buy your own house, you can go see the house whenever you want!

Josh: I’ve got a follow up on that. A lot of our listeners are agents, and there’s a million real estate agents out there. What I think a lot new investors assume is that all agents know what they’re talking about with investing, and we know that is not true, and frankly the good bulk of them probably don’t. To those agents who are looking at investors and saying “Oh I don’t want to work with investors! They stink and they lowball, and whatever it is.” What would you tell them, especially because I think the vast majority of them would love to be investors owning their own properties. What do you tell to the agents who are sitting there saying, “I hate investors because they lowball, but secretly I really want to be an investor, I really want to own properties.” How do those agents who are kind of stuck, get unstuck?

James: I 100% agree with you. The majority of real estate agents are not investor-focused. And to be honest with you, the residential, first-time home buyer, people buying a house to live inside of the business, it’s a lot easier to sell one of those houses. I mean a lot of times, you’re literally showing somebody five houses and then they go “I love this house. I want to buy this house, get me in this house.” And that’s your job. Right there. Boom. Done. When you’re selling investment properties, especially when you’re selling them to guys out of state, you know you need to go over the numbers, you need to give them bids for how much it’s going to cost to get everything fixed up. You need to explain how the rental process will work. There’s a lot more work involved, however, the same person that’s going to buy a house and live in that house is probably not going to buy a house for another seven to ten years. Whereas if you get yourself involved with an investor, he might buy 5, 10, 15 houses from you every single month. So you know.

And also, too, once you start working with an investor, after you start doing a few deals, it becomes so much easier, and the trust is built up and that’s a two-way street. It really is. And you know, you start doing a lot of deals with somebody, and you know, it’s just, it’s very very easy. “Hey trust me! This is a great house.” They’ve already bought several houses. They understand the criteria they’re looking for. You find something that fits similar to the last five properties they bought and they’re like “Yeah. Absolutely. Let’s do it.” Boom. Go. Done.

Josh: So how does an investor then, to flip it the other way, how does an investor then go about proving to agents that they’re not just another flash in the pan real estate investor who just took some get rich quick, or who doesn’t know anything from anything, but is actually going to close on deals and make things happen?

James: Well the first thing would be to prove to the agent that they have the ability to close. So, coming in with absolutely no money, there’s pretty much no way that you’re going to be able to prove to that agent that you might be a great use of their time. But if you have the capital and if you have the desire, show it to them. Show them a proof of funds and you also want to search out an agent that is interested in that space. Not every agent is going to be interested in that space, so if you find yourself an agent that owns a few rental properties themselves, convey to them that you have the ability to close deals, and start working together. And like I said, it’s a two-way street. The agent might be apprehensive at first, the investor’s going to be apprehensive at first. You start working together and getting closer and closer and that relationship develops and you become almost like business partners after a while.

Josh: Yeah. That’s great. Good advice. Good advice.

Brandon: Yeah, I love it.

Josh: Before we go to the fire round, I guess I’ve got one more question, so you’ve been building this business, you’ve got this portfolio, you’ve got this partner, it sounds like things are going well. I’m going to ask an obvious and stupid question, that may be obvious and stupid, but on BiggerPockets of course, there’s no such thing as a stupid question, so. How do you make money? How do you make money with a portfolio if you’re continuing to build it and reinvest it? Where do you get money to pay your bills and pay your own personal mortgage, and pay for your groceries? For I think a lot of people wonder this, and they’re afraid to ask this question, so I figured I’d just ask it. So if I’m just a guy who buys property and buys more and more property, where do you get the cash to actually live?

James: Well the properties themselves should of course make some money. You know, you should definitely be getting cash-flow off of your properties. So you have to buy your properties right.

Us personally, we also make money off the real-estate brokerage and then we do property management, so we make money off of the property management company as well. So once somebody buys a house from us, we make a commission for that. Then we make commissions placing the tenants, and then the management fees, and anything that’s broken with the property, we make money that way. We reinvest a lot of that money into our properties. A lot of our personal investments are more for the long-term gain. It’s not necessarily a cash now thing. It’s a lot of stuff that’s going to pay off when we’re both old and gray.

Josh: Right on. Right on. I think it’s one of those things because I know I wondered it when I first started and I was afraid to ask and I was like, “Hey so I’m a full time buying whole investor. How do I actually make money to live?” Because, generally you’re making some kind of profit, but is that going to be enough, at least in the early days, and I think for most people, it’s not.

James: I agree with you. It’s not. You’re not going to buy five houses and quit your job tomorrow. A lot of people are looking to quit their jobs a lot faster than they should. Don’t do that! Bad idea! Absolutely. It’s a get rich slow process. It really is.

