Discover why so many successful investors support their investment careers with house hacking—and learn from a frugality expert who has “hacked” his way toward financial freedom!
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Josh: Hey, everybody. My name is Josh Dorkin from BiggerPockets.com and welcome to the BiggerPockets podcast, show 3. Today, we’re going to talk with Brian Burke. Brian Burke is from Santa Rosa, California and is co-founder and managing director of Praxis Capital, a real estate equity investment firm. He’s been a real estate investor for more than 20 years, focusing on residential real estate, mostly single-family and multi-family, as well as development, self-storage, and commercial deals.
Brian has completed more than 500 flips and has a current rental portfolio of over 400 residential units. Brian is clearly a sophisticated investor but he’s also a nice guy that can relate to the rest of us. So, without further ado, let me welcome my co-host, Brandon Turner. Hey, Brandon.
Brandon: Hello, Josh. How’s it going?
Josh: It’s great, man. It’s great. This is going to be an exciting show. Brian is one smart guy, isn’t he?
Brandon: He is. I have been looking forward to this show for the past week or so since I first talked to Brian about it. So yeah, I’m excited to get him on board.
Josh: Excellent. Well, let’s do it. Brian, what’s up? Welcome to the show.
Brian: Hey, thanks for having me, guys. I’ve got to tell you, I listened to the first couple of podcasts you guys put out. This is some first-class stuff. I’m really humbled to be here and appreciative of the invitation and thanks very much, guys, for having me be a part of this.
Josh: Thank you.
Brandon: Yeah, thank you. We’re glad to have you.
Brian: Absolutely. This is good.
Josh: Cool, man. Well, listen. Let’s just jump right in and talk about you. So, Brian, you’re in Santa Rosa now. Where’d you grow up? How’d you come up through the ranks here?
Brian: I grew up in Southern California down in Los Angeles County in the San Gabriel Valley and then when I was in junior high school, my family moved to northern California. We settled in in Sonoma County, the beautiful wine country of Northern California. Unfortunately, I don’t drink so that does me absolutely no good whatsoever, but it’s a great place to live.
When I was 20 years old, I got this wild idea to start investing in real estate, of all things, and I’ll tell you, it’s been quite a wild ride.
Josh: Wow, so 20 years old—did you say out of the blue, hey, you know what? I’m going to be a real estate investor. What was the revelation? How did that come to be?
Brian: Well, you know, I had no real estate experience, I had no money, and I had no rich friends so what else to do except for getting in one of the most expensive businesses in creation, right? There you go. And it really started with, I bought a rental house because I had a family member that had nowhere to live and I thought, well, I’m renting my own apartment and I don’t want this person living with me so I guess I could go and buy a rental house and they could rent it from me.
So I managed to convince somebody to sell me this house with getting a finance company to finance the first loan and then the seller did a carryback. So I got into it with absolutely no money down and I learned my lesson on why you never rent to family.
Brandon: I was just going to ask how that turned out.
Brian: Well, I’ll tell you the one thing that’s great about real estate is no matter whatever happens in this business, everything is a learning experience and a lot of people are afraid to screw up. But if you don’t screw up, you don’t learn. And I’ll be honest with you, there’s a lot of lessons that I’ve learned in this business that I never would have learned the full value of those lessons if I hadn’t experienced them for myself.
Anybody can go out there and tell you, watch out for this or do this or don’t do that. But you’re still going to go out and do it and then when you do it and it really bites you, then you say, all right, I learned my lesson. I guess I shouldn’t do that again. So, that was one of those and of course, there’s been many, many more instances like that in the years since.
Josh: You talked about that first deal having a seller carryback. As a new investor, what got your brain around, hey, I’m going to do a carryback. Where did that come from with somebody with no experience?
Brian: What’s even more surprising is they actually agreed to it. Here I am, as a young investor. I’m 20 years old. The fact that they actually said yes was incredible to me but I guess they won’t say yes if you don’t ask.
Brandon: And just for those who don’t know, what exactly is a seller carryback?
Brian: What we did was we go a finance company to do the bulk of the loan and then the seller carried back a second loan. In other words, they said okay, let’s just say the purchase price is $100,000 and the finance company provides $80,000 as the capital stack. Then, the seller comes in and says, I’ll make a loan for the other $20,000 and you can pay me back later.
Brandon: Okay, yeah, that makes sense.
Brian: It was a pretty simple process but it was a great way to get in. That was supposed to be a rental and it was for a while and I sold it eventually and lost money on it, and of course, you have to do that in real estate, too, in order to really learn how to get into this business. And then I decided, you know what? This rental thing is kind of hard. I better wait until I learn how to do this better before I do this again so I’m going to get into the flipping business. So then I got into the buying and fixing and reselling houses as my next venture.
Josh: Where did that come from? We didn’t have the house flip shows back 20 years ago so what inspired you to actually do that?
Brian: Well, it was the only way I could think of in order to really make any money. You can buy rental houses and make $100 a month or something if you’re lucky or in my case, you lose money. But I had the same golden dreams as everybody else. I wanted to make a ton of money and everybody says, it’s got to be easy. Anybody can do it. You don’t need any money or any free time. You can just do this in your spare time with no money at all and it’s a simple thing to do, right?
