BiggerPockets Podcast 030 with Kenny Estes Transcript

Link to show: BP Podcast 030: Conservative Real Estate Investing and Starting Out with Kenny Estes

Josh: This is the BiggerPockets Podcast, Show 30.

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Josh: What's going on everybody? This is Josh Dorkin, founder of BiggerPockets and your host here on the BiggerPockets podcast. I am joined by my wonderful podcast co-host, Brandon Turner. You know him, the man, the myth.

Brandon: The legend?

Josh: No, not really a legend, but.

Brandon: Oh not yet.

Josh: What's up? What's up Brandon?

Brandon: Hey, not much. What's up with you?

Josh: Yes, you know, doing alright, man. Doing alright, excited about this show we've got to come. I think we're going to blow some brains with this one.

Brandon: I believe so, so put on your thinking caps.

Josh: Yes. Definitely.

Brandon: Sit in your thinking chair. I have a thinking chair.

Josh: Do you really?

Brandon: I do. It's like this awesome, bright yellow, like old-fashioned, like 1800s chair, that I sit in and think.

Josh: Is it in a corner and you were this cone.

Brandon: Yes.

Josh: Hat on it and face the wall?

Brandon: I don't wear the hat, but it is in the corner and I sit there and I think. It's awesome.

Josh: Nice.

Brandon: I'll put a picture or something on Twitter some time.

Josh: Yes, get a picture of you and the thinking corner.

Brandon: Yes.

Josh: The dunce cap on it. Well, so we do have a great show. We're very excited about it, and we're also very excited that this is show 30. The podcast continues to chug along and we continue to bring you guys some pretty cool guests. It's been pretty exciting to watch the show grow. Thank you to everyone for listening. We definitely appreciate it. We're going to move on to today's.

Josh & Brandon: Quick tip.

Josh: Quick Tip. The quick tip of today is BiggerPockets Wizzy Wig. You can now easily post photos, YouTube videos and format more easily your posts on the BiggerPockets forums. Definitely, jump in and check that out. We've totally rehashed how our posting system works and we actually redesigned our blog Wizzy Wig as well, to match that of the forums. We're going to start having contests on the site, things like before and after transformations and other cool stuff. Definitely come check it out, maybe test it out with a photo of your own that’s one of your properties or you know, the ugliest house in the neighborhood or I don't know, anything like that. Jump on and give that a look.

Brandon: Cool.

Josh: For today's show, we are talking with a guy named Kenny Estes. If you are not familiar with Kenny, he is a regular contributor on the BiggerPockets blog. He's got sometimes-controversial things to say and in fact, we have a bit of a mini little debate in this episode to come.

Brandon: Josh was throwing chairs.

Josh: I was angry. I'm angry! Kenny started investing in real estate at 18 years old. Yes, now I'm throwing chairs. I'm like, "What 18 year old has some nerve to start investing at 18?"

Brandon: Yes, weirdos.

Josh: Jerk! Alright, no so Kenny started investing at 18 years old. He's got a bit of a different model than most investors. You guys are definitely going to love the interview. If you don't love it, you hate it. At least you listened and got some passion out of it, but Kenny is. What was that?

Brandon: I was going to say. Either way, if you love it or hate it, come leave a comment on the show notes, because, yes, comments on the show notes are awesome. Come tell Kenny what you think and debate.

Josh: Yes and he'll be there to answer your questions too or comments, so if you hate the show, tell him why you hate it. If you disagree with him, tell him why. If you love Brandon and hate me, let us know that, or vice versa. If you think we chatter too much, feel free to leave that remark as well. People will have left that. You know, it's okay, we don't mind. We don't mind.

Brandon: We don’t mind. Where can—hey Josh, where can they go to find that show notes page?

Josh: That's a great question. They can go to BiggerPockets.com/Show30.

Brandon: Nice.

Josh: That's BiggerPockets.com/Show30. Alright, can I finish?

Brandon: Finish. Do it. Go.

Josh: Alright, Kenny's managing member of Pear Tree Properties. He runs a blog at PearTreeProperty.com. As I said, he's a contributor to the BiggerPockets blog. Without further chitter chatter, alright Kenny, welcome to show, man. How's it going?

Kenny: Oh, it's pretty good. Long-time listener, first time caller. Do people say that in this day and age, I don't know.

Josh: Yes.

Brandon: That's awesome.

Josh: That was like the whole Dr. Ruth thing wasn't it, back in the day?

Kenny: Yes and every sports talk radio you’ll ever listen to. Not that I listen to them, but apparently that's a thing.

Josh: I don’t listen to Dr. Ruth either. I think I just aged myself there a little bit, once again.

Kenny: Right.

Brandon: Yes, I think so. Well no, cool, well, welcome to the show Kenny.

Kenny: Well, thanks for having me guys.

Brandon: Yes.

Josh: Yes, no prob—well listen, man so tell us, what's your story? You're obviously a real estate guy, how'd you get started in the game?

Kenny: Actually, I started about ten years ago. I went to college in a little town called Kirksville, Missouri. The name of the school is Truman State University.

Josh: Yes, I know Truman State.

Kenny: Yes?

Josh: I went to Wash, in St. Louis.

Kenny: Oh, Wash U? Okay.

Josh: Yes. Yes.

Kenny: Nice.

Josh: Yes, ok.

Kenny: Not too far away. It's only about a three-hour drive or so.

Brandon: You two old college buddies done catching up? Can we get on with this? I’m kidding. I don’t know. Anyway.

Kenny: Yes.

Josh: That was rude.

Kenny: My bro—actually it kind of worked out, I was what, 18 I guess, when I bought my first house. The only reason that was, was my brother went to UCLA, got a out-of-state tuition and then my parents kind of felt guilty because they paid for his education and I went there and you know, schooling in Truman State isn't the most expensive thing in the world. They were going to buy me a car. We got in there and then it turns out that you can buy literally a house for the price of the car. At the age of eighteen, bought my first house, moved in to it the next year. By the time I left college, I think I had five properties in the area. I hired a property manager and started my full-time career in finance, of all things.

Brandon: Nice. What'd you do in Finance?

Kenny: I was a high-frequency market maker, which means I wrote computer algorithm to trade the stock market all day.

Josh: You don't have to be fancy, man. Geez.

Kenny: Sorry.

Brandon: No, that's cool.

Josh: No, that's awesome.

Kenny: Yes, it was interesting, but you know, you can only do that for so long. I was in that space for about the same amount of time because I started before I went to college. I was in that space for about a decade. I worked in Chicago for six of those years and then I actually moved to London for the last four years. I moved—so we kind of kept growing, kind of putting more money and you know, wrangling in some investors to buy some more real estate over the years. About August September, kind of looking at various options on the table, and we had kind of hit a critical mass where it was a viable option to take this kind of part-time hobby and really start focusing on it and growing it into a proper enterprise.

Brandon: Nice.

Kenny: Decided to do that and it's been, wow, a year. That's scary. Wow, time flies doesn't it? I got married in there so that probably you know, breaks it up a little bit for me.

Josh: Nice, well, that's awesome. That's very cool, and I bet you a lot of the people listening are going to be as wowed as I am by your getting out of college with five rental properties under your belt because I know when I was a senior in college I was living with a guy. My roommate and I were totally into the whole idea of buying rental properties and it just—it didn't make sense where we were looking, for us. You know, to hear somebody come out of school with five properties, that's awesome.

Kenny: Actually, interestingly enough, turns out that I was buying those properties before 2007 and of course at the time financing was, you know free and clear and you could pretty much get anybody to give you money. After the crash in '07 actually, investments down there went a little bit south, and I’m still, you know, it's not terrible terrible. I'm still doing a little bit to try to dig out of it. Fortunately, around that time we started investing where we’re investing now, in the south in South Bend Mishawaka area. There you're getting a lot higher cash flows, a lot higher returns. I kind of view my time invested in Missouri as a learning curve, right? When you first get into it, there's a lot of stuff to pick up, especially when you're 18, and you know you think you know everything about it. It was nice to get in there, take my knocks early and then really start applying the things I learned to building enterprise when we moved into a different area.

Brandon: Yes, that makes sense.

Josh: Definitely, definitely.