Josh: Right on.

Brandon: The only way to like, the way I look at is if you want to quit your job, you’ve got to replace it with another business. And that’s where people get into maybe flipping, or wholesaling, or whatever. But with buying whole rentals it’s very very hard to just quit your job. I mean it took me six years or something like that. And then I was out for like a year, and then I went back in because I wanted more income. You know, so like. Yeah, it’s very very difficult to just take your passive income, or whatever you want to call it, from rentals, unless you have a whole lot of them.

James: Yeah. It’s a volume business. Plus, too, as soon as you quit your job, you’re cutting yourself off at the knees. Bank financing now became almost impossible!

Brandon: Exactly. You have to get really creative. Yeah, when I started with, you know I got a W-2 again here at BiggerPockets, all of a sudden, bank financing became so much easier! I forgot how easy it was compared to when I didn’t. Having to go to like 20 banks and getting turned down by everyone, and having to get really creative because I didn’t have a job. And then, going to the first bank and having them say, oh yeah no problem.

James: I think the greatest thing about a rental property is not actual the cash flow, it’s the fact that you can go in, purchase a property using somebody else’s money, the bank, and then have another person, the tenant, pay off your bank loan. So 30 years later, you bought a $100,000, you put $25,000 into it, 30 years later it’s worth $200,000. So you turned your $25,000 into $200,000 and you probably made a decent amount of money along the way. That to me, that’s the real business. I think a lot of people, they look at incredibly cheap properties and cash flow and they miss the boat on the fact it’s all about leverage, and you’re buying something for 25% down. You’re quadrupling your money!

Josh: Great stuff. I mean, great stuff.

Brandon: All right moving on! Let’s go on over to the next segment of the show, which we call the…

It’s time for the fire round!!

Brandon: All right, the fire round. These questions come direct out of the BiggerPockets forums. And James you are in the forums a lot, so you’ve probably seen all of these, but I want to pick your brain on all of them. So, number one, what do you believe makes a great investment market? What do you look for in a market?

James: Well first of all, I like the Cavaliers.

Josh: I’m sorry, I’m sorry. Hey, yeah, can we get another guest for this show? Come on, now.

James: I think. This is what I think.

Josh: Da Bears.

James: You should first, anybody, any investor, should first look locally. You should look to the town that you live in. That’s the very first thing that you should do. If for some reason, the town that you live in is not going to provide you any properties that will make you money, then, then look to the outside. But the very very first thing you need to do is look local. You’re a) closer to the properties, b) you know the neighborhoods, c) you know the people that live in the neighborhood and d) when there’s a problem you’re right there to be able to go solve it.

Josh: Perfect, agree 100%.

James: So if you live in Cincinnati, Cincinnati is probably the greatest real-estate market for you. If you live in Indianapolis, Indianapolis is the market for you.

Josh: What if you live in Detroit? Or Rochester?

James: I hear good things about metro Detroit.

Josh: What about Cleveland?

Brandon: I hear good things.

James: Cleveland I mean, now that’s a given.

Josh: Yeah, yeah yeah. Listen, I bust on the rust belt cities. But you know, I think they’re amazing places for local people. I think they’re great places for people if they live far away if know what they’re doing and know the city. So cool! Vacancy rates. What’s the best way to find a vacancy rate?

James: Oh! That’s kind of a tough one. Right now what we’re running, I think we’re at about 90% occupied over the entire portfolio. But, you know, it’s going to vary based on how every landlord is operating their portfolio. I mean there’s so many things that can go into that. You know if your apartment, you have it rented for $700, your vacancy rate is going to be higher, than if you have the exact same apartment that’s rented for $650. You know. How well you are in tuned to your market, how quality of a product you’re producing, you know that’s how you figure that out.

Brandon: What about like for a market? Like if I want to know about the vacancy for Cleveland? Is there such a thing as a vacancy rate for Cleveland? Or how do I know if I’m interested in investing somewhere, where would I even begin to look for that information? I don’t think it’s published anymore.

James: I mean, to be honest, I’ve never had to or thought about looking into something like that. I really don’t know. I know what we’re doing. And everywhere I invest, I mean I literally live 15 minutes from every one of our properties. You know I grew up here, I kind of just know the market. I know the kind of people that are living there. I never had to go look into a more macro-level thing such as that.

Brandon: So that's fine, and I actually think you answered the question almost perfectly. That’s one benefit of your own neighborhood. And two, you said “Well I know what we do.” What I do, if I wanted to go find a vacancy rate, I would call up you. If I was going to go invest in your neighborhood, I would call you up and be like “Hey I know you’re a property manager and we’re looking to invest in this area. Can you let me know kind of what we’re looking at?” And your company would probably be like “Sure, this is kind of what we’re seeing and this is what our numbers are.” And at least it would give me a general idea if I’m at 95% or at 65%.