Brandon: That’s true. Well, that’s what they say anyway.
Josh: And you pulled that off, right? About two hours a week, you were flipping houses, right?
Brian: Yeah, absolutely. You know, it’s kind of interesting. When I first bought that first place or I first got into studying real estate as a business, I was working in a grocery store and I was making about $12 an hour. I didn’t have any money at all and I had these wild dreams that I was going to get into real estate, so I got a partner and I thought, this is going to be my key. Because not only was I 20 years old, I looked 15. So I thought, there’s no way I can approach a seller and say, I want to buy your house. So I got a partner that was older than me and that was his only qualification so I thought that gave some credibility, right? I think it’s really important that you’ve got to pick your partners right, first of all.
But anyway, I tried to get in and make a break through that way. That didn’t get me very far and I still had to pay the bills. So grocery store wasn’t going to do it for me so I ended up getting into—at first, I thought I was going to be an air traffic controller, so I took an air traffic controller test and missed it by about half a point.
Then, I thought, and I’m so glad I didn’t get that, by the way. I would not be where I am today and I’ll tell you, sometimes your failures are your biggest boosts. Let me tell you. So then, I decided to get into a law enforcement career. I went into law enforcement and the great thing about law enforcement was, I was working evenings and weekends, which left me essentially the business week, the Monday through Friday 8 to 5 part as free time. So that was a huge advantage for me as opposed to working a 9 to 5.
It gave me all week long to go out and chase foreclosures and go to foreclosure auctions and learn and figure out how all that process works and go down to the county recorders office and learned how to research titles and just all the things that are required to build a foundation of knowledge in this business. So that was great. Then I decided, it’s time to pull the trigger and start flipping houses.
Josh: Hey, so back then, before Nixon was in office—
Brian: Hey, I’m not that old.
Josh: But you did start at a time that predates the modern internet. So I think it’s kind of interesting, maybe to even look at what you were doing back then versus what people do today and are there any tactics and techniques that you were using back then that people stopped doing but which are really effective? Is there anything that comes to mind on that?
Brian: Yeah, there is. When I first started buying houses at foreclosure auctions which wasn’t my first or second deal—this was a little bit later on—there was no such thing as the internet as it exists today and I had to figure out how I was going to learn all the pieces of information that I needed to learn about a house that was going to sale at a foreclosure auction because there’s just no information given out by the trustees that are putting on these sales.
The only way that I could do it was I had to go hi-tech. so I taught myself how to write computer code and I wrote my own computer software that enabled me to take all of the information that came from all these various sources and compile it into one central location so that when it was time for me to go to an auction and bid on a property, I knew everything that I needed to know about that property, all the information was stored in a very methodical way right in front of me so that I could make a quick and accurate decision. And that was a real important thing.
Now, they’ve got internet subscription-based websites that keep track of some of this information for you which I still don’t use. I still do it old school. But I’ll tell you what, and this is kind of interesting. This has to do with you guys at BiggerPockets. I joined BiggerPockets as a member, I don’t know, maybe about six months or so ago. I had no idea what I was going to do with it. It looked interesting. There was a lot of interesting information. I thought maybe I could give back and help some people along.
But man, I’ll tell you—there was nothing like this in existence when I got started. When I was trying to figure out how to do this, I had to read books and figure it out and trial and error and if I had a resource like what you guys have developed, I would be a lot further along than I am today.
I’ll tell you, I struggled in this business for ten years trying to get it right before my business really look off so my hats off to you for what you guys have been doing.
Brandon: I guess, I’m an example of how that did work when I first started. I know nowadays, I’m kind of the cheerleader for BiggerPockets but when I first started, I found BiggerPockets by searching Google, for what to do when a tenant doesn’t pay. Because that was the question I had. That helped me through that situation and that helped me through a million more since then.
BiggerPockets, I credit them as my number one reason for everything I have today because anytime I had a questionable anything that I couldn’t overcome, I just went on the forums and asked it, so I’m not just part of BiggerPockets. I am somebody who I am who I am because of BiggerPockets.
Brian: That makes sense. That makes complete sense.
Josh: Well, thank you. That means a lot and if only I were a little older or something. Hey, listen, I started this site because I was screwing up left and right and I thought there needed to be a place where I could get help. I mean, that’s where it came out of. So, it sounds like you’ve got—you’ve literally explored every different avenues. You’ve flipped, you’ve done the auctions, foreclosures—you used probably every strategy, I’m guessing. What strategy have you found to be your least favorite, actually?
Brian: My least favorite strategy is actually going and dealing directly with sellers. When I first started in this business, I was doing the old postcard mail out and waiting for the phone to ring and knock on doors of foreclosures and that kind of thing, just trying to scour out for a deal. And man, I struggled with that and I just couldn’t get any traction with sellers and when I finally did, I got really close on a couple of deals where we were all the way to the point of signing a contract and it’s amazing to me how so many people who are in a distress sale situation just never really can sign on the dotted line and make the decision to do something about their situation. And I had a couple of deals get really close and then just completely die off because the sellers just went totally dark.
