BiggerPockets Podcast 046 with Jon Klaus Transcript

Link to show: BP Podcast 046: Six Figure Profit Spec Building and Marketing for Incredible Deals with Jon Klaus

Josh: This is the BiggerPockets Podcast, show 46.

You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing without all the hype, you're in the right place.

Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com, your home for real estate investing online.

Josh: What's going on everybody this is Josh Dorkin, host of the BiggerPockets podcast. Here with my co-host Brandon Turner. Hey Brandon.

Brandon: Hey, how's it going?

Josh: Good, man. It's a big day, man. It's a big day.

Brandon: It's a big day. That is if you're listening to this podcast on the day it comes out, it's a big day. You have no idea what we're talking about.

Josh: That is true. Well today is a once in a millennium occasion. The combination of Thanksgiving - one of my favorite days of the year - where the eats are plentiful and tasty. And Hanukkah - yet another wonderful period in my life as a member of the tribe, as we like to call it.

Brandon: Hahaha. I am not part of that tribe, I'm sorry.

Josh: Eh, we're all Jews. 

Brandon: Hahaha

Josh: You're a Jew at some point, I don't know. I don't know. Yeah but yeah. Anyway, now things are good, man. Things are good and we've got a really cool show ahead. And we'll get into that really quick but before we do, why don't we do this week's...

All: Quick Tip.

Brandon: Today's quick tip, I'm going to take and because this has been my baby for the last couple of months, we finally came out with the Buy and Hold Calculator that we've been talking about forever so my quick tip is go check it out because I honestly think it is awesome. And I don't say awesome very much.

Josh: Take a shot, it's awesome. Shot. Shot.

Brandon: Yeah. Yeah, no really it is really great. You can put in your property information. You can put in potential rent income. Kind of figure out the next, 5... 10... 20... 30 years of an investment property. So if you ever are considering a buy and hold real estate investment, I definitely, definitely recommend you check this thing out. Run your potential property. Do the calculations and see what it comes up with. See what your future looks like. Yeah, check it out.

Josh: It's like a crystal ball, isn't it?

Brandon: Not quite. Estimations, you know. You don't guarantee anything like crystal balls guarantee everything, right?

Josh: There you go. Good classification. Well you can check it out BiggerPockets.com/calc along with our other calculators so definitely make sure to check that out. Cool, all right. Well let's jump into the introduction here. We've got a really cool show with a really great guy, Jon Klaus. Jon is an investor. He's an entrepreneur and an investor in the Austin area. He started lots of businesses previous to his real estate business but he's done it all. He really has and we're going to explore a bunch of that. There's tons of great information for anybody and everybody, whether you're a newbie or if you've been investing forever. Definitely pay close attention. Bust out a notepad and be ready because there's lots to cover here.

Really, really quickly before I bring him in, quick reminder to write down any questions you have and post them in the show notes. Ask them in the show notes after the show at BiggerPockets.com/show46 and Jon will be sure to come in and answer your questions. Also really quickly, if you haven't already done so, jump on iTunes and please leave us a rating and review. We'd love to hear your feedback. The more ratings and reviews you guys leave, the better visibility we're going the get on iTunes and the more people are going to benefit from the show so please take a couple of minutes to do that. We've got a link to that on the show notes as well.

So without further ado, let's bring him in. Hey Jon how's it going? Nice to have you here.

Jon: It's great to be here, Josh.

Brandon: Awesome. Good, good. We're glad to have you. Let's jump into this thing. What do you do? What kind of investing are you into?

Jon: I do several different types of investing. I'm a buy and hold guy. I have a number of single-family rentals. I've got an office building. I've got some land. The main thing I'm doing now is new spec builds.

Brandon: Okay, okay. I know a couple of those things we haven't talked about a whole lot on the podcast. We haven't really talked about office buildings and we haven't talked about spec buildings a whole lot. Just that one episode with Tucker Merrihew and I think it was podcast 22. So anyway, let's definitely touch on that today.

Josh: And we'll link to that in the notes. The show notes which you can find at BiggerPockets.com/show46

Brandon: Thank you. All right. And by the way Jon Happy Thanksgiving.

Jon: Thank you. Same to you guys as well. Happy Hanukkah Josh.

Brandon: Thank you.

Josh: Aw, thanks for remembering Jon…

Brandon: Nice, nice.

Josh: It is Thanksgivikah. But officially this is like the one time in a millennia that Hanukkah and Thanksgiving fall on the same day. So to all my fellow members of the tribe, enjoy your latka laden turkey.

Brandon: I don't even know what you just said.

Josh: You got to lick it up, baby. If you don't know, you're missing out, man.

Brandon: I believe that. Well Jon, how did you get into all this and how long have you been doing it and when did you get started?

Jon: So I finished school and I moved to Texas and I got a job as a limo driver. The owner of that company was super entrepreneurial. In fact, he was a successful stock broker and this was back in the days when if you had a business that attacks laws, that was good, it could offset your other games that changed. But he started this business to lose money and he made a lot of money and he built it in the franchises. And I was just inspired, entrepreneurly speaking, so I thought, "I got to have my own business."

So I found the guy who was selling his lawn care business and I worked with him for summer and had a lawn care business for a few years. So that wasn't real estate necessarily but it was entrepreneurial. When you're out there landscaping lawns, it gives you a lot of time to think and I did think a lot about the future. I also ran into another lawn guy in East Dallas who told me he had 50 houses. I'm like, "How can you have 50 houses? You're mowing lawns." And I think many of us know the story. He bought one, he bought another, he bought three and over time he had a serious portfolio all in the same area of houses. And I didn't really understand how he did it, but that never left my mind. It was a couple of years that I bought my first house but he was probably the biggest single inspiration. A guy like me, sweating to earn a living has 50 houses.

Josh: Yeah, that's the beauty. I think that's the thing that society, as a whole, fails to realize because I think real estate investors are kind of the ugly, stepchildren of stock holders and their traditional real estate investments as CNBC likes to…

Brandon: I'm not ugly.

Josh: Aw, speak for yourself.

Brandon: Haha.

Josh: Wait, wait. Hold on. It's exactly what you said. That lawn guy, the guy who's pushing a mower on your property had 50 houses. Who on earth would think that? Well, that's exactly what it is. Your neighbors have properties. Your friends. There's a lot of real estate investors that we don't realize are real estate investors and I don't know, it's kind of one of my personal piece. I wish we got a little more respect in the financial press because there's far more investors in our area and our neighborhoods than I think most people realize.

Jon: I think that's true. I think that's increasing as for the last several years. Ownership has decreased, so that means there's more and more landlords out there.

Josh: Yep.

Brandon: Yeah, I agree.

Josh: So you... Oh, go ahead. Go ahead, Brandon.

Brandon: So your first house you said you bought then, can you kind of walk us through that? Your first investment property?

Jon: Yeah and I'll back up just a second to the first property I bought period which is the home I moved into and carrying on the lawn care thing, I saved my dollars. I saved up my 3 1/2 %. FHA down payment and I bought a house with - actually with one million money. So that was my first one. Moved in to that. Lived in that for several years. Probably a couple of years after that, I bought my first investment property. And I read a book from the library by a guy named Wade Cook who is currently in federal penitentiary.

Josh: Yup, yup. Haha.

Jon: He was a guru back in the day but along with his guruism, he had some good stuff and he taught wraparound mortgages which are very similar to subject to mortgages today. So I bought - over a few years - a few houses via wrap, that is, wrap a mortgage around the existing mortgage.

Josh: Hey Jon, can you just dig in a little bit more on what that means?