Josh: I was going to follow up and say, James you said 90%, and I’ll ask the “stupid question,” which is not a stupid question, is that good? Is 90% vacancy rate a good vacancy rate or what, across the portfolio?

Brandon: Don’t you mean occupancy rate?

Josh: That’s what I meant. You know whatever.

James: Yeah, a 90% vacancy rate, we’d have some problems.

Josh: You’d be in deep trouble. The 10% vacancy rate, yes I’ve been corrected. Thank you. Thank you.

James: I think it’s pretty good. I think we strive to get everything rented as soon as humanly possible. I mean you’re always going to have vacancies. It’s just part of the business, it’s just going to happen. But I stand pretty firmly that 90% is pretty good.

Josh: Right on man. Right on. Cool. All right Brandon, next question?

Brandon: I want to sell my property, but I still have tenants in it? How should I do that?

James: Oh. That does make things much more difficult. Are you looking to sell your property to another investor, or do you want to sell it to a more or less owner occupant?

Brandon: Well, let’s say I want to sell it to another investor.

James: Well the tenants being in it, that’s a good thing in that situation!

Brandon: Okay, let’s do it the other way then. I want to sell it without the tenants in it?

James: You should try really hard to get the tenants out of it.

Brandon: That’s good! Is that hard to sell a property with tenants in it.

James: It is 10 times harder to sell a property with tenants. Especially if it’s in a neighborhood where owner occupants are buying them up, the majority of the houses. The tenants, they don’t like to be bothered. It’s very difficult to get people in them. If the tenants are on a lease, the lease might have six months left, so you know if I’m looking for a house to buy for me and my family. I don’t want to buy a house and then not be able to move in for a half a year. Plus you don’t know what kind of damages are going to happen in the next six months. So, I think if you’re looking to sell your property, that might be a situation where you try to place that tenant in another property that you have, or maybe you offer a cash settlement to get them to move out. But it is bar none, a million times easier to sell an empty property than one with tenants.

Brandon: Well how about this then, so let’s just say that I, you know I’m kind of tight on money…

Josh: This is supposed to be the fire round, by the way. You realize this isn’t called the salt and pepper round.

Brandon: Yeah, yeah, yeah. All right, so I want to sell a property but I’m kind of broke, but I don’t want that property sitting empty for the next three months, four months, five months, while it sells. Can I have a month-to-month tenants in there? And then sell it? Then as soon as I get an offer that’s accepted, the tenants can move out? Or is that a stupid idea?

James: If you have month-to-month tenants, again I would strive to end their tenancy and then start marketing the property for sale. I mean, you have a lot of tenants, Brandon. Have you tried to sell any of your properties with tenants to owner occupants?

Brandon: No, and I wouldn’t.

James: Have you ever done that? I mean it’s tough!

Brandon: Yeah, it’s tough. It really is!

Josh: Showing your property with tenants is not easy.

Brandon: It’s miserable, yeah.

James: I don’t want to do that ever again, and I don’t recommend anybody else do that. I don’t think it’s a great idea. I mean I’ve had tenants refuse to let people into properties before.

Josh: Yep, yep yep yep. It happens all the time. Happens all the time. You can read about it on BiggerPockets, right? All right. Last question in the fire round. Does it really matter the age of the property, or as long as it’s in good condition and up to date? I don’t really fully understand the question, but I think the question is asking you know, if you’re looking at investment property, does age matter, as long as it’s got updated water and sewer and all that other stuff, pipes are good?

James: I think it absolutely matters. You take properties with cast-iron plumbing, you know people update things, they update the electrical, they update the plumbing fixtures, but it’s very rare that people are going in and gutting out houses and completely removing everything. Not to mention the same pipe that’s running out of the house to the main sewer line, that’s probably going to be cast iron as well, or you know the clay tiles, tree roots are growing into them. So of course the newer properties are going to have a lot less maintenance issues down the road.

Josh: Now is that necessarily the case? Let’s talk about this. My former house has the original boiler. This boiler was built in the ‘50s. This boiler is still working and it’s working in great condition. You buy new HVAC, you know, how long are those going to last? Ten, 15 years? They don’t make stuff like they used to, so is that necessarily the case?

James: I would argue that your boiler is also less efficient than the newer stuff. So that's that. And eventually, it will give out, of course. If I had my preference, if all things being equal I had two houses and one had a brand new furnace and one had a 50 year old boiler, you know all things being equal, I would prefer the new boiler. That doesn’t mean I won’t buy things with old, you know, old utilities and stuff like that in them, old mechanicals rather. But, you know, I believe newer is better.