Brandon: Do you mind actually if we touch on that real quick? What do you think went wrong in those early properties? You said you're still digging out on some of them. Was it just you didn't buy them for the right price or the cash flow wasn't there? What was going on there?

Kenny: Partly, we were investing based on pro forma, which you know, pro forma is, you write down how much rent you get. You take a ballpark estimate on all of your expenses and then, "Hey, that's how much you should be making." There was a little bit of disconnect between that and the reality of the cash flow. It did pretty well for a couple of years, but then after the downturn and the market, you know, the rents dropped a little bit as well. You know, we just didn't leave ourselves enough room for error. Plus, we were, you know leveraged out pretty much to the gills at that point. As the market goes down, when you start having to worry about things like re-financing, it becomes a lot harder.

Brandon: Yes.

Kenny: The combination of you know, and you know at the point of where you’re expanding probably too quickly. We were buying stuff up, we didn't really have an established track record. You know, just expanding, expanding, expanding. At one point it's like, "Well, okay what we thought was actually going to happen, it didn't really happen." Now the market's down and it's going to be hard to re-finance. It's just a matter of you know, sit on them, pay down the debt, kind of dig yourself out over the next few years.

Brandon: Yes.

Josh: What can, you know, the folks listening, what can they do to avoid being in a situation like that? You know, you said, "Maybe we bought too quickly." Is there a way that might help people identify, you know, "I'm buying a little quickly. Maybe I'm growing too fast." You have any thoughts on that?

Kenny: Sure and this kind of goes to a larger point that I try to make a lot, is that be very cognizant of your risk thresholds. When you're first starting out, especially if you don't have a lot of capital. From the fundamentals of investing, if you're starting out you want to get of your day job and you want to do this full-time, you need to invest in a way that has a low-risk threshold. Because you're not in the position where things go sideways you're going to be able to absorb. You know, if things go bad, you know, you don't get the cash flow, you have to start having to feed it anything like that. You're going to end up in a much worse situation yet again.

Brandon: In other words, don't flip houses if you're absolutely broke and have do all that on credit card.

Kenny: Yes, exactly right?

Brandon: Been there.

Kenny: Or even buy or you know. Is that why you had to go back to work, right?

Brandon: Yes.

Josh: I thought you were working for me because you like it.

Brandon: No, the first time, when I went into a bank. Yes, that would be because I was flipping a house and it couldn't sell, the market tanked. Had to re-finance it, but you can't get a re-finance without a job so I went to work for a year, back then. Anyway, yes that's cool.

Kenny: Yes, be cognizant with your risk thresholds and do it very, very conservatively. I think that in general, you get gurus out there, you know people advocating creative financing or no-money down, you know, "This is the best way to invest because there's no risk to your part." You know, in theory it'll work out, but if anything goes wrong, you end up in a really, really tough spot very quickly. Build the savings, do it conservatively. Don't overextend yourself. If you feel like you have to have XYZ go in your favor, don't count on that going in your favor. Count on it not going in your favor. If it still makes sense at that point, then go ahead and do the investment.

Josh: That's awesome.

Brandon: You know one thing we came out recently with this calculator for house flippers. We'll link to it in the show notes at BiggerPockets.com/Show30. One thing that when we made this calculator, we made sure we put in there was what if different things went wrong? Like, what if your holding time was 90 days instead of 30 days? Or what if it's 270 days instead of 90 days. Because those things are, they happen to people all the time. Like your timeline goes longer, your budget doubles. You know, things happen. I would say, you know if you double your budget and double your timeline and it still works out as a profit, then it's probably a good deal to invest in. You just got to be conservative like that. Anyway, that was my quick little plug for the Flipping Calculator.

Kenny: Yes, in the finance industry they.

Josh: Nice Plug.

Kenny: In the finance industry, they focus a lot on risk management, as you might imagine, it's called stress testing. Essentially, you know, find a bunch of outlier situations and are you going to file for bankruptcy if these happen.

Brandon: Yes.

Kenny: I mean if you are, you probably shouldn't do the investment.

Josh: Oh.

Brandon: Yes, that's good advice. Well, I really want to go more, we’ll talk more about the whole "no-money down" stuff, but before we do, let's talk a little more about you. Just so people can get to know you a little bit. What kind of investing—after college, you got out the area, you moved, and where are you at now did you say? What kind of investing are you doing now?

Kenny: We're in South Bend, Mishawaka in Indiana.

Brandon: Okay.

Kenny: When we first came here, we bought, I think it was a 32-unit apartment building, and then I had like one or two investors down in Missouri. South Bend's geographically is a lot closer to Chicago, which was where I was working at the time. After we bought the 32-unit apartment building, we started realizing there was a bunch of single families in the area that had really high cap rates. I mean, this was '08, '09, the whole market list down. That point, we started expanding our investor pool and buying up a bunch of these properties.

In South Bend and in the United States in general, there wasn't a very strong lending market at that point in time, especially for investors. We actually bought everything and still own everything in cash. Every single family home we have is cash. There was no financing whatsover.

Josh: Got you, got you. Let me ask you about that. You know, I'm just curious how you went from, you know, scooping up these single families, I know you talked, you have the job and you were acquiring the single families and then you moved. Then you buy this, what did you say it was a 32?

Kenny: Yes.

Josh: This 32-unit and that was it sounds like paid via outside investors, yes?

Kenny: That one was a family investment.

Josh: It was a family investment.

Kenny: After that, we started getting single families with outside investor money.

Josh: How did that transition happen, right? You know, you come to  a point where you realize either A, you're tapped out on cash, or B, you want to start to expand at a rate a little bit quicker obviously, than you can personally afford, so I guess it's the same thing. How do you transition from doing it on your own to going out, reaching out to other folks, asking them for money? And what's that like?

Kenny: Honestly, luck. I mean, as terrible as that sounds, and that's not what you want to hear. I happen to have a pretty good job. I had one or two investors that got in early down in Missouri that you know, had I guess respect for what I was doing, or at least kind of where opens the idea of what I was doing. Once you get a couple and you start getting your track record, getting people to believe in you is a lot easier than if you're just starting out fresh.

For us, the reason we wanted to make the transition was just frankly, economy is a scale. If you're doing one flip or one buy and hold at a time, two buy and holds at a time, you're paying retail on your labor. You're paying retail on your materials. The theory at the time was, if we pool some funds by a larger number of properties, then all of a sudden all of our fixing these distressed properties and managing them, and you know renting them out becomes a lot easier and a lot cheaper. We decided to go that route.

Josh: How did you get those first investors? I know you said your family was the first investors, but then the next private investors, how did that happen?

Kenny: It was just, you know co-workers. People that I knew from my day job.

Brandon: That's absolutely key right there. People think that private investors have to be some like mysterious club like.

Josh: You got to pay a network and pay for access to private investors and there's all these sites offering that nonsense. I mean. Private investors are people you know.

Brandon: Yes.

Kenny: Honestly, I get, you know, I get solicited, for a lack of better words, for investment [Inaudible][17:36] from a lot of people who are just starting out. You know, 99% of the time I'm just like, "I have no interest in this. It's completely unknown entity. I'm not going to do that." It is exactly what you said. If somebody knows you and knows you have a good work ethic and a good head on your shoulders, then that's when they're going to be able to give you money or be willing to give you money.

Brandon: Well, that's the same thing on BiggerPockets too. People will come on the forums, first time ever posting, and say, "I'm looking for $100,000." Besides flirting with being illegal there.

Kenny: Yes.

Brandon: Just the fact that they've never posted, they have no track record, they don't say anything, they're brand new at this and they're asking for hundreds of thousands of dollars, it's crazy. Now when people, you know, establish themselves and participate and engage, I mean myself like six months ago, I needed some money. A guy in the site lent to me for a property I bought. I mean, yes, it's all about establishing a track record with the people you hang out with and you know, building your reputation. That's key. Rural, rural. I have a hard time saying that word.

Josh: Rural, rural, rural.

Brandon: Rural investing. Rural.

Josh: Rural. Say it three times fast.

Brandon: No, you'll mock me so.

Josh: That's happening anyway.

Brandon: Alright, rural investing. You talked about that, I read it on your own personal blog earlier, that you like to invest in non-city areas. Why is that? What can you tell us about, kind of strategy with that?