Jon: Yeah, so this isn't done so much anymore. Laws change and mortgages change, but again, subject to is similar and that is you find somebody with a mortgage that you can assume. You assume their mortgage. You buy the house. You take title to the house and then you re-sell that house on another mortgage - an owner-financed mortgage. So there are a number of reasons you can't do that today. Similar concepts today might be lease option or subject to. I don't really want to get into all the new regulations around it but all that's become a lot more difficult to do now so we're not doing it.

Josh: Were you not prepared to break down the laws for us?

Brandon: Haha.

Josh: Because we wanted you to be ready for this, Jon.

Jon: Okay, so I do get like a Dodd-Frank quiz now.

Josh: Hahaha.

Jon: Yeah, I think that's broken down fairly well in the forums under a few different threads right now. There's some good stuff being written.

Brandon: There are and I will link to that in the show notes too. There's a number of good threads on it right now, that if people are wondering. We'll link to it.

Josh: For sure, for sure. Well, can I ask on that FHA house really quick.

Jon: Yep sure.

Josh: You said it's a 3 1/2 % FHA loan. What does that mean? Can anyone get an FHA loan? How do people go about doing that?

Jon: So the 3 1/2 % was the down payment and anybody can get it who is going to be an owner occupant. So if you’re going to move into that house and live in that house for at least a year, you can do that and have a very small down payment. But you know, on conventional loans, down payments are coming down now too for owner occupants. So you can buy a conventional loan home for 5% down now, not much more.

Brandon: Wow. You know what I love about that, what you just said Jon, is that you worked a summer - whatever it was - and saved up money from lawn care to buy that first property. And I think so many people just want to like jump into real estate right now and everyone's worried about "How can I do it with no money?" But I think that's cool like you don't have to have no money. You can just save up a little bit of money, like you said 3 1/2 or 5% and make it happen. Just takes some hard work.

Jon: Mmhm. Yep. You really can get going for a few thousand dollars. You're not going to start where everybody else is, but it doesn't take much. If you're determined and focused and you have a little money, you can be a real estate investor today. Although, I don't recommend doing it today necessarily. Get the dollars. Do your due diligence first because as a lot of folks will say rightly so, you make your money when you buy so you have to be pretty educated to truly buy right.

Josh: So you're not saying like today meaning right now isn't necessarily a bad time for any kind of financial or political reasons - you're just saying for somebody who might be new, wait until you're ready to go.

Jon: Yeah. I think that's right, yes.

Josh: Okay, gotcha. Gotcha. All right.

Brandon: And I was going to also say there's a post I wrote like a couple of weeks ago that I'll link to in the show notes called How to Hack your Housing and Get Paid to Live for Free, and it's kind of about that same philosophy of how to use a FHA loan to buy a house or a small multi-family property. Anyway, if anybody's interested that, it's on the show notes at BiggerPockets.com/show46. Anyway, let's move on I guess. What happened after that first - you bought your own house, then you bought a rental property, an investment property. What was that like?

Jon: Yeah, I learned to be a landlord by doing. There was no BiggerPockets. There wasn't that much written about it that I could find so I learned by doing and that means I made a lot of mistakes. Probably the biggest, single one mistake I made was buying for price and numbers alone. I looked at properties and said they sell for this and they rent for that. Those are great numbers, not considering location enough so I bought in the wrong areas, including a war zone.

And I know there's various definitions thrown around about what a war zone is, and I just define it by violent crime. If the violent crime is high, you don't want to be there. I know there's a few investors who do, but it's just not worth it to me no matter what the numbers look like. And they only look like that on paper with your vacancies and your repairs and your vandalism and your break-ins and such. The reality isn't there. So that's an early mistake I made - buying in the wrong areas but I really only did that one time.

Josh: Okay so do you mind if we dig in a little bit more on the war zone thing because I made the same mistake. I saw some properties. I saw some prices and said, "Oh, well these prices are great." Bought the properties because the rents look great but I really didn't take into consideration all those other things. Like the vandalism, the repair costs. So what was your experience?

Jon: So it was a fairly new property, it was a townhouse so I thought I'd be safe on the condition of the property. It was just over $30,000. Really cheap. My first rental on it was $650 so everything just seems fine. If I got good tenants in there, they did not stay just because it was too rough living down there and what I mean too rough is - violent crime or the threat of violent crime. That's terrible quality of life for anybody to live scared and truly be at risk. Including me, when I went down there to do anything.  You know you talk about not feeling safe at night. Well, if you're not even feeling in the day and you're getting the death stare from the gangsters in the corner, you probably should take that message and move on.

Josh: Yeah and I had the same thing. For me, I definitely underestimated repair costs, turnover. Finding high-quality tenants was really, really hard and you're more inclined to take lower quality ones because to get a great tenant is very, very difficult. And then you know, the crime is just headache. Everything from dealing with drug dealers and properties to folks stealing condensers and having to get cages, there's a lot of hassle that comes with those properties though if you have the stomach to deal with it, they could potentially make you a lot of money but it's not easy.

Jon: I should also say, I helped out for like nine years. Way too long. And I had zero appreciation and if I had just bought in some other moderate neighborhood I would have at least 50% appreciation over that same time period. So that's something to consider in the hood too.

Josh: Yeah, for sure. For sure.

Brandon: Well, cool. Well hey, we talked about the ranch with the 7,000 square foot. Would you mind if we touch on that? Was that a part of your story at this point?

Jon: Yeah, I've always liked looking at deals on land just because I love the land. I would look at MLS just constantly and the real estate magazines. For just properties around, not necessarily looking to buy them - but possibly for my primary residence, but just because I was really interested in it. And I saw a listing, I saw it on realtor.com for an REO, it said 5,500 square-foot house on 49 acres and the price was $350,000 and I said, "That's just way wrong. I got to go check this out."

So I did and the agent was an agent for the bank. It was an REO. Had a story. And the story was the bank is selling this house that was never really completed on one acre and it's completely landlocked by this other acreage by the guy they foreclosed on. And they're not getting along really well. Since the house was never completed, there's no water meter. And the guy who owns the surrounding land is in no way going to let them have an easement to get a water line across it. So the bank is stuck and the guy, he doesn't really care that much one way or another about selling the land but he's not going to let the bank win since the bank foreclosed on this home. Agent explained the only way this is going to work is if you're going to buy the acres surrounding the house and the house. "Okay, I'll really consider doing that and the bank is going to be really motivated because this isn't going to be easy to make it work."

So I went out into the city. It was actually in the country but a city had extra-terrestrial jurisdiction of this area. And I said, "What can I do with this property? Can I divide the property? Can I develop this property?" I got a good education from them and I learned that they only had 20 feet of road frontage. That wasn't wide enough to put a road back on it. So what I did is I tucked the property owners on either side. The land owner on the north and the landowner on the south. I tried to buy just the strip to get at least 60 feet wide and the landowner on the south, she sold me a 40-foot strip off of her property and it turned out - I didn't know it going into this - turned out that she went to my church. So she was someone I knew.

I put this offer together to the bank, to the landowner, to the lady who had just little strip - and actually that was a little after the fact, that piece. The deal worked and I got the bank to take a big discount because they just wanted out of the property. So I think I got all for like $280,000. And it turned out - the listing said 5,500 - but when I measured it I got 7,000. I said to the agent, "What's the deal?" He said, "Yeah, it's probably near 7,000 but no one was going to believe that that was a real deal."

Brandon: Haha.

Josh: Wow.