So I came to the realization that I had a couple of problems. One was that I was having a lot of trouble getting through to sellers and even if I could get through to sellers, getting that deal to close. So, I came up with the strategy of buying at auctions and I really just did it out of desperation because it was the way that nobody could say no to me. I could go to the auction and I could either buy the house or not buy the house. I didn’t have to get permission from the seller. I didn’t have to get them to agree to anything. I could just make it happen on my own and it was the only way that I could actually take control of the situation and actually make something happen.
Brandon: So Brian, how did you fund your first couple of flips then? Or your first couple of projects. How did those come about?
Brian: My first flip was one of those direct from the owner deals that I told you I wasn’t a big fan of and it was the only one where I got it to work. And it was a deal where the homeowner was in foreclosure. They were back on their payments so I went in. I had no money but I offered them $1500 to deed the property to me and I took it subject-to the existing financing. So I would take a cash advance out on a credit card, pay the owner the $1500 and then I took another cash advance out on my credit card to pay the back payments on the loan that the former owner was behind on.
Then, I used my credit cards again to finance all the fix-up and all that stuff and then I sold the house and man, I’ll tell you, the cost of that financing, it is steep. When it was all said and done, I made a whopping $1500 on that flip. But I’ll tell you what, it wasn’t about how much money I made on the flip. It was about the fact that I’ve done one. I had no resources to start with and I actually can now say I’ve flipped one of these houses and made it work. I’ve proven the concept. Now, I’ve used that as a building block so that when it’s time to go and do the next one, I have a bit of a track record.
Brandon: When I first started, I actually read a book that said to do that. That was okay. They said go get credit cards and just max them out and use it for the flip because you’ll make back much more than that. So I remember thinking, oh, okay, so I went to Home Depot and I opened up—I think I had four or five Home Depot cards at the time that I financed one of my early flips with. And then that flip didn’t sell and it didn’t sell and it didn’t sell and I ended up holding that house for eight months before refinancing it and paying off most of those credit cards, but that was a terrible, terrible learning experience for me.
I’m kind of in the same boat as you where I say I did it. I made it work and now it’s a cash flowing property but that put me behind quite a bit in my financial independence, was because of those credit cards.
Brian: But you know what? You learned a lesson and every lesson you learn costs you money. I don’t care if you go to Harvard or Yale or you do it on the streets of real estate school—every lesson will cost you one way or another. So consider that to be your student loan.
Brandon: Exactly. I tell people it was cheaper than college. It was hard but it was organic learning. I just wrote that in the forums the other day. I think people often want a proven method and that’s why they go to the gurus. They want a this is how it’s done. I think the best learning is organic. It’s good, it’s bad, it’s ugly and it’s organic but it works that way.
Brian: I was just going to say, if people want to know how it’s done, it’s done by getting out there and doing.
Josh: Okay, that said, what would you guys say to some guy starting out who’s working a grocery job who’s got maybe one credit card and he wants to flip houses. Are you going to tell him to go put all that debt on his credit card to flip that first house or are you going to tell him to hold out until he builds a little bit of a nest egg, potentially? What do you guys advise? We may disagree on this one.
Brian: We might. I advise people that you’ve got to do whatever you’re comfortable with your tolerance for risk. When I did, it was in my early 20s. I didn’t have a lot of tolerance for risk because if I lost a lot of money, it was going to be really tough to convince my wife to do this again. so I had to be really careful and make sure that I could do a deal where I knew that the worst case scenario was breaking even and that meant that I had to sift through a lot of deals to get there and there were a lot of deals that didn’t get done because of that. But everybody has to take their own risk in mind when they set out to do this.
I can’t tell a guy that’s $50,000 in credit card debt to go make himself $80,000 in credit card debt to do a flip if he doesn’t know what he’s doing, but I’ll tell you what, if you don’t take risks in life, you don’t get the rewards in life and sometimes you just got to do what you’ve got to do.
Josh: How about you, Brandon?
Brandon: So, I would say a couple of years ago, I probably would have said yes, go ahead and do it. Today, I am a little bit more conservative and I would say, rather than using a credit card and spending the hundreds or thousands and the risk, I would find a partner instead. I would find somebody who’s got good credit, who’s got some money and who wants to go 50/50 on a flip.
That’s what I would advise somebody if they’re saying I’m going to go use a credit card to flip. I would say, if you’re going to start out, why don’t you go find a partner instead or maybe even another investor where you’ll do all the work and they’ll help you cover part of it. That’s where I would go today. I’m a little more conservative.
Brian: Knowing now what I know and having done what I’ve done, I agree with you 100%. That is the way to do it. But here’s the rub, guys. When you go out to talk to a private investor to back your deal, what’s the first question they’re going to ask you? What have you ever done? What is it that makes me think that I can give you my money and I’m going to get it back? So sometimes you’ve got to take that risk yourself on the first one to be able to go to that private investor on deal #2 and say, look, here’s what I did on my first one. Look how successful this one was. I want to do one with you and you can share in the success and I agree with you 1000% that’s a better way to do a deal.