Josh: Fair enough. I’m not arguing for cast-iron. I’m not arguing against it, I’m just putting it out there. Awesome, awesome. Cool man. So let’s move on from the fire round.

Brandon: All right, I guess it’s time for…

The Famous Four!

Brandon: All right it is time for the World Famous, Famous four. These are questions that we ask every single guest here on the podcast, and I want to know your answers. So number one! What is your favorite real estate related book?

James: I’ve actually only read one business book ever and it was Multiple Streams of Income. It dabbled into real estate, but it had a lot of other stuff in there. The whole premise to the book was that, you know, you have to have multiple sources of income so that if stream of income were to ever dry up, you still have the other three or four to rely on. I read that about ten years ago.

Josh: So then, I think I heard you say, BiggerPockets is your favorite real estate book.

James: I think I said something like that too.

Josh: I thought I heard that, I you know maybe I’m off, maybe I’m off. And you answered the business book question, so you know cutting me off at my knees I’m going to have to just skip all the way ahead to, what do you do for fun, man?

James: Well I run my business. We work a lot. We’re still in the newer stages of our business, so it’s kind of hard to fit a lot of hobbies in, but you know, I’m a pretty avid sports fan, Cleveland Cavaliers in particular. Spend a lot of time with that, watching the Browns.

Josh: Shocker!

James: Yeah! I know! You didn’t see that coming, did you?

Josh: By the way, just so you know, I just saw a movie this week called draft day and I don’t know if you’ve seen it. I, well I’m not a hater of Cleveland in any which way.

James: I didn’t get that impression from you at all.

Josh: I don’t like LeBron, but that’s a whole other story. But Draft Day, for those of you who are looking for fun movies. Draft Day is all about football Draft Day, and it wasn’t about guys throwing footballs, it was literally about the strategy of the draft and it was really cool just watching, it was directed by Ivan Wrightman. I loved it. And as a person who is not a huge fan of Cleveland sports, I would wholeheartedly recommend this film which is very big in supporting Cleveland sports. There you go. There’s me having your back in some way shape or form.

James: I appreciate that Josh!

Josh: There you go. There you go.

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

James: Drive, passion. The ability to fall down and get back up. A lot of people I see, they want to get involved in investing because they think that they’re going to sit on a beach. You know, this job, just like any other job is hard work. You’re probably working more than at your 40 hour a week job. I know I work twice as many hours a week as 40 hours. I’ve never worked this many hours in my entire life, but if you love it, it doesn’t really feel like work.

Josh: Right on. Right on. Great stuff man. So where can people find out more about you?

James: Well you guys can find out about me, of course, on BiggerPockets and on our website at www.holtonwisepropertygroup.com

Josh: Awesome and we will link to that in the show notes. James! Thank you so much for coming on the show man. We really really appreciate it! And if you guys have any questions for James you can hit him up on the show notes at BiggerPockets.com/show127 James Wise, thanks for being on the podcast!

James: Thank you guys!

Josh: All right everybody! Big thanks again to James for being on the show. James that was awesome! Since this is my show, I get the last word, and LeBron is going down. The Cavs are going down. Hopefully those of you who are listening, three months, six months aren’t laughing at me for being completely wrong, but you know I’m wishful, I’m wishful. But yeah, thanks again. Great show, lots of cool bits of information and hopefully you guys enjoyed it. As we talked about on the show, BiggerPockets is an amazing place to connect, to find people, to link up, to find deals, to help educate yourself, and if you’re not participating as James suggested in our community on our forums on a regular basis, make it part of your day, make it part of your business I think you’re missing out. I could legitimately say that. What do you think Brandon?

Brandon: Yeah definitely. You could definitely hear that today in James’ story about how he used BP in such a powerful way to learn and grow. So, yeah jump in people!

Josh: That’s awesome! So jump on BiggerPockets. BiggerPockets.com/forums are the forums. Create a free account today! Get involved. Otherwise check us out on Facebook, on LinkedIn, on G+, maybe not G+ because it’s dying, but still do it if you’re still there. And as we said in the upfront, we would love your ratings and reviews. They definitely help us out. So jump on iTunes and please share your feedback with us about how the show is going and we’re going to try and read those going forward on the show. So that’s it! That’s all I got! Brandon, anything?

Brandon: I’ve got nothing, let’s take off. Go eat lunch.

Josh: Awesome. It’s been a pleasure! Thanks for listening, until next time I’m Josh Dorkin, signing off.

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