Jon: And it was unfinished meaning it needed appliances and new countertops and flooring and paint and such so I think it needed some work on land. I put $60,000 into it to finish it up and then sold it. I didn't have a giant profit but I didn't have a lot of time into it. And by the way, the bank loaned me the money on the whole deal. The loaned me 80% not just on their house, but on the land too.

Josh: Was this a traditional bank or was this a portfolio?

Jon: It was a traditional, regional bank that owned the foreclosure. And I had been doing other business with them so it was not a conventional loan. It was one they kept in-house and then I just paid it off.

Josh: Ooh, that's nice.

Brandon: Are you saying the same bank that sold it is the one that carried the financing on it?

Jon: They did, yes.

Brandon: Wow, that's nice. I've heard of that happening. Never had it happen for me.

Jon: I think I had an advantage since I already had done a couple of deals with them. Like the church I used to go to deal a building project and I got the construction financed to them and I kind of headed that out so I had that relationship.

Josh: Nice, nice. That's awesome. So it's sounds like you've got about $340,000 into plus holding costs and so on and so forth. What did you end up turning that for?

Jon: I sold it at $395,000 so that was my net was about $30,000 on it.

Josh: Okay, okay. It's a respectable return.

Brandon: Yeah, I'd take it. I'd take it. Haha.

Josh: Absolutely. No, that's cool. That's a great story. Have you done other flips? I know you said in the beginning you do the single-family, the office, the specs. But have you done other flips?

Jon: Yeah, so in 2008, 2009 time frame is when I decided to not just play around with real estate but seriously get after real estate investing. The reason I made that decision primarily was just the downturn in the real estate market where I tend to be contrarian in my investing. So I thought, "You know I don't know if we're ever going to see a 20% or 30% discount again. It's very rarely happened in the past," and of course you guys know how severe it got. It got as severe as the Great Depression in terms of housing values. But property values after every single down cycle have gone up, so I thought, "I've got to get into this. Now is the time." And of course it was the perfect storm with banking hitting the wall at the same time that real estate and some other things hit the wall.

So I started doing my homework. I decided to read ten books on real estate investing, except about halfway through I discovered BiggerPockets and I decided to stop my goal of ten books and just devoured BiggerPockets. That was in the end of '08 and beginning of '09. And I started buying at HUT auctions. And I ended up buying about 20 houses in the HUT auctions at over 2009, 2010 and I kept most of them but I did rehab flip some of those. And actually I still have about half of those that I bought back in that timeframe. Financing was really tough then so it was a combination of my money, my partner's money and a couple of private money guys to buy most of that. Those are bread and butter rentals. Those are properties that are today worth maybe $60,000 and rent for $950 or so on average.

Brandon: Okay, that's not bad at all.

Josh: So HUT auctions. I know we've covered it but do you want to give us a quick 30 seconds on what a HUT auction is? How it works?

Jon: Sure yeah. So I did most of my work online, identifying and researching the properties and when I was in the buying phase, I bid on properties every week. Sometimes three or four a week, so that over a two-year period I bid on close to 200 properties to get 20. So my ratio wins was only about one and ten. So I bid pretty conservatively and of course owner occupants get the first shot. So what that meant is I bought mostly uninsurable homes, which meant they needed a lot of work. That they weren't ready to loan on. So that meant every single time I had a rehab project. I got a lot of rehabbing under my belt from $2000 to $3000 cosmetic to $7000 to $8000, to sometimes we'd have to put $20,000 into a property and at that point we'd either rent it or sell it.

Josh: What kind of discount were you getting on these properties?

Jon: Okay, so these properties sold new for - say, in 2001 for example - for $100,000. I'd get a property like that for maybe $30,000 and I have to put $10,000 into it so I'd be in for $40,000 and that would have a tax value of maybe $85,000 or so. So you could say a 50% or 60% discount to what it was but as far as real market value, probably more like a 30% to 40% discount over real market value.

Josh: Oh, that's great. That's great. Now do you have any tips on that? Brandon, we talked about this a couple of episodes ago, didn't we?

Brandon: Yeah, we did. What episode was that?

Josh: I don't remember which.

Brandon: Yeah, but we've talked about it a couple of times now.

Josh: But one of the strategies was literally, super, super lowball, their offers. They expected way, way smaller ratio than you're getting. I'm curious what's kind of your bidding strategy on these HUT properties?

Jon: And that evolved over time, but it's a number that going to work for me. And I wouldn't necessarily try to bid so low to like win the lottery, maybe like that other investor's doing. Or there was a guru back in the day on late-night TV, Tom Vu. I think that was his main strategy is go on off for 50% of asking on a whole lot of properties. I wasn't doing that. I was looking at the value, trying to figure out what it's really worth. What it'll take to fix. What we can rent it for and does it fit with our criteria.

And back in that day - there's still talk on BiggerPockets about this - but the 2% rule, which of course, we're in a completely different market today than we were there. And these things vary a lot by geography, but I thought, "Well, if I can get 2% rent back for my total capitalized cost, that's pretty good," and sometimes I'd hit 3% or 3 1/2%. So my target was 3%, unless it was a higher quality property - bigger acreage or a better location. Then I would bend that rule a little bit.

Brandon: Hey Jon, can you go a little bit more detail on the 2% rule for those who might not be familiar with what that is?

Jon: So the 2% rule or it's actually a rule of thumb that you'll read about on BiggerPockets sometimes is for the serious cash flow investor, it says don't pay more than 50 times of one month's rent for a property. So that would be 2% of the purchase price or the purchase plus fix price which is the capitalized price. And if you do that, you're almost certainly going to cash flow. However, in the top 25 cities in the US, it's really hard to do that in most of those cities. It's hard to do it on the East Coast. It's hard do it on the West Coast. But it can be done in the Midwest. It can be done in more rural areas. It can be done in the South and MidSouth. So I'm not preaching that rule necessarily. I'm just saying that was one of my criteria at that time.

Today - in a different market - I'm willing to buy property that I'm only getting 1% percent back on per month but I want that to be in great area, a great school district, with a really good chance of appreciation.

Brandon: Okay, so your strategy's kind of shifting a little bit and I think that's important.

Josh: Right. Yeah, it is. I'll say this Brandon, that I was all about income because income was just so rational and I could defend. Now, I'm not quite as much in the income. I've got more income that I need. I'm just putting it back into more properties. I'm thinking in terms of, "What does this look like 10, 20 and 30 years down the line?" and buying properties with that in mind. Of course, not the spec flips but other properties because once in a while you'll hear about properties.

Oh Brandon, you and I have talked real briefly that some of my family came from the Greeley area or Windsor in particular. My grandfather bought a farm in 1930 or his father did. $7,500 and that's worth several million today. So how does that happen? And I want to back up and take a look at that macro trend over 80 years. How can you get 1000x appreciation? Not that I need to but if I understand that, that'll affect how I invest in real estate for the future?

Josh: Nice, nice.

Brandon: And you know, I think that's also an interesting point about when you're starting out, I feel like - you know for me I'm the same - cash flow is always number one. And when you're starting out and you don't have a lot of money and you want to quit your job, I do believe cash flow is imperative to it. But as you get the cash flow, I think it's okay like you said to change over time to maybe make it more appreciation-focused. I mean, I would never tell somebody to go out and get negative cash flow severely just to try bet on the market but if it becomes a big picture thing, I don't think it's terrible.

Jon: Yeah and just to get a little finer on that point - it's not so much betting on appreciation or speculating on appreciation as buying in high-quality areas, we'll say class areas, which have historically appreciated more in faster and longer term than B areas or C areas. That's just the role that is generally going to happen. And then the other macro trends, which I want to follow is population growth and job growth. I look hard at those things now as to where to buy my properties.