Every deal I do now I’ve done that way. I don’t cash advance credit cards. I don’t pull money on my house. I don’t do any of that stuff anymore. But I don’t because I don’t have to. When I’m young and I’ve got no deals under my belt and I’m trying to get into this business, I did what I had to do to get to where I am today. Would I want to do it again? Absolutely not. Would I advise somebody else to do it? I say you’ve got to do what you’ve got to do sometimes. But it’s a risk you have to decide whether or not you’re willing to take.
Brandon: I agree. It’s easy for me now to say use a partner but that’s because I don’t have a problem anymore finding partners to work with because I have that experience but you’re right. Back in the day, I don’t know too many guys that would have jumped to work with me because all I had was what I had read and all I had was the books I had.
Josh: Let’s get into that in a second. I personally am way more risk averse today than I was with family and kids—everything changes. If somebody asks me, should I put it on credit cards, I would actually say flat out no. I would say find another way to go. I would say, work your job until you’ve got at least the resources or until you’ve paid down your debt. I’m just a lot more conservative. I don’t think that your advice is bad, because again, it has to do with the risk tolerance of the person.
So you guys—we’re talking about partners and we’ve talked about it a couple of times. Let’s get into that and let’s talk about finding that partner and getting to the point where you first approach somebody to being your partner. How do you go about doing that? Clearly, you need some kind of experience. Clearly, you need to have proof of concept, right? I’ve been successful on 1, 5, 10, 20 deals. Come in, let’s do a deal together. But what’s the approach? Obviously, you go out and you find people you know who have money but how does that pitch go?
Brian: Yeah, you’re exactly right. I mean, that really is it. I’ll tell you, when you start to get big, and I don’t know if I would call myself big yet but I think it’s a fairly sizeable organization we’ve put together here. You find yourself spending a lot of time raising capital. Probably a third of my time right now is spent raising capital, and it’s tough. I was out yesterday, in fact. I was doing an investor presentation with a client of ours.
He’s an investment advisor at a multi-family office, and for those of you who don’t know what a multi-family office is, basically it’s an investment advisor that works for ultra-high net worth clients, typically net worth over $10 million. And they help them manage their money and make investments and in some cases, these outfits are full service. They even pay their bills for them.
So I was out doing a presentation with this one group that had invested a couple million dollars with us and they were bringing in more clients to invest some more and we were talking—somebody in the group had asked me a question about deal flow and that kind of thing and I said, look, our problem isn’t with deal flow. We have plenty of deal flow. Our problem is in raising capital. Raising capital is difficult and if our organization has any weakness at all, it’s in raising capital.
And the investment advisor chimed in and he said something that I thought was really profound. And this guy, he really dug into our business and did a lot of due diligence on us and he’s a really sharp guy. He says, do you know why you’re having a tough time raising capital? And I said, why is that? He said, because you don’t overpromise.
I thought, you know what? That really is interesting. A lot of people raise capital by saying, do this deal with me. I’m going to make you a 50% return or I’m going to double your money in six months. That’s like the guru approach to raising capital. I mean, a guru has to overpromise to sell boot camps, right? They have to say you’re going to make a lot of money. It’s going to come quickly and easily. You can do it in your spare time. Give me $30,000 and I’ll come show you how to do it. Well, that’s an overpromise. Investors typically get overpromised all the time by investment sponsors. So if I can say anything on how to get investors, one is just be honest with people. Be open with your investors. Tell it like it really is. Don’t overpromise. Sell yourself, but sell yourself based on your track record. Show them what you have done so that they can see what you can do instead of always showing them this is what we’re going to do.
So that kind of dovetails back. You’ve got to be able to build that track record. The more track record you build, the easier it will be for you to raise capital. The bottom line is you’ve got to be relevant.
Josh: I want to add one more thing to that, too. Knowing the lingo is huge in real estate. When somebody comes to me and tells me they want to flip a house because the monthly depreciation is going to fund their next deal, I’m like, that doesn’t make any sense whatsoever. They don’t know what they’re talking about. I immediately know they don’t know what they’re talking about. They might have meant to say cash flow or appreciation. I mean, not knowing the language—so for a complete beginner, I would start with that. Start with what do the words actually mean? You can get that from interacting with people who know what they’re talking about.
Brian: Yeah, who was that that said that? Was that Kiyosaki in his book Rich Dad, Poor Dad where he was talking about expanding your vocabulary?
Josh: I think so, yeah.
Brian: And how your vocabulary is—if you want to change your situation, change your vocabulary. Learn the language of the business that you want to get into and when you go out there, you can sound like you’re smart. And really, a lot of this business is sounding like you’re smart. The problem is, you’ve got to back it up.
Brandon: Fake it 'til you make it, right?
Brian: You’ve got to back it up. You’ve got to be able to produce those results that you’re promising you’re going to produce. Otherwise, you’re going to be in this business of perpetually capital-raising to replace investors that didn’t get satisfied by your last deal who go walk off and find somebody else to work with. Now, you’ve got to go back out, repeat the whole process again to find another investor. One of the things that I’m most proud of is we’ve been able to keep all of our investors. Nobody leaves once we come in because we produce for them and that’s what people have to do. If you want to raise capital successfully, produce for your investors. That’s tip #1.