Kenny: Right. One thing that might help inform that. I'm a massive numbers and data geek. You know, I love computers. Computer programming. Metrics, data, all that stuff. I mean I did it for a living for 10 years, like I just, it's kind of part of what I do. One of the things when we were looking about where to invest is, you know you look at a graph right? Of prices in urban markets versus prices in rural markets. You can really see a bubble ending in 2007 in like a Chicago, or Miami or in L.A. If you look at a Missouri or an Indiana, it's pretty much straight the entire way. Like there's maybe a slight blip, but that's it.

For us, we want to build passive income so that we have a nice and cushy retirement. If we don't want to have the stress of a bunch of volatility, invest in rural areas. You're going to have steady appreciation. You're going to have steady rent rates and you're going have a lot more certain about what's coming in the future.

Brandon: Yes, you know Ben Leybovitch put a post today called, "Boring Can Be Sexy when Investing in Real Estate," and that was the whole idea of it, was you don't have to invest in like the cool, you know bubble markets of I don't know, I don't want to name any names. But you know, you don't have to invest in.

Josh: Oh name names. It's certainly not Detroit.

Brandon: No, not Detroit.

Kenny: No, yes.

Josh: I had throw my Detroit. Yes, there you go.

Brandon: Mock them. No, you know, I'm thinking like, not that there's anything wrong with Phoenix, but Phoenix is up and down all the time. You know, they swing. Florida swings, California. A lot of people invest there, but you don't have to. You can invest in a boring area like, I mean that sounds mean, but like you know, you can invest for things that are just solid. They're just straight and move forward.

Josh: Name names. Come on, what's boring, Brandon?

Brandon: Oh. Lima, Ohio. That's what the post, South Bend Indiana.

Kenny: South Bend Indiana.

Brandon: Milwaukee. Last week we talked to Dawn about Milwaukee. Nobody ever, they don't shoot movies in Milwaukee. It's not like the hottest place in the world, but I don't know investing seems pretty solid in those areas.

Kenny: One thing about all this stuff is when you're buying real estate, you're buying anything. You need to look at yourself first and foremost as an investor. An investor is in the long haul. Who's the most successful investor in the world? It's the 3rd richest person in the world,

Josh: Warren Buffet.

Brandon: Buffet.

Kenny: Warren Buffet right? He is the most boring freakin' investor you I could possibly imagine. He literally just spends all of his time poring over prospectuses and reading management profiles, or manager profiles. There is nothing sexy about what he's doing. He just sits there, grinds it out. Finds kind of fundamental things that he looks at and buys and holds forever. Like he doesn't get involved in the tech stuff. He doesn't get involved in anything he doesn't understand. He doesn't go chasing the shiny ball. He's just, "I know exactly what I'm going to do. It's going to be really simple and I'm going to do it over and over and over again and I'm not going to go down on some detour or into what the new hot commodity is."

Brandon: Yes, and I think that is a danger for a lot of investors. Like we get bored. I know I get bored sometimes. Like I know what works. I know that buying these cash flow properties and I could just buy that for the rest of my life. It works, but it gets boring. It's like, "I'm going to go and flip this cool house here and turn it into something different." It's fun but it's not intelligent necessarily.

Josh: I think it's a whole ADD nation. We can't stay focused on anything and frankly that's why we’re in and out of bubbles every couple of years now. I mean it's tech bubble in 2000. The housing bubble. We're arguably in another housing bubble now, so it’s just if people were to slow it down and say, "Listen, there's need for, you know, those quick and potentially dangerous returns. Let me take my time. Let me do it the Buffet way. Let me do it the boring way, so to speak." I think it makes a lot more sense.

Kenny: There’s a—in finance there's the cab driver metric, which is if your cab driver ever talks to you about any stock that they're considering buying, go out, go sell it. Just sell it immediately. You have no interest in that, because it's so hyped, it's speculative [Inaudible][23:20] so much into it that the price, it almost guarantee not to make sense.

Brandon: That's funny, I've never heard that before, That's really funny. Cool. Well, what about like cash flow and what kind of properties are you buying here? Cash flow and stuff wise?

Kenny: We're looking for high-cap rates. Cap rate is just a cash flow without financing. For us, it's the same thing. 9% to 10 % cash flow is pretty good for us. We also have a fair amount of equity in these properties because we do buy a lot of these properties and we fix them up. We add economic value. The return's higher than 9 to 10% but even if we never sell them, that's what we get.

Brandon: Yes, that makes sense. I like how you don't come out and say, "We're getting 30%." Even though maybe you will get 30% when you go and sell those. I mean, you're talking as if you would never sell them. I think that's a very, very smart way to look at this. Again it just goes back to the conservative thing. You might get a lot better than that, but even if that's all you ever did, was rented these things out, you're sitting at 10%, that's awesome,

Kenny: Yes, and I’m making [Inaudible][24:29] that too, like flipping right? Kind of what we do, we kind of view it as long term flipping. We value stuff based on rent. We want our return on a monthly basis, and we'll sell when the time's right. If the market goes up, hey look at that, it's an actual payday. Especially when you're talking about dealing with investors. If you start delivering or start promising 20% and delivering 10%, and the market goes against you, your reputation is trashed. You're never going to get any money again. Under deliver, over promise right? No, under promise, over deliver. That's the one.

Josh: Yes. Yes, so with those investors, what are you promising? What would you tell a potential private investor? Somebody you worked with, somebody you run into who is impressed with what you've got going on there. You know, "Hey Kenny. I'm interested in doing this." What kind of information are you going to give them?

Kenny: I’ll give them our historical of returns. At this point we have four years worth of data to show how much cash flow we're actually getting. Don't promise people any number because A, it's going to ruin your reputation. B, you might end up in problems with the FCC. Right?

Josh: Yes.

Kenny: Let me a—I actually have a funny story about that. When we were first kind of getting going on this, we knew a guy who ran a real estate investment group. He promised 12% return per year to all of his investors. We didn't ended up with [Inaudible][25:58] apartment building. We didn’t investment. We got all these e-mails and direct mailers and solicitations and stuff form him, just continually, continually, continually and then all of a sudden it just stopped. I didn't even notice until about three months later. Then I go to look them up and he's in jail.

Brandon: Ooh.

Kenny: Because it was a Ponzi Scheme. He started off with best intentions. You know, this was before 2007. He was actually getting that 12% return, and then when things turned south, he had made so many promises that he couldn't stop. He started intermingling or co-mingling funds. He started taking money from a new investor to pay off an old investor and then it just snowballed completely out of control. Ponzi Scheme, I think he's got 10 years in jail.

Josh: Nice. Nice.

Brandon: Wow.

Josh: The advice I think for people who might be listening would be don't promise returns. I mean, don't guarantee. Don't make any promises on what you're going to deliver. You can show your historical returns. Historical or historic? Historic?

Kenny: Either way. Yes.

Josh: Your historic returns and ultimately just say, "This is what we've done in the past. Hopefully we get something close to that, but no guarantees of course."

Kenny: Exactly.

Brandon: That's different though for private lenders, right? If you're going to borrow money from somebody like, you know, with a promissory note. You need to offer them an interest rate, right? I mean how does that differ from what you're talking about?

Kenny: Yes, you're absolutely right. For us, we view our investors as partners. You know, they participate in the upside just as much as we do. It's a little bit different because it's not an established security I guess, for a lack for better words. Yes, you're right. When you take a loan, you need to give them an interest rate, but it's also not going to be in general you know, 10, 15, 20%. Whatever you might get on your personal investment other wise you wouldn't take the loan, because you're going to lose money on that trade.

Brandon: Yes, so let's talk about the way you have that set up. You said that you view them as partners. How exactly does that work? You mean, basically like shareholders, is that kind of what you're doing?

Kenny: We're an LLC so they're members. Everybody puts money in and it all goes into the same LLC. You put your money in today, we essentially take three months to find a property, buy it, fix it up and find a tenant. Then at that point, you just get a [Inaudible][28:21] ownership in the LLC based on how much you put in. If there's a million bucks in the fund and you put a hundred grand in there, you own 10%. Everybody participates in the upside. They all participate equally in the cash flow, so it's just super simple to everybody; and they get the advantage of having immediate diversification because now if you've got a hundred properties and one LLC, when you come in, you know you own 10% in all of these properties. You don't have as much risk with any individual investment.