Brandon: Yeah, and like I told you before we recorded today, that someday I'd like to just move all of my investing to Texas. I mean I haven't done all the research but it just seems like there's a lot more job growth happening there than there is out here in Washington.

Josh: Come on guys. You guys know you want to move all your properties to Detroit. Come on.

Brandon: Haha.

Josh: You knew it was coming.

Jon: We did.

Brandon: Yeah, I knew it was coming. Yeah, we had to do it.

Josh: I mean that's the reason I pick on Detroit more than anything else. I mean it's all about trends, right? If people are leaving and fleeing your area, it's an area you probably want to unload on. And that's what I had to do with those tough properties that I had talked about earlier. The area was getting real bad. It was getting worse than it was. And it wasn't great to start with. The renters, even decent or half-decent renters, were taking off. Well, what are your chances of having a cash flow on property? I don't care how cheap it is. If you can't put somebody in there, it's too expensive.

Jon: Now one point on that is that an area can have a temporary decline and then come back. Like in Florida, I think in 2009, Florida had its first year in over 50 years were the population actually decreased. And I looked at that and I looked at the rest of the [inaudible] [31:50] and I said, "That has to be temporary." What's going on in Nevada, in Arizona and Florida just has to be temporary. It turns out that that's the case and I suspect that might be the case with parts of the Midwest too and hopefully it's true in Detroit, that they turn it around.

Josh: Well, yeah I mean the key is to get some stronger economy going in these areas and if they can get politicians who can incentivize business and move it into these hard hit areas, obviously jobs are going to come and people are going to move. You know it really kind of goes up to the top and we are reliant and a lot of these cities are reliant upon having good quality politicians who know how to attract business. Because if you can't do that, there's not going to be people looking to rent.

Jon: Sure.

Brandon: Deep.

Josh: You know, that's who I am and I'm a deep dude.

Brandon: You're a deep thinker.

Josh: That's right. Alright, so let's cover some of these things in a little more detail. It sounds like you've bounced around a lot from these SFRs, single-familys, the office, the spec stuff. You've bought through auctions. Sounds like you've purchased REOs on MLS and things like that. What I want to kind of focus on is marketing for a little bit here. How are you finding, obviously the auction ones you're finding on the auction sites, right?

Jon: Yep. So where marketing comes in is now I'm buying most of my properties through my own marketing and not through auctions or MLS anymore. Occasionally an MLS deal will come along. But I kept reading and hearing about these deals that were above and beyond anything I've ever seen on the MLS. I'm wondering how in the world do these people get them? Marketing is sometimes the answer. Sometimes the answer is just the right relationships or being extremely knowledgeable and well-connected in a certain area.

But I decided to try marketing to buy properties myself, just starting with yellow letter campaigns a couple of years. I didn't get a lot attraction in the first six months but since then I've had a lot attraction. And it's not so much that I'm buying a lot of properties, but it's that I'm getting high-quality properties at a deep, deep discount that makes the marketing pay for itself over and over and over again.

For example, on our spec builds - and these are not just little houses, they're pretty high-end - but on average, we're making over $100,000 per build. The key there is," What do we buy the lot for? What do we buy the property for in the first place?" I'm not the world's greatest builder. In fact, I'm not that experienced yet, but I can beat a lot of the great builders because I can buy better than them, because I'm paying less for the property than they're paying for. I know we've talked in a number of your podcasts you've gotten into marketing a fair amount and also direct mail campaigns. Specifically, I've worked with Jerry Puckett and Brandon, you know what podcast number Jerry was? Was it 21?

Brandon: What was it? 21, I think.

Jon: Okay, what Jerry says is market like a wholesaler and what he means by that is all investors who are buying should market like wholesales. So instead of buying a 10% or 20% off market value, you can consistently buy at 60% off market value, because that's what wholesales have to do. You have to buy at 60% so they could flip that contract for 70% and keep the difference. I've mailed out, at this point, tens of thousands of letters, which might sound like a big number but it's really not a big number. Maybe spent $25,000 on yellow letters but I'm looking at profit margins from those yellow letters and I've got deals that are closed, deals that are under contract and deals that were still going to build well over a million dollars just from $25,000. That's profit. Just from $25K in marketing. So I'm a huge proponent in investors doing their own marketing to buy their own deals. Not to wholesale them.

Brandon: That's great Jon. And one thing I want to touch on a little more there, just to make sure people understood what you said there. Like you said, Jerry says market like a wholesaler. That's why I think sometimes we interview wholesalers here on the podcast, and I think people that aren't wholesalers sometimes may tend to ignore those episodes or they don't think it applies to them - but I think this is exactly why it applies to them is because if only other landlords are flippers, if only people approach their business the way that wholesalers do, like you said, it's all about how low you can get the initial buy. It's all about the buy. So I think that's a huge, huge, huge point that people need to remember is if you can market like a wholesaler, then you don't need to use a wholesaler to buy properties because you can get them for the wholesale price and that's key. That's call.

Josh: Hey, can I jump in on that? Because I've got a friend, he's one of those hedge fund guys and he and I have talked a lot about wholesalers and he's fascinated by the whole premise of these folks and what they do. You know, because what they do is they go and they buy MLS and they buy REOs and they buy auctions and they think they're getting all the best-priced deals out there. Maybe I should have shut my mouth but we talked about it and he's like, "Wow, that's crazy. I can't believe that people are doing all this stuff and there's a whole segment that we're not even touching.

The thing is they don't even care to do it. It's too much work for them to do that. They don't want to spend the time and energy to do that. They want to just buy it as fast as possible. But it's fascinating. Doing that really does give you an advantage over everybody and especially for those people who are freaking out by all the hype that's out there from some of these gurus saying the world is coming to a close for real estate investors. Just keep marketing. Keep doing your thing. The world ain't gonna end, trust me.

Brandon: True.

Jon: Sure and the deal flow will always be there no matter what's going on in the economy. People will always be buying and selling property. Always.

Josh: So Jon, you had mentioned that the yellows didn't work at first and so what did you change or was it just that it took time to kick in?

Jon: That's it, you just have to do the repetition and once I had a prospect - and I had a number of prospects going - but sometimes it takes them a few months to actually get to the place where they're really to do their deal. Ready to move. They have their next place lined up that they're going to move. So it was just giving it enough time and then tweaking the message and also tweaking my approach as I went along. Early on, I was afraid to make offers because I wasn't just going to flip the deal, I had to close on the deal. That was my plan, but I got more and more comfortable with the neighborhoods. I was working in neighborhoods virtually - that is I was there with Google Streetview. I was there with the tax appraisal site. I was looking at the Zillows and I was looking at MLS, the comps.

So I got to the point where I really could make a decision about an offer number within 15 minutes or so. And once I could do that, I could engage the potential seller pretty quickly with a lot of confidence or at least give them a range. And also, just buying a couple gave us confidence to keep going and do more and I've always had in my back pocket, "Well, if I'm not going to close on it, if I don't need to close on it, I know enough people now where they'll close on this deal." So that made me not afraid to put properties under contract.

Josh: Go ahead, sorry.

Jon: Well, I've been attracting enough capital, getting more and more bankable that I'm able to buy at higher rate, a higher level than before so my marketing's working better but so far we're able to close on everything we've put under contract.

Josh: That's awesome. That's awesome. Well, so... Darn it, I was going to go somewhere but you said something that just grabbed me. You're becoming more bankable. You're becoming more attractive and I think we've talked about…

Brandon: [whistles]

Josh: Yeah, look at you.