Tip #2: you’ve got to be relevant. You’ve got to get yourself out there and you’ve got to mean something to people. I’ll give you one last tip on the freeway to raising capital that I think most people really need to take into account—we’ve raised more capital from investors that have come to us after reading articles about us in the newspaper. You’ve got to get in the press. You’ve got to do something newsworthy. You wonder why Richard Branson gets in a hot air balloon and sails all the way around the world? It’s not because he’s crazy. It’s because he knows that that publicity means something and when things like that happen, people pay attention. And if they’re not paying attention to you and you’re not relevant, your phone’s not going to ring and you’re not going to get those investors.
Brandon: That’s great. All right. I’m assuming then that today you’re paying for those deals with your investors, correct?
Brandon: Okay, great. How does that work? So you’ve got investors. You’ve got deal flow. How do you make it happen? How do you put it together? What do those packages look like? What are we doing here?
Brian: Okay, well we’re getting a little bit into advanced class investing, so let’s build up a couple of building blocks, then we’ll graduate. To begin with, the first thing you’ve got to do is you’ve got to go out and do a few deals so that you can show people that #1, you’ve got the ability to get deals and actually make something happen, and #2 produce your investors. Once you’ve gotten to that stage, then you can move to the next level, which for me, what it was was establishing a fund.
Here’s how I did that. When I was working I law enforcement, I was going out and using credit cards and using a person that we knew that had a few bucks to kind of partner with us on a deal. That was the next step after credit cards. And I did about a dozen or so deals. Then I graduated to using private money financing. And after getting about a dozen or two dozen deals under my belt, I said all right. I went and said, I’ve got this down. I’m going to go full time. I’m going to quit my job and I’m going out on my own. I went into the police station, and I said, guys, I quit. And next Tuesday, at the senior center, I rented out the room. I want all of you guys to come down there and I’m going to tell you what I’m doing in real estate.
And that room was full of guys. And I said, look, here’s what I think is going to happen. Here’s what I’ve been doing. Here’s what I’ve done. Here’s my results. I’ve got a plan. Over the next five years, I want to buy about ten houses a year, fix them up, and resell them. I’m going to split the profits with you guys if you guys will invest in a fund. I walked out of that room with $500,000 and 28 investors that all had guns.
So if anything is going to motivate you, it’s going to motivate you to know you cannot screw this up. So I did a little Reg-D offering. I had my attorney draw it up, put these guys into it. I had essentially a $500,000 expense account that I could go out and use to buy houses at foreclosure auctions. And by now, I had done a few. I had done them with the credit cards or whatever else. And now I started doing about 15-25 houses a year using that fund. I had full discretionary power to spend and I produced for these guys.
Over that whole five year span, they netted in their pockets over 20% annualized return on their investment. They did well. Almost all of those investors are still with me til this day. So that’s how you grow from the very minute level to the intermediate level, and that’s what that was. That was the intermediate level. The graduate class comes after.
Josh: So you approach these guys. These are people you knew. You weren’t out soliciting people out of the blue, because if you were to do that, what would happen?
Brian: Yeah, that’s right. Now, you’re going out and you’re soliciting for unregistered securities. You’ve got to know what the securities laws are. Before I did this, I went to my attorney and said, this is what I want to do and he said okay, if that’s what you want to do, these are the guidelines you have to work under. It has to be 35 or fewer investors. It has to be people that you’ve had a previous personal or business relationship with. You can only raise so many dollars. So I knew what my guidelines were.
And people oftentimes would get so tight into, what are the rules and what do I got to do and what are the steps? They forget that what they need is a concept. Let the attorney figure out the steps. Don’t try to save the costs and don’t overanalyze it. Just go find out what the rules are for what you’re trying to do, put it together and go out and do it.
Brandon: That’s great. But that said, you do need to understand at least the basic laws and basic rules because if you were to go out and hit up random people on the streets and say, hey, I’m starting this real estate fund, come on in, you’re breaking the law.
Brian: Absolutely correct don’t do anything without running it by your attorney first. Don’t try to save $250 on an attorney consultation to try to go out and do this on your own.
Brandon: Yeah, that’s excellent advice. I actually need to—I said that last time and I called my attorney and I have, hopefully, appointments set up this week. We’ll see. You guys have to keep me accountable on that.
Josh: Yeah, Brandon and I have been going back and forth on that and I’m kicking his butt a little bit on the, you’ve got to get your lawyer to respond. But we all deal with that. I’ve been trying to deal with my lawyer for a week now. And it’s hard to get him on the phone so that’s the price.
Brian: I’ll tell you this, when I approach an investor that’s looking at investing, say, $10 million with our company, one of the first questions that they’ll ask is who’s your law firm? So if you don’t have an attorney and you don’t have a relationship with one, you’re not going to get to that level. Guys that are playing at that level want to know that you’re a professional and you’ve got a law firm in place that’s helping you put your offerings together. If they don’t, then they don’t want to deal with you and you might as well start when you’re first getting going and get started with an attorney that can help you with that.