Brandon: Yes, okay. It's a different set-up than most people we've had, I think anybody we've had on the podcast so far. Most people just offer a flat 12% or whatever that is on individual houses to lend the money as private money. It's definitely kind of a new concept to me so I like it. Let's shift gear a little bit here. I want to think about something, still a little bit of a debate here.

Josh: Controversy.

Brandon: Yes, still a little... You said a little while ago, essentially the phrase you said was, "Individuals just starting out with little capital,” and you said this earlier too, “shouldn’t buy real estate themselves.” You even did a post called, “Is Stocks Better Than Real Estate,” whe you kind of hinted that maybe stocks are better than real estate for new investors so. Can you elaborate on that a little bit, what do you mean?

Kenny: Sure. When you’re just starting out, youd don’t have—to start off you don’t have any economies to scale. Right? You’re going to be paying more for labor and materials than anybody who is an established investor, right? That’s the first thing. Second thing, you don't have an established reputation in your area so you have to put a lot of hours into going out, finding a property, fixing it up managing it because you A you don't know what you're doing and B they're not coming through your door. A deal comes in, you're going to spend two to three times as much time as I would have to, to analyze that deal. That point, your actual return for your hour invested is quite a bit lower than somebody who is more established [Inaudible][30:27] scale. Not to mention, just as you become more experienced you know what to avoid, what to watch for, you know, just generally your returns tend to improve as you become more experienced.

The other kind of leg of the argument is on the risk management side. We mentioned it a little bit before, but as a new investor with little capital, if you have, you know, 10 grand to invest, 5 grand to invest and you want to go and buy out $200,000 or $300,000 property, that risk peripheral profile's completely outmatched to what you're earning potential is or what you were able to absorb. My argument would be, you want to have a low-risk investment. Build your savings. Put it in the stock market for a while and then be able to put 20, 30% down on investments so you don't have to worry if things go against you. Not to mention, real estate still continuing on the risk management side, I think it's a very low liquidity situation. If you have attended 10 to 20 grand and you locked it up into real estate, if anything goes wrong with your personal life, you have no way of accessing that in any reasonable amount of time.

Josh: That makes sense.

Kenny: Whereas if you put it in stocks, "Hey, I'll go sell a stock and hey move on with my life."

Josh: Ok.

Brandon: Oh, sorry go ahead.

Josh: Go ahead.

Brandon: Well, I’m wondering, how do you build experience then if you don't start? How do you suggest people to build experience then?

Kenny: Yes, well first off, build the savings. I would argue that you want to build your savings then you want to invest with somebody who has some experience. You don't want to start out doing yourself, because...

Josh: You're saying invest with somebody like in their LLC kind of like you've got yours set-up or are you saying give them your money like a private lender? Can you clarify on that?

Kenny: Sure, I would argue that if you really want to get into real estate, find somebody who is already doing real estate, has an established track record and find a way to invest along with them. Profit if they profit. Don't if they don't. For one, that gets your foot in the door. You can have all these conversations with the person. Learn. Pick his brain. Understand what's going on on a day to day basis. Understand how much work is going to be involved with it. In addition, you get that economies of scale that this established investor brings to the table.

So even though he's probably he's going to take 5, 10, 15% of the total profit, back out of it, you're probably going to come out ahead as far as your total returns because you're going to avoid a lot of the pitfalls that are going to wipe out your entire portfolio.

Josh: Here's the problem that I see with that. What you're proposing is that somebody goes in, and essentially acts as a mentee that gets a piece of the action under somebody who's kind of mentoring them, but I've been doing this for a very long time and maybe you can give examples of this actually working, but you know in almost nine years I've been running BiggerPockets, I think it's extremely rare that I've seen any example where anybody would take a guy with no experience, no background, no nothing and give them a piece of their business out of the blue, just to let them ride their coattails or maybe even for a couple of bucks because they don't need it. They don't need the headache unless, again, they're doing it with the cause and with the purpose of taking this person as a mentee.

Brandon: If they've got 50 grand to go housing and set on the deal or something then...

Josh: Yes, but Kenny isn't talking about 50 grand...

Kenny: Yes I was.

Josh: Oh you were?

Kenny: Yes, yes sorry.

Josh: So you were.

Brandon: Save up to that point, right?

Kenny: Save up to that point and consider non-real estate assets like there's no rush to get into real estate. Real estate is a high-risk investment. If you only got 10 grand sitting around, you probably don't want to be in it, especially if you're going to be leveraging up. Grow some savings. Set some aside and then invest a reasonable amount of money with somebody who has an established track record.

Brandon: The thing I see with that, I mean the bait is some guys will say, "If you have 5 or 10 grand, you should spend that on marketing." I mean, the gurus would say you should spend that on training.

Josh: Well, Brandon seriously? Quote somebody better with your argument.

Brandon: No, a lot of guys would say, "Well, if you have 10 grand, that's plenty to get into direct mail marketing and you should start your business because that 10 you can turn it to 20, which you can turn into 40. I mean essentially you're buying a business. What are your thoughts on that?

Kenny: You're talking about wholesaling?

Brandon: Yes, let's say wholesaling or even flipping, if you use the $10,000 to put up the down payment on your first flip. You know like a hard money lender would probably do a deal if you got a good enough one, if you only had 10 grand.

Kenny: On the wholesaling side of things, yes sure, but that's not a job, right? At that point, you are in real estate in a sense you're looking at real estate, but you're not a real estate investor, right? You’re kind of—wholesaling is a bit of a grey area for me. I would actually argue they’re closer to a real estate agent than anything else, because they are going out, finding properties. Essentially, you're acting as a buyer's agent, right? You're getting commission at the back of that. It's another profession. It's another job. If you want that to be your job, let it be your job. Yes.

Josh: You're making the distinction and I think it is in important distinction. You know flipping houses, wholesaling, those are jobs. You're not buying investments and holding on to those investments. I tend to agree I think with you on that. When you're investing, you're holding on to something, right? Obviously, you're holding on to a flip, when you flip a house but...

Kenny: Hopefully not really long. 

Josh: Well right. I used to be a stock trader. When I was trading stock, I did not consider myself as an investor. I was a trader. I just traded. That was a job. Very different when I have my long-term portfolio holds, that's where I'm investing.

Kenny: Yes.

Josh: I think we're on an agreement on the actual definition here of what an investor is. There is a fuzzy area, but I think there is a fine line there.

Kenny: Yes, but the point I'm trying to make is if you got 5, 10 grand out there and you want to become a buy and hold investor right away. If you follow, there's plenty of gurus out there that would argue that what you should do is, put no money down or use your 5 grand for the closing cost. Do a hundred to unleverage, 200 to unleverage and buy your real estate and get the ball rolling. What I'm saying is that really, the risk that you're incurring by doing is not worth what you're getting. Not to mention, just the sheer number of hours that you have to put in to find one of these properties. If you actually crunch it out with that much leverage what your hourly wage is, I would argue that you’d probably make less than a minimum wage.

Brandon: I mean yes, it makes sense. It depends on how long you hold up for it of course, but if you put in a thousand hours to make a hundred bucks a month, how long does take to take actually make sense? Now, there is an educational factor there

Kenny: Absolutely.

Brandon: Where just like college, you don't make money going to college and you go for four years to spend a hundred grand, but there is an educational factor there which makes sense but...

Kenny: A lot of people I talk to, they're kind of viewing real estate as kind of a, I don't know, maybe it's how the gurus are touting it, a get rich quick sort of scheme right? No money down and then all of a sudden money is running in the doors. You can do this a hundred thousand times and you're making so much money. You don't have to worry about anything and that's not really realistic.

Brandon: Yes, I think it's probably exception of the rule. I mean I like to talk about no money down stuff, and when I do, and you and I have talked about this before, but my idea is no money down doesn't mean no equity down. Essentially, let's say there's a property worth a hundred thousand dollars in a good market. If I were to get it for $50,000, my downpayment is the fact that I found a deal for 50% on of what it's worth. You could come in and buy it for $50,000 with $50,000 down. Or I can buy just for half price and it's essentially the same thing, right?