Brandon: Haha.

Josh: Is that just a matter of having a history of success?

Jon: That's part of it but honestly a bigger part of it is banking is loosening up. I mean, just in the last five years, five years ago you could do nothing and now especially in the last couple of years, banks are loosening up. But also, my balance sheet is growing, my income is growing, you know, send it to the bank and they're good or get in partnerships with others where they're looking at you in an aggregate. And if you've got three or four strong partners in a deal, the banks just love that. And if it's not a bank, it's an equity deal with another investor or it's a debt deal with a private money person - and we're doing all of those.

But bank is probably best just because that's cheap money and they'll lend a lot. We just got approved for a $405,000 loan a couple of weeks and one of the next ones I'm looking at is $600,000 - and that's construction loan - so we pay it off in a year. There was no way I was even close to that 18 months ago so it's both banks plus success.

Josh: Gotcha. No, that's awesome. So let's circle really quickly back to marketing. You're currently marketing primarily for land, correct? For these spec builds?

Jon: Yeah, although most of the time there is a home on the land. It's just an old, small-frame home that we scrape off.

Brandon: That's what I was wondering that same thing. That's what Tucker does, that he talked about. Cool.

Jon: Now, I'm working a lot in Austin and the exception there is if you've got trees in place, you can't build new close to those trees, especially if they're big trees. And the city has designated what they call "heritage trees" and these are really big deal. I don't want to spend a lot of times on these, but a big tree in the wrong place, believe it or not, can make a lot worth $200,000 less because you can't build on that lot or build anywhere close to that tree. So sometimes, we'll buy a lot with a bad, old house on it but we'll keep that bad, old house because we've got to protect the trees and then we're grandfathered a building, you know, completely re-building that house and adding a second story onto it.

Josh: Ah, so you're not going to scrape it. You're just going to take the old house and keep the frame and you're good to go. Very smart. And that's something that's specific to Austin. Presumably, there's other areas that have similar rules.

Jon: I would say any larger progressive city is doing that. And I would call Austin the only really progressive city in Texas, compared by California standards.

Josh: Yeah, Austin. You might as well be in California.

Jon: Yup.

Josh: Nice, nice. I just realized something. You're working a job as well, right? You've got a company outside of your real estate, don't you?

Jon: I do, but I spend very little time on it because that's a mature company now with a mature staff and I get involved for troubleshooting and such. But I probably only spend only 10% to 15% of my time in that company at this point. Which is really what we want out of our real estate businesses, right? To be active initially, get it mature so that it's passive and it can still grow. Well, that's actually the case with my IT services company, which was a little garage start-up with no money but now it goes off a good W2 income to myself and my partner which helps us borrow as well.

Josh: Nice. So you're living the dream across both fronts?

Jon: Yeah. I'm not quite living the four hour work week dream. Haha.

Josh: But surely that's going to be your favorite book as we get into that question, isn't it?

Jon: If I want to torment you, maybe.

Josh: Haha. Nice. Well, you know I want to move on to spec building because you mentioned that with some of the specs you can do over $100,000 per build in profit and that's awesome.

Brandon: That's huge.

Josh: But I think a lot of people are intimidated by the premise of building a house from the ground up. Let's first talk about why you got into spec building and then I'd like, if you didn't mind, if you could walk us through the process of a spec build?

Jon: Okay, first I'll say, if you're intimidated, I was intimidated too. I thought, well, there's a thousand different things you have to know to build a house. I'm going to miss something and I'm going to mess up big time. However, I'm not building it myself. I'm working with a contractor who knows what they're doing. I'm working with an architect who knows what they're doing. I get consulting where I need it, especially early on, or work with an experienced investor the first time or two around. So that's how I started.

My first time out, I went with the guy and put in half the money and he had done seven in his neighborhood and I could tell he was getting better at it, and I just watched really closely everything he did. And he still made mistakes and what I realized - I suspected this the start - but I realized, that a new build is just like a rehab but with more steps. Especially before you start steps. And you've got to learn those pre-development steps before you break ground. But after that, I mean I've heard Jay Scott say this too, it's building the house is pretty easy for an experienced rehabber, because you've done almost everything before. It's just having just a few new elements to the actual building of it.

Josh: Gotcha. Gotcha. Gotcha. Alright, let's talk about those pre steps and the post steps. Let's start at zero. I mean, alright I found a lot. Cool, i'm going to tear this house down and build a spec on it. So presumably you're going to have to get some permits to knock it down and clean up. You've done that. The land is pretty much a clean slate at this point. Now what?

Jon: Okay, I'll start there but I will say that you've brushed through probably the most important part and that's selecting the lot and making sure you can build on it. But we can get back to that.

Josh: Well, let's cover that. I don't want to brush through that.

Jon: Okay. So the question is, whenever I'm evaluating a lot is what can get built on this lot? And generally speaking, the developer says, "I want the highest density that I can get in here." So that might be multi-family. Not that I do multi-family, but if I'm going to build a single-family on a lot that you can build eight on, that's not the highest and best use. So maybe I should flip that lot to somebody else who's going to build more on it.

So for us the answer to the question is usually - because we're buying small lots - single-family home or duplex or a condo regime with two homes on it on one lot, so it was one home before but we're going back with two homes. And that's what I'm looking for. I want a lot that's an SFR lot but it's zoned so that can build two homes on it.

So that's a certain size and there's certain other criteria and you have to learn the specific criteria of the city that you're going to work in and I would recommend going down and talking to planning and zoning in that city to start understanding what you can and can't build. They want you to bring them a specific lot or specific questions. That's great if you. If you can't, they'll still answer some of your questions.

"So what can I build?" I want to build the most square footage and the highest density that they'll allow me and usually they're going to be smart about their growth and they're not going to let us do something stupid that hurts the neighborhood. So if it looks like it's green-lighted to build a duplex, I'll hire an architect and let the architect do a lot of the dealings with the city and really go all the way from the designing the home to getting the permit. And that typically, for what we're doing, takes some time. Because we're changing the use of land. The shortest it's ever taken us is three months and the longest it's ever taken is eleven months. Although if you're just building a single-family home, you could sometimes get permits in the city I work in in two weeks. And I've heard of even faster in some other cities.

Josh: Hey Jon, what does it cost to hire an architect to design and take care of permits and all that stuff?

Jon: We'll pay in now $2 or $2.5 a square foot, which is a little on the high side just for design, but for them to take the ball and get over the end of the end zone, it's worth it to us. And by that, I mean permit. The building permit is the first big hurdle you have to get over with the city. And the second one is when you get to the end of the build, it's the certificate of occupancy. I mean, those are the two things. The start of the build and the finish of the build. And inside of that, it's if you're working with a good general contractor, they're managing pretty much all of that with not that many choices from you along the way, if the architect's given a good plan. But in some cases, you might be more hands-on. You might be the GC yourself. And if you're the GC yourself, that's probably a little too much to get into on this podcast, other than to say that you are managing every piece of that construction and every sub and it's all got to work together to get the right product to the right CO at the end of the time.

So you're managing for satisfy the city. You're managing for cost. You're managing for quality and you're managing for time. So you have to bring those four elements together and if you can come in on time, on budget, good quality and get your city requirements done, you're in good shape. Every experienced builder knows that but I think here's the thing that every experienced builder doesn't know and this is kind of moving back to the beginning. Buy the lot right and that makes all the difference in the world. I see a lot of good builders out there who are just - maybe they're not overpaying for the lot - but they're not buying in a neighborhood that's going to support spec construction to the degree that they're going to make enough money.