Josh: That’s great. Well, I want to take it back a little bit because we kind of skipped from advanced class to beginner’s class to—why don’t we circle back around to something that I think a lot of people are going to find exciting and we’re going to call that your Homerun Flip.
Brian: The Homerun Flip.
Josh: Yeah, man. So for those folks listening, if you go to BiggerPockets.com/Show003 in our show notes, we’re going to have a link to an article—I think the title is Homerun Flip, but we’ll point to it.
Brian: The Anatomy of the Grand Slam.
Josh: The Anatomy of the Grand Slam. There it is. There’s a picture of Babe Ruth on there, yeah, Yankees. I’m a Mets fan, but Babe Ruth, come on. Anyways, let’s talk about this, man. You profited $800,000 on this flip. That’s quite a profit and I know the post goes into it but maybe you can talk about it a little bit.
Brian: This was a flip of a multi-family deal. Originally, it wasn’t intended to be a flip. We were going to buy this and hold onto it for five years. It just did so well that we could actually get a higher IRR for our investors if we exited it early rather than carry it out to the five year term.
But essentially, it was a deal down in Texas. It was 54 units and I got a call from my property manager saying, hey, there’s this apartment complex that was taken back in foreclosure. The lender’s really anxious to unload it. They were in escrow for somewhere near $1.8 million. It just fell out. They lowered their price to $1.3 million. It’s in a great spot and it has a lot of potential. You really need to check it out.
And I tell you what, that right there is why you use property management firms. Because if you’ve got the right one and they know what’s going on, they’ve got their finger on the pulse of the market, you can get a lot of information from those guys. I’ve got to credit this one to our property manager, for sure.
The story’s all in there—I don’t know if you want me to rehash the whole story or you think people need to go back to the site and they need to check out the article and they’ll see how it all went, but this was a deal where we financed it using private investors—reg-D offerings. I had no money in it myself but our investors did awesome and I think so did we.
Josh: I think the thing I found most interesting in the story was your point about not budging and not negotiating against yourself. That, to me, was one of the best pieces of advice I had seen, so can you go into that a little bit?
Brian: So yeah, this is the thing that’s happening a lot today. Guys that are out there making a lot of offers on REOs, they know exactly what I’m talking about. Now, the biggest thing that you’ll see on putting in an REO offer is they always come back and they want you to give your highest and best offer. And sometimes, you’re bidding against yourself and sometimes you’re actually bidding against people who have legitimate offers in. but in this case, there really was nobody else that was son this deal for whatever reason, I’m not quite sure why.
But I just wasn’t going to budge. I had to stick to my ground. I knew it. And this is kind of always the way I operate is when we’re buying houses at auctions, it’s kind of the same thing. We have a strike price. We have a limit of where we’re going to go. And when we get to that limit, we’re out. We’ll wait for the next one. So when the broker kept calling saying can you come up? The answer is no. this is our price. We’re in or we’re out. It’s your call. And if we didn’t get it, we would have moved onto the next one. Now, looking back, I would have been pretty sad if we didn’t get it.
Brandon: For sure, yeah.
Josh: And that’s a particular good lesson, I think, for new investors. I think a lot of the times, they get caught up in the hype and the excitement of potentially bidding or wanting that property, getting emotionally attached. Your point about sticking to your strike price and not budging and walking away, I mean it’s incredibly important.
Brian: Guys, this is the Grand Slam Flip, right? But let me tell you—this business is not made up of a series of grand slams. This business is made up by going out and trying your best and making some base hits and one day, you’ll hit a grand slam. And I’ve hit my share of strikeouts. And I’ve lost money. In 2008, when the economy cataclysmically collapsed, I took a really bad haircut and I lost a few million dollars of my own money and I know exactly what it feels like to really get hurt in real estate by making mistakes.
I heard Marty’s podcast about his story in podcast #1 and I can really relate to what he went through. I went through the same thing in the market collapse. I know what pain feels like and let me tell you, when you’ve felt pain in the real estate market, it wakes you up, it causes you to pay attention and be careful in doing what you’re doing. I’m a full believer in expanding your comfort zone and growing big and getting into new things and taking some risks. I think you have to do that. But let me tell you, if you do it carelessly, it’s going to come back and bite you.
And those student loans that Brandon and I were talking about earlier with credit cards? They can get really pricey.
Brandon: Yeah, they can.
Josh: What piece of advice would you give to somebody starting out other than put it on your credit card? What would you say, over your career, what’s that one golden nugget that you say any new investor just can’t survive without?
Brian: That’s a tough one. I think one of the things is you’ve got to go out there and give it your best and despite whether or not you’ve had challenges and setbacks, you have to keep going and you can never give up in your dream and you’ve got to have a passion for this business. I do what I do because I love what I do. If guys are getting into this business because they saw the guru pitch and they think that you can work three hours a week and make $100,000/month. If that’s why you’re in this business, you will always have challenges and obstacles in your way.