Kenny: Yes, I can definitely see that argument. Absolutely. There are deals like that and you have been in the game long enough and you're going to be able to recognize these stuff. As a new investor coming in at the gate, dealing with, maybe a buyer's agent, and pretty much your only access is yellow letters or potentially MLS. The likelihood of you finding a 50% off deal like that is pretty slim.

Brandon: Yes. That's definitely true, definitely true.

Josh: Well, I think you could find them. I just think you may not know how to identify them.

Brandon: Yes and what to do with them if you do find them.

Josh: That's the challenge, yes. You know, again, we see case after case of people doing it. The issue I have with what you're doing, and I think what you're proposing is actually very, very, very safe way to go. I still think you're going to have, I mean granted you come in with 50 grand in your pocket, and you've got something to offer. I'm going to argue that you’re going to have as much of a challenge doing that and finding somebody who's going to take your money than you are being a new investor, finding somebody to finance you.

Brandon: I'll take their money.

Kenny: Yes, I'll take their money. You can come down every week and kind of just touch up along with you, if you want to.

Brandon: I don't know. I understand. I get what you're saying Josh too is,  I guess, I see both sides of that.

Josh: Well I mean, I feel like what Ken is saying is, you kind of have to jump in. There's that learning period, right? I think what you're advocating is you're going to learn while you've got your money invested with somebody, and I don't know for me, that's actually probably a lot scarier than learning while doing it on my own because you got to put an immense amount of trust in that person. You have to know enough to know that the person you're giving your money to has got their crap together. How do you that? How do you determine that? To me, that's a little scary because again, I think a lot of investors come in and they want to know their heads from their backside. If you, or a fraudster came in and said, "Hey, yes. I got all these great deals and I can give you 12% return. Give me your $50,000," "Well that sounds good." Right?

Kenny: Yes and I think the trick there is you have to make sure you invest with them. Don't allow them to invest for you, right? You want to make sure they have skin in the game. So if you're investing with them and they take 50% ownership, then they're going to work hard and they're probably not going to be a fraudster, because well it's pretty hard to fraud when they've got 50% of their own money in there because they're going to be hurting themselves as well.

Brandon: Yes.

Josh: I got you. I just think you don't have enough information at that point. You're not educated enough in the game to give somebody your 50 grand. I really do think it's kind of a bad idea unless you have more. I think you've got to have a base of knowledge before you start giving people money to invest in real estate. I really do. I think even though you're advocating having somebody who have skin in the game, I still think that if you're coming in with totally green, that could potentially go really bad for you.

Kenny: I would argue that, so let's say you have 50 grand and 0 understanding of real estate. Your two options at this point are to vet somebody who has minimum of five years of experience in real estate that you're going to be able to invest and they're going to have skin in the game; or to go out and buy a house by yourself? The latter is a lot riskier than the former.

Josh: How do you vet them?

Kenny: Yes, that's when you have to actually look at what their returns are. They need to have had, you know, investors in the past look through and see what they've historically done. Right?

Brandon: Absolutely.

Josh: How do you know how to read the historical numbers if you don't have the experience or background? These are the questions that I'm asking. I'm not trying to pick a fight with you.

Kenny: No, no, no. Absolutely. 

Josh: I'm sitting here thinking like, "Hey, the average guy that I see on BiggerPockets and on other websites that are around, who are trying to learn real estate." I mean, no offense, and I agree there are no stupid questions, but there's a lot of really green questions that these guys are asking and if they come out and I asked them and every single one of us who's ever done this has asked them at some point. You know, when are you asking these questions now? You know, if you're suddenly like, "Hey, I got my 50 grand now and I got to put it in somebody's investment." You know, I'm trying to find that fine line, I'm not trying to fight with you.

Kenny: No, no yes. I would say that, so you're talking about the skill set necessary to understand whether somebody's good or not.

Josh: Yes.

Kenny: I would say to analyze a personal investment, you need to be proficient at things like looking at cash on cash returns. Understanding what cash  flow is. You know, looking at equity they have built into it. Probably even things like depreciation. That's high level, really simple, real estate stuff. If you really want to get into a real estate investment, then you've got to understand how much it's going to take to get worked done, or how you can do stress test on your investment, things like that. These are all things you should really be doing before you make your first investment.

Being able to understand whether somebody has historically performed well or not, the skills necessary for that are less than what you need to properly vet at real estate investment because if you can do a cash flow analysis and you know all the stuff about real estate and you put in the hours, you're going to be able to understand whether somebody's actually made money and hasn't had a good return over the last five years. Because it's literally going to be how much did you distribute on your investments. It's a lot simpler than going the other route.

Brandon: Yes that make sense. I mean, that also is where, I mean, sites like BiggerPockets and this podcast come in handy. This where more people can learn those things. Now I still lean more towards I think Josh's side of things where I say--I'm a big fan. I mean if you've got $20,000 to invest, this is going to sound really bad, but I would rather have a person lose that $20,000 investing in real estate, not go bankrupt, but lose that $20,000 investment in real estate but learn how to invest in real estate than give that $20,000 to somebody else and not learn how to invest in real estate. Because I mean I'd rather lose that $20,000 but gain the experience that will benefit me for the rest of my life, than to simply just be a by-stander. Again, that's my personality. I like being active and I like being involved, but... I don't know.

Kenny: Then it comes down to, what do you want to do, right? It's very possible slash likely, especially if you're listening to this podcast, that you are passionate about real estate and you want to be in it the long haul. It's also possible that what you really care about is creating a passive return for yourself. If you are that passionate about real estate, then you want to learn everything about there and you want to become a real estate guru or real estate investor in your own, right? Then absolutely it might pay, it might be beneficial to pay $20,000 to gain that knowledge.

If really all you care about is being able to retire at the age of 35, and you just want the passive income and you don't want to have to sustain that in the long run, then it probably makes more sense to take that whatever 20, 30, 50  grand and invest to somebody else, and maybe you don't event want to get involved into the day-to-day of real estate.

Brandon: Yes, that makes sense like you said. It comes down to kind of that fundamental question is, what do you really want? I think a lot of people, they want the financial freedom. They don't want to deal with tenants. Yet they deal with tenants because they think that's the only way they get to the financial freedom.

Kenny: Yes.

Brandon: But again, there's a hundreds of ways to invest in real estate and being a landlord or being a flipper or wholesaler, those are just one of very many, so.

Josh: I thought we just talked about being a flipper wasn't investing, Brandon. Are you not paying attention when I talk, man? I mean, come on. Come on.

Brandon: I am talking investing in the philosophical sense of the word. Alright, so yes, yes. Moving on a little bit but still kind of tied in with this. We talked about being flipping, landlording, things like that. You wrote a post recently and you mentioned this phrase that you should plan on being landlord even if you're flipping. What do you mean by that?

Kenny: That goes back to what you were talking about earlier. When you're talking about your flipping app. It's an app, right?

Brandon: Yes, not on an iPhone, but yes the web app, yes.

Kenny: Okay, your flipping web app, where you need to be able to stress test it. How long if you end up getting stuck with this thing for two years, right? How much is that going to hurt your situation? All I'm saying it when that blog post, it's kind of another way of stress test. Buy it, expecting to rent it out, because that's the worst case scenario. If you're unable to sell it, if the market turns against you or anything like that, then you're going to have to rent this thing out. If you're not getting return or you're losing money every month on that, then you're going to be on a pretty tight spot. One of the things to consider is,"How much will this rent for?" "Will I make money if I hold it?" and only if that works as well as all your flipping numbers, then do it..

Josh: You're talking about multiple exit strategies.

Kenny: Yes exactly. Give yourself some flexibility. 

Josh: Yes and that's something that we definitely talk about a lot and it's one of the chapters in the BiggerPockets, our Ultimate Beginner's Guide, which would be something that will be very helpful to all those people who might be wanting to give somebody $50,000 of their money, but we wrote this. Brandon and I wrote this Beginner's Guide for Real Estate Investors and it really covers all the fundamentals, but one of the things that we really wanted to stress in there was the multiple exit strategies. Because you know, it's something that I think most newer investors don't consider and I'm glad that's what you were talking about because if you can look at two, three, four different exit strategies, if you get in on a deal and the market turns on you or a flip you know, takes longer or whatever happens. You at least have different paths to save yourself. 

Kenny: Exactly.