I would say if there are 2,000 square foot homes in that neighborhood, new ones selling for $200,000 - that's not going to work very well. However, if in a different neighborhood 2000 square foot homes are selling for $400,000 - $200 a square foot, you've really got some potential there. If you can buy your lots in that neighborhood for $50,000 to $100,000, you're going to have potentially six-figure margin on those deals. So it's going to have to be in higher-end neighborhoods and where I work is infill neighborhoods. That is close to downtown where there are tear-downs. In newly developed areas, it's a lot harder. It's a lot more competitive. So I like to find the one-off lot which packed to marketing in yellow letters, is a good fit for that.

Brandon: Yeah.

Josh: Nice. Wow it's fascinating and it seems like if you bring on the right architect and GC, it's simplifying it but it kind of builds itself. Where do you come into play? As a flipper, you're going to go in, you're going to take pictures, look at the property, see what needs to be fixed. But when you're building this upfront, how much of that is decided by the architect? How much of the detail is decided by you? Do they basically say, "Hey Jon, this is kind of generally what we've got. Now we want you to kind of pick the finishes," or is that kind of in a big, open conversation upfront?

Jon: Well, I've got a team and I trust my team members in the areas of their strength. I'm outsourcing a lot of my marketing. I don't take a lot of those calls in the first place. But in terms of identifying and negotiating the lot I'm going to buy, I'm very involved in that and I'm very involved in the financing and finding the financing. I have a business partner who lives in Austin and he does a lot of stuff on the ground for me. He's not the actual GC. We also have a dedicated GC under contract just to us who I've worked with in Dallas before I worked within Austin. Add to that, the architect and that's the team. So it's my main business partner, it's the builder, it's the architect, it's my marketing team and outside of that there's other players but those are the main ones.

Personally, I have opinions about design but I don't get too far into that because that's what the architect's good at and our particular architect lives in Austin. Knows the neighborhoods really well. Knows what's selling well. Her husband is an agent in Austin so they're good at that.

Josh: So you defer most of that? I mean you literally say, "Here's a plot of land. Run with this thing. I trust you to basically come up with all the specs and design and it's hands off for you in terms of that."

Jon: It is, it is. Now I have GCd my own homes before so I can get involved if I need to but I don't need to since I've got the better help. And I'm also a big believer of the concept of highest and best use of not just real estate, but each person's talents and time. So I try to be disciplined not to get to into stuff I'm not that great at and keep my team in their strengths and out of their weaknesses.

Josh: Gotcha. Gotcha. How long does it take to build the spec? You had talked about timelines. Permits could be potentially 3 to 11 months. How about the build time?

Jon: Yeah, if for us, if things go well it's four months. If things go poorly, it's five and a half months. The actual build time. Again, there's more knowns that that and more unknowns with the city. We generally look at projects about one-year start to finish. That is from the time we buy the lot til we sell it.

Brandon: You said earlier that these houses that leave a higher rent. I'm wondering what you can kind of tell us about. Like what's the typical size look like and the quality when you're all finished. I mean, how high-end are you talking about?

Jon: Okay, so I'll give you a link to some pictures. I don't have that right now, but we'll have that in the notes.

Josh: And where can we find the show notes guys?

Brandon: BiggerPockets.com/show46

Josh: 46. There you go.

Jon: So it's a custom design. It's a unique one-of-a-kind design. Where we're working modern and contemporary architecture is most desirable so it'll be kind of a funky design and it'll have just a number of modern features like - for materials - might be stained concrete or they might be wood. But it's fairly high-end wood. And then we might go with granite stainless in the kitchens, we might go with corks or something else on the countertops. Lots of light. Lots of windows and fairly green. We want a fairly efficient house, but we're not going towards net zero energy but at last addressing that.

So our build costs have varied from $90 a square foot to $130 a square foot. I don't want to be paying $130, that's a little bit too high. But some locations can justify that and where I work - and I have a great location - we'll spend more construction and we might get an exit price approaching $300 a square foot. So maybe it's $600,000 on a 2,000-foot house.

Brandon: Wow. And how long do these houses take to sell?

Jon: So far, they're selling immediately.

Brandon: That's good.

Jon: In some cases, we've got contracts in before we put them on the market. In some cases, we have multiple offers the first weekend. We want to price them so that happens. If I don't have an offer in two weeks, I priced it too high and I'm cutting the price. I want to move them quick.

Josh: How are you marketing them for sale? So obviously, price is going to be essential but what are you doing beyond that?

Jon: Yeah, you know far and away is just listing on MLS. Yes, we want great photography and we will do some great photography. We have not been staging. Some of my partners have staged but they go so quick that we haven't felt like a real need to do that. That's pretty much it. Get some good pictures. Get it up on MLS and you get a lot of traffic because we're building in such a hot area.

Josh: That's a great idea. That's fantastic. That's great. Well, listen. I mean it's something that I know I'm personally enthralled with and would love to get into at some point in time and I'm sure lots of other people would also be interested and so thank you so much for digging into the spec stuff. You know there is a thread on the site, you had mentioned Jay Scott earlier, that Jay has put together. I started it, I believe, about the spec build that he's been going through and I don't know what it's 400 or 500 posts now, Brandon?

Brandon: Yeah, something like that. It's huge. It's a monster post.

Josh: It's literally like every single thing that he's done. He's kind of put notes on every step along the way and for those people listening we'll put a link to that thread in the show notes as well.

Jon: Josh, I've read every post to that thread and it is gold. I mean, there are so much that he tells but other builders have come in and given their experience in there. I mean that is probably better than any book I've seen on the nuts and bolts of how to build in 2013.

Josh: That's awesome. Well, there you go.

Brandon: That's cool. That is the benefit of a forum. It's like a 3D book that's constantly changing with the way you do things. If people aren't active on a forum, like ours, I think it's a mistake because there's some really good value there. Anyway why don't we move on, Jon, a little bit away from the spec build and talk about a couple of things before we close this up. And one of those is - I know that you meet with other BiggerPockets people often. Like BiggerPockets meetup or whatever you want to call it. Can you kind of talk about the benefits and why you get together with other investors?

Jon: Yeah, so pretty early on I started seeing posts from the same people who knew what they were talking about. So I started reaching out to them especially if they were knowledgeable in the area I was interested in and I've learned a lot. That would be in the forums, or private messaging or pick up the phone or email. And in some cases, if they're local get with them. And of course, I've actually seen BiggerPockets members just not locally but in other parts of the country too. Learning from others is probably the best way I learned. Having an hour conversation with somebody who knows what they're doing which is one reason the podcast has been so great. I've been learning from so many of your guests and you guys.

But I've got a group of mentors. I wouldn't say that any single one is a mentor, but I'll just throw out a couple of names. Rich Weese, who's been very active in the past, not quite so active now, has done a ton of stuff in real estate over the last 40 years and written a book. He spent time with me and I've learned a lot of stuff from him and as far as meetups go, yeah I've done of few. You know, called up or set up a few of these over the last few years in Dallas. And I always meet somebody new or meet the same folks again where I develop relationships with and pretty soon we're doing some kind of business with them. And I've done business with, I'd say a lot of business with several different people on BiggerPockets. So it's not just meeting and learning from them, but lucrative relationships with them and that is partnering on deals, borrowing money, selling properties to members, working with them on marketing. Just strategizing on new development deals. All has come out of BiggerPockets relationships.