When I come to work every morning, I don’t feel like I’m coming to work. This is fun for me. I like what I do and I enjoy it and if you don’t, you’re never going to get to the next level. You’ve really got to have a love for it, and that way, when you do fail, you can get back up on your horse and ride again because you still love what you do. The other thing that I think is really critical is having a support structure behind you.
I’ve got a very supportive spouse. Now I’ve got you guys and I think that having that to fall back on is vitally important.
Josh: Very cool. I want to actually look at your whole business model right now, as a whole. If you don’t mind, you talk about doing a lot of flips at one time. You say, dozens and dozens, probably—how many do you do a year?
Brian: About 100 to 120 flips a year.
Josh: I remember you saying that and I thought that was incredible. I struggled with doing one or two at a time. How do you do that and how does that look in your company?
Brian: Well, I’ve got 25 employees and I think that makes a big difference. There’s no way I can flip 100 houses a year by myself. Really, it was organically grown. I started out in this business doing one flip at a time like anybody starting out—if anybody starts out doing ten flips at once, they’re probably going to crash and burn. So I built it from a one at a time business to a two at a time business to a five at a time business. And I carry it at about a five at a time business for three or four years, and then I actually scaled back.
In ’04, ’05, ’06, I saw the light at the end of the tunnel. The problem was, it was a train and I had to get out of the way. So I was kind of in retrench mode at that point in time. I scaled my flips all the way back to four flips a year during those peak years when it was big on TV and all that stuff.
And then after the market crashed, while I had stopped flipping, that’s when I decided to go out and do other things that I had no experience in because I knew I couldn’t make any money in flipping and that’s when I took my haircut. So stick to what you know would also be one piece of advice.
But anyway, after the market collapsed and I realized that the market can giveth back what the market taketh away, I knew I had to really get going and the only way I was going to bring myself back was to get busier. So I started flipping again in 2008 pretty heavily, about four, five, six at a time, and then I knew—I saw what was going on with the foreclosure volume. I knew that there was going to be a huge amount of real estate coming along in the foreclosure pipeline and it was going to create a massive opportunity and I had to figure out a way to take advantage of it.
And I was a solo operator. I had one employee that was my bookkeeper and I had one independent contractor that was my buying agent and project manager and I knew I had to grow. So I was looking for a partner and looking for the right partner and I realized you know what, even if I have to give up half my business to a partner that can bring in more, then what I can do by myself, I’m actually going to make more money between the two of us with me only getting half than me doing it all myself.
So coincidentally, I met my current partner now. He was the CEO and founder of one of the largest building companies in our region. And he was seeing the same thing that I was seeing in the real estate market, that there was no opportunity in building houses anymore. So he was scaling back in his home-building operation. It was the only independently-owned homebuilders in our area to survive without losing all of his money and I realized that we could take his ability to build houses in a production line fashion—he was doing about $75 million a year in sales at the time—and adapt that into a production line fashion in house remodeling, which is easier than house-building.
And that’s exactly what we did. We took some foremen and superintendents that he had with his firm and taught them how to flip houses and we built what we have now.
Now, we’ve got a team of 25 people, about half of them are in Acquisitions department and about a third of them are in the project oversight department and then there’s all of us back office people.
Josh: Wow. Okay. That’s incredible. So you scaled this one-man operation up. In doing so, certainly you must have made a mistake or two. Are there any other bits of advice you’ve got for folks in actually scaling?
Brian: In scaling, you’ve got to scale measurably. We didn’t make any mistakes that I can say is something that we shouldn’t have done. Everything that we’ve done is something that we should have done even if it didn’t go the way we planned. You don’t get to where you are without stumbling along the way just enough to correct your course of action in making who you are. No major mistakes, but I’ll say that what we did to avoid the major mistakes is we expanded methodically. When we expanded our geographical regions, we expanded it one at a time and we got entrenched in that region before we would go and expand in another region and another region.
Some people, what they’ll do is they’ll try to grow too quickly and not be careful about how they set up their operations. I think we did really well in avoiding that. Fortunately, my biggest mistakes were in ’06, ’07, ’08 when I got out of house flipping. When I stay in house flipping, house renting, and multi-family, I’m just much more comfortable. When I bridge out into other things, I get taught why you only bridge out into other things when you know what you’re doing.
Brandon: That’s great advice. You know, Brian, I like talking to you a lot because you are where I want to be ten years from now—the multi-family, the things that you do, that homerun flip, the Grand Slam Flip is exactly what I want to do and the kind of investing I want to get into so this has been awesome.
But before we wrap it up, we do have some questions that we like to ask everyone at the end, so Josh, why don’t you start that off?
Josh: Sure. First off, where can people find more information about you? Presumably, you’re on BiggerPockets—we’ll point people in the show notes—BiggerPockets.com/Show3 , to your BiggerPockets profile. Are you also on Facebook, Twitter, or LinkedIn, anywhere else that you’d like to link up with people?