Brandon: I've always had that same thought. I won't flip a house that I can't cash flow by renting out. I never really like put it as eloquently as your post did, but yes. It's a same thing. I got a duplex right now, that I think I might sell it, I might rent it but it doesn't really matter because either way I win. Because I set it up that way at the beginning and I made sure when I bought that I would win no matter what decision I end up actually making with it.

Kenny: Right.

Brandon: Yes, that's exactly right.

Kenny: Part of the audience for that post was people who just come off guru courses. There’s real estate gurus—are paid to sell, right? They're going to make real estate investing sound as easy as possible and you're going to make a bunch of money really quick. right. That's how they're going to get you excited and that's how they're going to sell more books, tapes, board games or whatever, right? If you're coming off of this guru course or you just played cash flow for the first time last week and now you want to get into real estate investing. You're so optimistic that you don't take that step back and realize actually this is a risk, there are things that can go wrong here, and I actually have to account for those. So it's just kind of a quick sanity check there.

Brandon: Yes.

Josh: That's great.

Brandon: That's awesome. 

Josh: Yes, definitely. Well let's get to the topic of raising private money. I know we've talked about it a little bit, but I want to get more into it right now. The funding that you're currently using, well let me circle back. How are you funding all of these deals today? You talked about some private money, you talked about some money of your own. Are you still self-financing deals? Are you still continuing to use that private money? Are you pooling? What's your current strategy?

Kenny: Yes, our approach is pretty simple, right. We have this one LLC. We raise funds every three months right. However much we get, that's how much we invest. That's how much we go on by. Fortunately, we have a good enough spot in the South Bend area that up to this point, we haven't had to worry about not finding enough deals within capital restraint. Our investor pools has kind of organically growing. Word of mouth and now that I'm focused on it full-time, doing things like BiggerPockets and trying to get more of brand recognition out there. Yes, we are still taking in outside investor money. We are still at this point, investing with cash only. When we do invest, obviously we want to have skin in the game and so we put our own capital in as well, so that all of our investors can sleep a little easier.

Brandon: Yes.

Josh: How big is we? You're saying we. Who's on your team and what does that look like?

Kenny: In South Bend, there's four, I guess, there's full time employees. We have a bookkeeper. Actually, my father is actually quite heavily involved in the day to day and then we have a general contractor and a property manager. Myself, my father and now the general contractor are all invested in the same fund as all the investors. That way they know that we actually care that this thing succeeds.

Brandon: Nice.

Josh: Let me ask you on that. How did you get to that point right? One of the big questions people always have in trying to scale their business is, who's that first guy? You've got you, and then you were working with other partners, other money partners. When did you start to bring on these staff and these employees and who is the first guy and why?

Kenny: It's a bit complicated in my situation because I actually hired the first property manager which I guess is the answer to your question. We hired the first property manager in Missouri and we started investing in South Bend. We actually kind of set up another office, a satellite office and had her train up the employees. We were at about 40 houses when we got the first property manager. The number that I hear throwing around a lot is, as a property manager, you start making money around 300 units of whatever. I've heard this on a bunch of different geographic areas, so we're about break even right now. We have about 170 units.

Josh: Those are all owned by you and your folks?

Kenny: Yes.

Josh: Got you, got you. Okay, so you got the property manager. When does the GC come in? How about the other players?

Kenny: How does that actually work. The GC comes in because you're going to have to do rehabs on them. We're buying distressed properties so you've got to find somebody to oversee the work unless you're going to be doing  it yourself, which for most people if it's a part-time gig, you don't want to be doing that. As you go through that you just kind of gradually increase how much responsibility you give to your general contractor. For us, that process took about a year, a year and a half where we went from we use this guy for one flip to now guy's working for us exclusively and he has 30 to 50 guys underneath him.

Brandon: Wow.

Josh: Got it.

Brandon: Yes, that's what I'm wondering more about is the general contractor thing. If I I can say there's one thing that every investor seems to struggle with it's the contractors.

Kenny: Yes.

Brandon: That's the biggest thorn in my side. Do you have any advice for people like, how did you, like you said you started with one deal. I guess that's one way to start, but any other advice for us?

Kenny:Man, I wish I knew. It is brutal. We found one general contractor. We probably churned through 10 others that we have given gos at one point or the other and it just didn't work out for various reasons. It's tough, especially if you're the kind of coming out from investor mindset. Connecting with a general contractor is very much on the low level. I just want to get my hands dirty and get this stuff done. There's a communication gap in there and just finding somebody has a good work ethic and is able to manage crews, and knows everything about house. It's actually really hard individuals to find.

Brandon: Yes, wait.

Kenny: It goes back to the argument about it's one of those things that once you're established it's easier to do than if you're just starting out.

Brandon: Yes.

Josh: I got to tell you that it's kind of sad to me, it really is troubling and sad maybe, because you know, we look at all these various trades and maybe it's a symptom of things, but I just think there's got to be. You know, listening to the show right now, there's got to be a handful of contractors. The sad thing about it is many of those guys suck. Many of them just don't get it. Show up on time. Do your job.

Brandon: Answer your phone.

Josh: Do it well. Answer your phone. Little tiny things that if you did that, I mean, you'd get so much work it would be crazy. It would be stupid, you know. The same applies for investors of course as well, but you know since were barking and bitching about the contractors here, I can't tell you. I don't think I've worked with a single contractor, and I've worked with quite a few who I go out and refer to people. I've yet to find somebody that I've been happy with. For one reason or another, they don't show up, they're late. They don't return phone calls. Their work is all a bit sloppy. You name it. I mean, it's like, you know, get it right guys. It's not that hard.

Brandon: I think it goes back to the whole, if you've read the E-Myth, the story is about a lady who's a baker, who bakes pies. The guy telling the story basically through the whole book is you may be good at baking pies but it doesn't mean you're good at running a pie baking business. The contractors are great at baking pies. They might be, but they're terrible at running a pie baking business. Just terrible and I don't know how you find. I don't know how you find them. That are good at both.

Kenny: I've owned probably 300 to 400 homes, and every six to nine months I go through this thing, "Oh I need to find a new contractor because I'm so dependent on this one guy," and in the ten years since I've been doing this, I found two. One in Missouri, one in Indiana. That's it.

Josh: Amazing.

Brandon:  That's hard so I guess when you find them, you just hang on to them and pay them well and treat them well.

Kenny: Exactly.

Brandon: What about your investors, going back to that. I know we're jumping around a little bit, but investors, accredited investors versus non-accredited. First of all, what is the difference for those who don't know? Kenny: So an accredited investor is an individual who has made 200 grand for the last two years and expects to make it going forward or a couple that made 300 grands in the same thing or they have a net worth of $1,000,000 excluding their personal residence.

Brandon: Okay.

Kenny: This is more of an SCC regulation because you can't generally solicit to non-accredited investors.

Brandon: Though that is changing.

Kenny: It is changing, hopefully if the SCC ever presents on the guidelines on the Jobs Act which passed last April.

Brandon: Yes and I heard they've made some changes in the past few weeks but still not everything is clear yet, but yes.

Kenny: Right, and the other thing is if you have a bunch of accredited investors, you have more leeway about when you have to register as an SCC company.

Brandon: Okay.

Kenny: If you have all accredited investors then you can have $2B under management and nobody's going to bat an eye, right. If you have half or non-accredited investors and you have, you know, 50 million under management, you're probably going to run into some problems.

Brandon: What do you do?

Brandon: Yes, do you do accredited or non-accredited?

Kenny: The people we first started out with, it was pre-existing relationship. Most of them were accredited. Now it's all accredited.

Brandon: Okay.

Kenny: All the investors are accredited.

Josh: The funny thing about that whole thing, you know to go off on a slight tangent here. You know we talked about having, you know some guy's got 50 grand to loan out who doesn't know their head from their backside. Well, you know just because you're accredited doesn't mean you know your head from your backside either, and you know interestingly the SCC just makes the assumption that that's the case. You know, I mean, I've got a friend out here in town who's a former football player and he now trains football players how to manage their money and the reason he does it is because so many football players lose their shirts because they don't know how to invest. They don't know what to do. Money doesn't really mean anything. I just think the rules are so arbitrarian. Just these numbers are just meaningless, you know. A dentist who's making a good business isn't necessarily going to know how to invest any better than grandma who's been studying the charts for 30 years, 40 years.