Brandon: That's awesome. And that's just a testament to why people need to be networking. Networking whether it's on BiggerPockets forums or wherever it is, networking is just key. And I love to hear that story. And that's another thing we mentioned that last week in the last podcast about the new local search on BiggerPockets and that you can go on there and sort by zip code or how far they are. 5, 10, 20, 50 miles or whatever. And you can see where people actually on BiggerPockets are living near you. You're not seeing their house or anything. Those kind of tools I think are invaluable for reaching out local investors and different people to do deals with. For those of you who want to check that out, just go to BiggerPockets.com/meet. M E E T. Not like eating beef or donut.

Josh: Haha.

Brandon: Anyway, so why don't we move on to the last question before my favorite section. I just want to know what your future plans are. You've done so much stuff, Jon. Where do you see yourself going in the future. Just continuing what you're doing?

Jon: It is an evolution and I do believe in trade up and build on what you've done in the past. So I do have changes planned. I'm planning to sell some or most of my single-family rentals in the near future and move that money really to two places: first, into more spec builds and more development and longer term I want to get into bigger, commercial properties. This isn't something I want to do at the moment, but down the line that are easy to manage or management-free. And those will be properties that I plan to hold for the rest of my life and leave to my heirs. So more spec building and long term commercial properties that take less hands-on management.

Josh: Gotcha. Gotcha. Are those properties currently for sale or is that just something you're planning on doing?

Jon: Yeah, I want to sell most of my SFRs in the next couple of quarters. So anytime between now and next summer.

Josh: Do you have those like up in your website or something?

Jon: You could check my profile, I've got info maybe on the profile on BiggerPockets.

Josh: Oh cool. Right on.

Brandon: And we'll link to that obviously at the bottom of the show notes to your profile. Cool.

Josh: Yeah, yeah. So hey, we're running out of time and want to hit the Fire Round but before we do, there's a couple things you had mentioned and there's some stuff I just wanted to housekeep with. You just talked about management-free commercial properties. And commercial or something, I really, really wanted to get into and unfortunately we're definitely running a little bit long. But maybe we could just briefly touch upon this stuff. How does one get a management-free property? What is a management-free property?

Jon: There's actually no such thing as a management-free property but it's who's doing the management. Let's look at an apartment complex. If you've got an apartment complex with more than 100 doors, you can have quality on-site management there where pretty much they're dealing 100% tenant and make-ready issues. And maybe you some of the financial and oversee the property management or if it's a single tenant commercial property like it's retail or an office or something like that or a restaurant, then you get into the double net and the triple net properties where the tenant is responsible for managing the property and managing themselves. And that can be extremely hands-off.

Where triple net means they are responsible for not only maintaining the building, but all expenses related to the building including the property tax. And that can be highly management-free. 

Josh: Those are the triple nets right?

Jon: The triple nets. You have to be very careful about how you buy them but you can get a great broker or consultant to help you buy those.

Josh: Yeah, we're going to have a show in the coming weeks. I don't know the exact date but we definitely have a trip on that episode planned. So for folks listening, just kind of stay tuned and we'll dig into that a little bit.

Jon: That's about as close to management-free as you can get unless it's just like a land lease where that's even a step beyond but pretty unusual.

Josh: Okay and so you're doing office properties as well, correct?

Jon: I've got one office building and the reason I have this office building is my IT services company had rented for quite a few years and we paid rent to the same landlord for ten years and I really, really wanted to stop doing that and start paying myself. So I bought an office building for our company and we have plenty of space to spare. And the beauty there is, if you have business and you can do that, you can be considered an owner occupant in the commercial lending world. So my financing on this building is awesome. It's fixed rate at 2.99%. You hardly ever hear that in commercial and the reason you can do that is because it is owner-occupied meaning my business is in there.

Josh: Ah, that's great. Wow. That's really great. So what's the difference? Say, BiggerPockets. We want to go and open up a new headquarters somewhere and buy a commercial office property. What's any different than buying a multi-family? Is it pretty much the same thing?

Jon: Dealing with tenants is way, way different. You'll have just yourself or maybe just a few other tenants. And it's pretty much a nine to five thing. You don't get the calls. Like last night, I got the calls on electricity out at 10pm. It's not going to happen in an office situation. That’s one difference and to be considered an owner occupant, your business would just have to occupy 51% or more of the building.

Josh: Gotcha. Gotcha. Okay but otherwise, obviously you're going to have other issues. Business leases and things like that that are probably a little bit different than a traditional residential.

Jon: Right, there's going to be because of that you might get into some more legal and consulting fees because those leases can get thick.

Josh: Yep, for sure. Well, that's fascinating. I think it's a good option for a lot of folks. When do you think is a good time for an investor, do you think as somebody who's done… You've done a lot, I mean, you've done everything in the residential side, it sounds like almost. And now you're in commercial. What's a good time for somebody to potentially transition from residential to commercial? Or do you think that a new investor could start in commercial?

Jon: I would say, a new investor probably should only look at starting in commercial if they have a fair amount of capital to work with. I don't recommend starting there. I do know there are small commercial properties that cost no more than houses but they're going to be one off type properties and may be problematic to keep good tenants in. So I'd say, there's a transition time that comes and I don't know exactly where it's going to be but I'd say for me it's when my income from all the other rental properties was covering more than my living expenses. That meant I could raise my head and start looking at some more sophisticated type things.

Josh: Gotcha. That's great. Fantastic. Well, you know we kind of glazed over it but I'm sure we're going to cover more commercial in later episodes. So for folks listening just stay tuned. With that said, this is show 46 of the BiggerPockets podcast. You can check out our show notes at BiggerPockets. com/show46 and ladies and gentlemen, it's time...

It's time for the Fire Round. Fire Round. Fire! Fire!

Jon: Haha.

Brandon: Nice.

Jon: I'm feeling warm.

Josh: Time for the Fire Round!

Brandon: Wow, that's impressive.

Josh: Go ahead, Brandon.

Brandon: Alright, Fire Round. These are all questions that come from the BiggerPockets forums. These are real-life questions that real-life investors are asking. Jon, number one. What do you believe is the best way to find a mentor?

Jon: I think the best way to find a mentor is first figure out what you are most interested in and then find somebody who is an expert at that, very experienced at that. And then approach them with something to offer, not just asking for them. So at least offer to buy them lunch if they're local and also don't scare them away by saying, "Hey, I want you to be my mentor." That's kind of sounds like, "Hey, I want to get married. I know we just met." That's not...

Brandon: Haha. That is really good advice.

Josh: Yeah, but how do you do it? I mean, "Okay Jon Klaus. I want you to be my mentor. Great." So I've decided that. I say, "Jon. I'm an upcoming investor in your area. Would love to take you out for lunch. Let's go get some steaks. We get steaks. Talk about what you're doing. I'm all giddy about how good you are and how cool you are." But how do you take that next step and actually transition. Do you just say, "Hey, listen. I want you to be my mentor?" or what?

Jon: Yeah it's got to be a fit for both sides. So it's okay to ask but know that that person might not be able to make a big time commitment. But if it looks like you're hitting it off and you have a good rapport going, say, "Would it be okay if I occasionally contacted you with questions?" I mean that's kind of like, "Okay, we're going to date not just get married." And maybe later on it turns into something. Maybe later on we're going to do a deal together, but walk before you run in that relationship.

Josh: That's awesome feedback. That's awesome feedback. Yeah, yeah. Absolutely. Because it's funny. I get people in the web world who are like, "Oh Josh. I want you to advise and all these stuff," and I'm like, "Woah. Slow it down, buddy." You know, shoot me an email. Hit me up with whatever questions. I don't have a ton of time to hop on an hour-long phone call with you but shoot me an occasional email and if we're getting along then we can transition. So that's fabulous, fabulous advice. I know we get this question constantly. Many times a day on the site. So hopefully there's a lot of newbies listening and heeding your feedback.