Brian: Hey, you know, I’ve got to tell you guys I’m still old school. When I started this business, I didn’t have the internet and I still haven’t quite figured all that out. You can reach me through BiggerPockets.com. I read all the forums and I answer people’s questions and I’ve got the article in the blog now, which is great. There’s of course our company website, PraxCap.com. You can google me on the internet or google Praxis Capital and read on all kinds of stuff that we’re up to. If you want to connect with me, just shoot me a message over at BiggerPockets.com.
Brandon: That’s great. Great. What is your favorite real estate book?
Brian: My favorite real estate book—that’s a tough one. I think everybody says Rich Dad, Poor Dad—I love that book but I like the books written by David Lindahl. I think his books are good. There’s some good content in there. I liked Donald Trump’s The Art of the Deal and The Art of the Comeback. I especially can relate to The Art of the Comeback and The Art of the Deal is a good old one.
But I’ll tell you one of the best books that I think is out there and it was written in 1937 and it’s called Think and Grow Rich by Napoleon Hill. It’s a great one that doesn’t get mentioned a lot, but a definite must-read.
Josh: I just bought that the other day—I haven’t finished it yet but I started it.
Brian: Well, you’ve only had about 50 years.
Josh: How about your favorite business book?
Brian: Favorite business book. Well, I’ll tell you the one I’m reading now, which I’m actually finding really interesting—it’s called Real Leaders Don’t DO PowerPoints. As I said, a third of my time now is spent in raising capital and it’s funny when you watch presentations, so often these presentations are so boring, it’s one slide after another of a guy reading bullet points and you just never want to present that way and learning how to give a good presentation, I think, is critical to growth. So far, this book has been pretty interesting in helping to shape that.
Josh: I’m going to pick that book up now. It sounds awesome.
Brian: Yeah, absolutely. You’ve got to check that out.
Brandon: Excellent. How about hobbies? I understand you might be a bit of an aviator.
Brian: Yeah, real estate is my business, my hobby, and my passion. But I’ll tell you, my love, though, when I’m not here doing real estate is definitely aviation. I’m a licensed pilot. I got my license, actually, when I was in high school. I used every paycheck I got working in the grocery store to get my pilot’s license and I just love flying. I’ve been flying now for 26 or 27 years or however long it’s been. And now, the great thing about real estate is it’s enabled me to do the things in life that I would have never been able to do otherwise and now I’m learning how to fly helicopters which is a total blast.
Josh: Yeah, that sounds awesome. I used to be afraid of flying but now more and more, I want to get my pilot’s license sometime. But that’s very cool.
Brian: Yeah, it’s a lot of fun!
Brandon: Last question I got for you. I ask this to everybody. So, in our industry, you’ve seen a lot of people come and go. I’m sure you’ve seen a lot of wholesale flippers come and go quickly—they read the guru stuff or whatever. What sets apart the people I think, like you, who really makes this a business and make this big—the top performers. What sets them apart from the people who come and go, in your opinion?
Brian: I think a lot of it is expectation management. Some people get into this business with the expectation that it’s easy, that there’s huge amounts of profits. It’s not. But I think the successful people understand that it’s a lot of hard work. They’re in it for the right reasons. They know that they’ve got to put in their time before they make it to the big time, so to speak. And they’ve got to have a passion for it and love what they do and never let setbacks stop you from accomplishing your dream. Because if you do, you will end up doing something else that isn’t real estate that you probably don’t like. And you might even give up right before you were about to hit your Grand Slam Flip.
Josh: That’s great advice. Well, Brian, listen, it’s been an absolute pleasure. This has been fantastic. Some very high level stuff and some great tips for folks starting out, so fantastic. Again, for anybody listening, this is BiggerPockets podcast Show 3. You can find our show notes at BiggerPockets.com/Show003. Also make sure to check our Facebook page out at Facebook.com/BiggerPockets.
And lastly, if you’re not a member of the site, guys like this, Brian Burke, are on the site every day giving great advice, feedback, helping out new guys, helping out sophisticated investors. People are coming together doing deals and doing business every single day on the site, so please, take a chance, take a moment and join us at BiggerPockets.com. www.BiggerPockets.com. Brian Burke, thank you so much.
Brian: Thanks for having me, guys.
Brandon: Yeah, thank you, Brian.
Josh: And that was today’s show, folks. I hope you enjoyed our talk with real estate investor Brian Burke as much as we did. Really quickly, before we go, we just wanted to say thanks to everybody for helping making BiggerPockets a top 10 business podcast in all of iTunes last week. This is truly an honor to be one of the most listened-to podcasts in the entire world.
As of now, we’re up to 49—that’s 49 five-star reviews in iTunes. Thank you to everybody who’s gone to iTunes and left us a review. We couldn’t be where we are without you guys, and if you haven’t left us a review yet, please, please help us out. Take a minute. Jump onto the iTunes player and just leave some feedback.
Every single review, you guys help us to climb in the rankings, get us more visibility so we can help more investors learn and grow in real estate without worrying about the upsell and all the pitch and all the nonsense that you get elsewhere. So please do take a minute to leave a review there.
Finally, just remember all the information talked about on this podcast can be found in our show notes at BiggerPockets.com/Show003. This is Josh Dorkin. Thank you so much again. I’m signing off.
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