Kenny: Yes and actually interesting on that. The argument that I've heard why the accredited investors rules are in place is not so much as they know what they're doing, but they're not going to get hurt if it goes against them.

Brandon: Yes.

Josh: Right.

Kenny: The thresholds, and don't quote me on the year, strangely enough, I'm terrible at remembering numbers, but I believe those thresholds were actually set in the 1970s.

Brandon: Interesting.

Kenny: Yes and they weren't tied to any appreciation or anything like that, so back in the '70s, if you're making $200,000 or $300,000 a year and you had a million dollar net worth, you're going to be okay. Now, I mean, I know a lot of people who are you know, making that $200,000 level and if an investment goes bad they're pretty much toast right?

Josh: Yes, yes. So somebody who's listening, who's got a fairly established real estate business going on—where would they go and find accredited investors? Outside of their own pool of friends and family.

Kenny: Yes that's a good question. Honestly, that's what I'm trying to figure out right now.

Josh: Nice, nice.

Kenny: Right now our investor pools is entirely word of mouth. You know, things like BiggerPockets getting my voice out there, I'm certainly getting a lot more interest from potential investors who have been approaching me. Nothing really solidified at this point. I guess just get your name out there, do some branding and have a strong track record. Have a strong track record and don't be shy about telling people what your track record is you know. That's at least how we're approaching it, but who knows if that's going to work out on the long run.

Josh: Yes, I've got a feeling that potentially after the show you might have more accredited folks get in touch, but that's just a feeling I've got going on. Obviously, like the beauty is here you're not pitching anything here, you're obviously helping to share good information and you know even though we had a little mini debate back a little while ago, I mean it's very interesting what your strategy is and your theories. Because I think you're one of the more reserved folks that we've interviewed so far and I appreciate that as somebody who's highly risk averse. What would you say that going forward is your exit strategy? What's the end game? Do just kind of continue to build that portfolio Warren Buffet style? Do you sell your business at some point? How does it move forward?

Kenny: Yes, so part of the reason we're so conservative is because we're super aggressive about where we want to go with it. Our exit strategy is to form a REIT and go public.

Brandon: Nice.

Josh: That is bold.

Kenny: To form a REIT, it's a two step process a REIT is a real estate investment trust, I think that's what it is.

Brandon: Yes.

Kenny: To form a REIT, you have to have at least a hundred investors. That's the first thing. No investor can have more than like 15%, I want to say. Once you form a REIT, then you have share holders. You have board of directors, your regulatory scrutiny increases quite a bit. To go public, the bare, bare, bare minimum of assets under control you have to have about a hundred million. Once you do go public, so let's say, hypothetically we are getting 10% returns for our investors every year. If the market stays exactly where it was today, the average public REIT yield is between 3 and 5 %. If we were to get the same pricing and we were getting 10 % before we went public, in theory, it would double the value of our portfolio effectively overnight.

Brandon: Woah.

Kenny: Does that makes sense?

Josh: Repeat that and explain it in child talk so that Brandon can understand. I saw his eyes light up.

Kenny: I was waiting for that.

Josh: No, you know what, I half got it my self. So clarify for all of us.

Kenny: Let's think about it this way, right? We'll flip around and just look at the distributions right? If you've got a $50 a year distribution, right? In the public market, that's worth, whatever a thousand dollars right? If you look at a 5% return then if at 5% return and you're getting $50 out of it, that's equivalent of the share being worth a thousand bucks.

Josh: For a share.

Kenny: Does that makes sense? For that cash flow.

Josh: Okay, okay. You're doing 5% return on a thousand bucks is $50, yes?

Kenny: Yes exactly, right?

Josh: Yes, yes.

Kenny: So now, if there is $100 of the cash flow.

Josh: You multiply that.. you've doubled your value, yes?

Kenny: Yes that's it. For us, we're coming in, we have effectively per share...

Josh: How did you up it to $100 dollars in cash flow?

Kenny: That's what our returns are. If we come in with an established track record of 10% per year and the market's 5% then it's the same situation.

Josh: Okay, I fully understand that. Maybe it was just how you were saying it. I honestly, honestly I have no idea what the hell are you talking about. Now I get it. It's obvious.

Kenny: Tell you what, that's like the most naive, simple way to look at a possible, like between now and we reached that point, the market's going to be completely different. I have no idea what the public reach is going to be. I'm assuming everything stays the same. When you go public, you're going to have to get under writers involved in investment banks and you're going to be paying seven figures at least, to get on to an exchange, right? Because that's going to remove some of your value. Like this is just like pie in the sky, back in the envelop. This is a possibility and that's what we're going to get to. You might get there and realize that, "Hey, you know it's actually not as good as we thought. We'll just stay at that size.

Josh: Got you, got you, got you, got you. Alright well listen. We're starting to run out a little bit and I think you know some people's brains might have been busted, I know. I know mine might be, but why don't we jump in to our fire round. Our famous fire round.

Kenny: Sure yes.

Josh: Our famous fire round here, and I think Brandon wanted to kick this thing off so, Brandon?

Brandon: I do. Again, these all come from the forums. I just pulled them all this morning from the last like 24 hours from the forum. First of all, if you had to leave your area and invest elsewhere where would you go?

Kenny: It's funny we're trying to figure out right now.

Josh: I'll take that as a non-answer.

Kenny: We want to, for our particular type of investing, we want to have a population between a 100,000 and 250,000 and we want cap rates to generally be, the fair market would be about 8%. We haven't really found the, "Ooh, this is the spot we want to go," but we're looking.

Brandon: Okay.

Josh: Okay. Do you ever structure rent to own leases for your tenants?

Kenny: There's one of those weirdly defined terms because everybody has a different way. I kind of know of these land contracts. It's a similar concept. I don't do it because I have an ethical issue with it. You're effectively charging somebody rent, and then—at least in a land contract situation. You're charging somebody rent and then you're expecting to them to pay for property taxes and up keep the property, so from a tenant's point of view, on a monthly basis, they're paying significantly more than they would be if they were just renting, right? The actual return on their investment versus just saving that money and buying it in two years is actually a lot worse. Not to mention, there are so many unscupulous people that you know, don't put the deed in the name of the tenant. They just don't pay the mortgage. The house gets foreclosed under somebody who is doing a rent to own. I just don't want to touch it. I think it hurts the tenants. It's taking advantage of people who might not have analyzed it from a purely return point of view.

Brandon: Okay.

Josh: Fair enough. Definitely.

Brandon: Alright, so when you if you have a tenant who sucks and they either leave or you have to evict him or you kicked him out or whatever the deal is, at what dollar point does it make sense to go after them? Like if they owe you $1,000 or it's $10,000? Where do you go after them and sue them or try to garnish wages or whatever.

Kenny: Yes sure totally. Any amount of owed balance, we get a judgment. We actually go to court and get the judgment. We go through the process of trying to garnish the wages, if they owe us about more than a grand. As far as handing them over to collection agencies, we're in a relatively rural area, so our balances don't get massive and this is not a lot of interest, like if you guys know any good collection agency who specialize in tenant balances, send them my way because I would love to find somebody who needs to track down some of our former tenants.

Josh: Yes, I've never had success with that either. I mean, garnishing, I've collected maybe a couple of bucks but you know really nothing more than that.

Kenny: Yes.

Josh: Alright, what do you do if you have 12 showings of a rental property and still no takers?

Kenny: Drop the price.

Brandon: That's nice.

Josh: Good answer, there you go.

Brandon: What if you had $100 a month from marketing, like you're looking for property and you had a $100 a month that's it.

Kenny:Oh looking to buy property?

Brandon: Yes so you're looking to buy property and you're you got a hundred bucks a month. I mean this is kind of go back the starting house.

Josh: He wouldn't, he would save it until he has $50,000. Hypothetically

Brandon: Hypothetically though, if you had a hundred what would you do? What's the most important?

Kenny: For buying property, the one thing that has had the most success for us is we have our little contractor cruise. Obviously they have their trucks, that are company cars or whatever. We just paint on the side of them in big, bold letters, "We buy houses and our phone number."

Brandon: Nice.