Jon: And my mentor with a capital M was BiggerPockets. An army of mentors, all with expertise in different areas. I think you should look at it and treat it that way and you'll gain a whole lot more.

Josh: That's what we like to tell people. Alright, so that first Fire Round question went a little bit long. Alright Jon. Is it better to buy one house with all cash or use that cash as a down payment on a bigger property. Take like a hundred grand, buy a $100,000 house with that hundred grand or take that hundred grand and use it on a down payment on a half a million dollar house?

Jon: So for me the answer is use the leverage because real estate can give you so much more because you can leverage it in ways you can't leverage other investments. However, it's a two-edged sword. Risk comes with that. You need to have other exit options and understand what you're going to do if things go wrong, when you do leverage.

Josh: Gotcha.

Brandon: Very cool. Very cool. Alright next question.

Josh: You falling asleep there, Brandon? I mean, what's...

Brandon: I forget I'm muted. Haha. I have my mute button... anyway. Next question. What software do you use to keep track of your books?

Jon: I don't keep track of my own books. I have an accountant, a CPA, who does it and he's a Quickbooks guy.

Brandon: Okay cool.

Josh: Gotcha. Gotcha. In your marketing, do you use Google Adwords? Why or why not?

Jon: I do not use Google Adwords. I do a little web. I do have a website and I'm doing mostly organic search and the reason is my direct mail works so well that I don't really spend time on other marketing.

Josh: Perfect.

Brandon: Perfect. Perfect. Where do you get your direct mail leads list from?

Jon: I buy them from my marketing company who uses various sources. Again, we mention we mentioned Jerry Puckett. I'm using Jerry. He sources the list for me.

Brandon: Okay cool.

Josh: Right on. Right on. Alright, last question is what does it cost to tear down a house? We had mentioned that earlier but it's a perfect fire round question.

Jon: Yeah, so the interesting thing about that is filling those dumpsters and hauling off those dumpsters is actually more expensive than tearing them down. We did a tear-down - I think we had 840 yards at about 500 per. So call it $7000 to $8000 to clean up that lot usually.

Josh: Okay, right on. Cool. Well, let's move to the last bit here of the show hour.

Josh and Brandon: Famous Four.

Josh: Famous Four. First question. I don't even have to ask. So what's the next question, Brandon?

Brandon: Haha.

Josh: Okay, I'll ask the first question. First question. What's your favorite real estate book?

Jon: Okay. This is a softball coming at me versus a hard ball. I know what you guys are aiming for. I'm going to say I read a lot of books. I'm going to say one. I've heard it mentioned but I don't know if it's a favorite. How I Turned $1000 into Five Million in Real Estate in my Spare Time by William Nickerson. It is my favorite book in real estate.

Brandon: That is a good book. I saw actually a video you made on that on YouTube one time. Kind of ran across a video. I'll try to link to that also the kind of review you left there. Good book. Alright, what is your favorite business book, non-real estate?

Jon: Also read a lot of those and I’m not going to say the E-Myth and stuff. They’re pretty easy. There's a book I read a few years ago called The Richest Man Who Ever Lived was a book about Solomon and Solomon wrote like four books in the Old Testament and this is based primarily on one proverbs and it applied a whole lot of proverbs to business and finance and just a smart living and I thought it was really, really practical and tight it well with my fave.

Brandon: Okay, cool. I haven't read that one.

Josh: I had not either.

Jon: Check it out.

Brandon: Right on, right on.

Josh: Alright, next question. Hobbies. What do you do for fun, Jon?

Jon: Okay so I've got seven kids. They are…

Josh: Wait, wait, wait. Can we rewind that? I think something's wrong with my ear. You said you have seven kids. Is that right or was there like a glitch in the matrix here.

Jon: It was seven.

Josh: Wow.

Jon: They're ages one through twenty-one. We've got our oldest three are biological. Our next three are adopted and we're working on adopting that number seven part of the sibling group. So when you talk about hobbies haha.

Josh: You don't have time for hobbies.

Jon: Actually before I came in to work this morning, I went boat hunting with my eight-year-old this morning. We didn't see anything but I do some ranching since I have a ranch. We have animals, we have wildlife. So we really have an outdoors lifestyle here. Especially in the fall and the spring where it's kind of reasonable weather in Texas.

Josh: Gotcha. Wow. That's awesome. Well, I've got three kids and I know how hard it is to balance three. I can't even fathom seven.

Jon: Yep. Well, the older ones help with the younger ones.

Josh: Yeah, yeah. I figured as much. Well, that's awesome man. And it's great that you're bringing some other kids into the family as well through adoption. I think that's really great.

Brandon: Yeah alright the final question of the famous four. What do you believe sets apart the investors who succeed in this world from those who fail and they give up and run away crying?

Josh: Haha. Crying.

Jon: So I'm fascinated by the first part of the question. Maybe not the last one but you know I've listened really hard to the other podcasts what people are saying and I think it's really important. I know we don't spend a whole lot of time on it and what I'm going to say is kind of a version of what I've heard a lot of times before and that's diligence and I'm going to define it as working smart or perseverance with focus. That is, you know where you're going. You're going to get there by working hard and working smart. Spend a bunch of time thinking about what you're doing and then do it with determination and endurance. Don't quit when it gets hard.

Josh: That's great. I like it.

Brandon: That's good, that's good. Another tweetable topic.

Josh: That is a tweetable topic.

Brandon: You'll see that on my Twitter feed later.

Josh: Yeah, yeah,

Brandon: Before we close up to your last question I have for you Jon. Where can people find more about you at?

Jon: First place is my BiggerPockets profile and I've got a few websites I think we can probably link in the show notes. Won't give them right now, but profile's probably the best place.

Brandon: Okay and we'll put them there and we'll put the link in the show notes.

Josh: Fabulous. Awesome man. Well Jon, thank you so, so much. I think anyone listening is probably going to have to go and listen again because there is a ton of stuff in here and I know I was taking notes and Brandon was yelling at me as I was, throughout the show. Nice work, thanks for being here. And thanks again for being a part of BiggerPockets. We definitely appreciate you. I know you provide a ton of really, really insightful commentary to folks and that means a lot.

Jon: Well, it's been awesome. You guys have a great Thanksgiving and Thankskanukkah.

Josh: Yeah, Kanukkah. Love it. Haha.

Jon: Catch you next time.

Brandon: Thanks Jon.

Josh: Alright guys, that was show 46 with Jon Klaus. We want to thank Jon again for being here. Ton of really good information.

Brandon: Tons.

Josh: Tons. Tons. And hopefully you guys got it all down and if not go back and check it out again. Also like we said upfront, if you've got questions definitely ask Jon those questions in the show notes at BiggerPockets.com/show46. We really appreciate you guys listening. We really do and again hopefully if you have not yet taken the time to join us in our community, you're going to meet people like Jon who spend a fair amount of time giving back. Jon answers pretty much any question he can get his hand on. So jump in, join the site. BiggerPockets.com and hopefully we'll get to hang out with you there. Otherwise, jump in. We'll catch you on Facebook. We'll catch you on Twitter, LinkedIn. All over the place. Check out our YouTube channel there's lots of great stuff on there. And keep listening. Keep learning, keep listening, keep doing and keep telling us about those success stories. We'll see you around. Thanks for listening. I'm Josh Dorkin. Signing off.

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