Kenny: Because you know they're actually doing work. People can see the quality what's coming out of it. They know you're going to manage your property well, everything like that. We get more calls from that than anything else.

Josh: Okay, and I'm going to ask you. Is this, this is like a pick up truck with like a stenciled “We buy houses,” or is this like, you know, with a brush... 

Brandon: Finger painting.

Brandon: Yes, you know, did you brush "We buy houses" like you know, somebody might do on a cardboard, you know, sign on the corner.

Kenny: It's stenciled and it's on the back. It's like the actual pick up part of the truck. The haul of it.

Josh: Okay, so it's professionally posted on there versus like you had me thinking you literally just like wrote with a brush, "We buy houses". I was getting a little nervous about it.

Kenny: Yes actually we found a five year old to do it just so it would really, really amateur.

Josh: That's awesome. Well that's the thing though, I mean, because you know some of these really amateur signs tend to be effective so I was curious.

Kenny: I don't know it, because we stenciled it’s any more effective I mean the people who were calling that number, they just want to f out, right? Like I don't think they really care about the quality of the sign.

Brandon: Yes.

Josh: Yes. Yes I'm glad you said f.

Brandon: So we don't have to bleep you. Alright so do you pay off personal debt first or start investing it in real estate?

Kenny: That's a hard question.

Josh: We didn't say it was going to be easy.

Kenny: It depends on the person honestly. I think that goes back to our earlier conversation about you know is it worth your time start investing right away? Should you build a nest egg first and go into it? If you are passionate about real estate and you want this to become a career and you have a moderate amount of debt then it might make sense to go straight into real estate. If you really are just trying to build passive income then you really need to compare kind of what returns you'd expect in the real estate are versus what your interest rate on your credit card or your personal debt is.

If there's a large, I mean if your credit card is charging you 5% per year and you're able to make it 10% in real estate, then yes it probably makes sense to do the real estate and just pay off the debt over time. Brandon: Cool. Do you rent to Section 8 tenants?

Kenny: We do. Yes.

Brandon: You're okay with that? Do you recommend that?

Kenny: It's a bit more red tape, but they're very good at paying because it's the government, right? You don't have to worry about collecting. You have lower turnover and all these things.

Josh: Got you, got you. Alright last question. If somebody comes to you, and is desperate to sell their house. The guy that you referred to earlier who wants to get the f out as, I quote you, but they have no equity. Is there anything you can do?

Kenny: Are they under water or they have no equity?

Brandon: Let's say no equity, I think.

Josh: Yes just no equity. Like nothing. Just even right?

Kenny: Yes okay. In that situation, I mean, they have to pay closing fees right? They have to get out there?

Brandon: Yes, they can't really sell it because they can't really afford it let's say.

Josh: They can't afford yes exact, to pay the 6%. They can't cover any of that stuff.

Kenny: Okay yes. Look you can go to lender, you can try to organize a short sale. I mean, that's certainly a possibility. We tried that a couple of times in the past and you know back in '08 - '09, yes, you could really get them to do it. Market's turning around a bit. That option's become less, less viable. You can do some owner financing to help them out a little bit, but one thing that we tried to do is figure out what we're good at and just do that a lot. Going back to what we were talking about.. Being very stupid or not stupid. Simple investors. When you start doing owner financing, then you start needing to do credit checks and you become a lender and that's not our core competencies. We just don't do that.

Josh: Got you.

Brandon: Cool.

Josh: Fair enough, fair enough. Alright. Let's move on the last part of the show. Our famous four. Seriously?

Kenny: Famous four.

Brandon: Yes!

Josh: That was Kenny. Yes. There you go. Alright, Kenny. Famous four. What is your favorite real estate book?

Kenny: The book that got me in to real estate investing was the granddaddy, Rich Dad, Poor Dad. I re-read it actually last week because why not? And there's no substance in it whatsoever. It's really just saying the same thing over and over again which is, invest in stuff right? It didn't really stand up to the test of time. As far as books that are really informative to my investing, and had a lot of substance and content, Investing in Real Estate by Gary Eldred is very, very good.

Josh: Okay, there you go. Nice. What about your favorite non real estate book? Any business books that you think would be helpful to the listeners?

Kenny: Oh, business books. The E-Myth Revisited was pretty good. Again that was very high level and does not give you a lot of detail about the actual, the day to day of what you need to do. Kind of related, I'm finding it's not really a business book but the last book I finished was On China by Henry Kissinger.

Brandon: Really okay.

Kenny: It's whatever since the 50s, whenever he started dealing with China. Tracking through how the landscape has changed and how their approaches have changed but the bit that really struck me and I actually wrote a recent blogpost on it was how China has managed to stay one country while there's been all these upheavals all over the rest of the world. There's a lot of takeaways that you can apply to your investing strategy on how to build something that's really going to last.

Josh: Would that have something to do with the guns that they point at the heads of their citizens or the tanks perhaps that they plow on people's houses down.

Kenny: It certainly doesn't help but I'm talking more like in 2000 BC, it was a country when we were still on the height of the Egyptian pharaohs right? It's still the same country. So there's something going on there.

Josh: Absolutely. Cool. Hobbies?

Brandon: Yes hobbies. I read that you were an Iron man, something, is that right?

Kenny: I did an Iron Man in Cozamel, Mexico back in 2011. It is a triathlon. It's a two and a half mile swim. It's a 112 mile bike ride and full marathon at the end.

Josh: Again showing off. Wow. Wow. Hey, I bike four miles every couple of days. That's kind of cool.

Kenny: Wow, I never run more than five minutes before I started training for that. Then a year later I was there. It's not as hard as everybody it's just time consuming.

Josh: Okay, got you. Got you. Okay okay.

Brandon: Last question for the day. What do you believe sets apart the investors who succeed from those who don't.

Kenny: First it's discipline. Find out what you're good at and do it. Focus on it, don't get distracted by the shiny balls we talked earlier at the very beginning about shiny balls. You know, like the shiny balls that's bouncing in front of you, and you act like a squirrel and you go chase after it.

Josh: Shiny objects. Yes I got you. I thought I'd have some maturity 

Kenny: 4th grade humor.

Kenny: We know we started with the whole thing about Warren Buffet right? Invest simply. Do it conservatively. Do it for the long haul and you'll be alright.

Brandon: Cool.

Josh: Nice. Alright, well listen Kenny that was great. Lots of interesting stuff. One of our few mini debates, I'd say. I think, listen, I think there's a lot of viewer points and my goal is to get as many out as possible. There's no one way to do it. The only way I believe that you shouldn't do it is, you should not rush in and you should not listen to the people who can tell you that you're gonna make millions overnight. That's absolute nonsense and I do like your philosophy on risk aversion and things like that so it's great. Thank you so much for being on the show, hopefully we don't leave too many people scratching their heads on the REIT up there and we'll look forward to seeing you on the BiggerPockets blog and around the site.

Kenny: Alright, thanks for having me guys.

Josh: Alright guys that was Kenny Estes. Hopefully you enjoyed the show as much as we enjoyed bringing it to you. Definitely a lot of interesting discussions there, and as we said earlier in the show, if you've got any questions or comments be sure to leave them in the show notes at BiggerPockets.com/Show30. Otherwise, I want to thank you guys again for engaging and being a part of the podcast. Being a part of BiggerPockets community. If you don't have a membership jump on, it's BiggerPockets.com. Sign up today and get involved. Definitely follow us on Facebook, at Facebook.com/BiggerPockets. And our YouTube channel, you know, it's not yet enough love guys. We are putting out some really cool interviews. Brandon is putting up some awesome videos and they are awesome Brandon. They're awesome.

Brandon: Thank you thank you.

Josh: And if you guys want more of those, you have to subscribe. If you do not subscribe, if we don't get people doing that, you know we think you guys don't care and we don't spend the time to put out the content. So if you like the videos, subscribe. Hit that little thumbs up button next to the videos and let us know that you guys are interested in these videos that we're doing. The channel is Youtube.com/BiggerPockets. That's about it, jump on iTunes. Leave us a review, leave us a rating and we'll see you around at the next show. Thank you so much for being my co-host Brandon.

Brandon: You are welcome thank you for being my host.

Josh: I am your host. Alright guys we'll see you at the next one. I'm Josh Dorkin. I'm outta here.

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