BiggerPockets Podcast 053 with Jason Hull Transcript
Link to show: BP Podcast 053: Investing Without Loans and Retiring Early with Jason Hull
Josh: This is the BiggerPockets podcast show 53.
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Josh: Hey everybody, what’s going on? This is Josh Dorkin, host of the BiggerPockets podcast, here with Brandon Turner. Hey, Brandon.
Brandon: It always cracks me up when you start with the, “Heyyy!” And did you hear my dog in the background?
Josh: I did not, and I don’t care.
Brandon: That’s my cute new puppy, c’mon.
Josh: So, all’s well. Things are happening. January is starting to really pick up. Lots of new people hopping on the site, and the podcast as well. Actually, last week our show with Ken McElroy that was a huge hit.
Brandon: Huge hit. People love that show so if you haven’t listened to it go listen to it. After this one, of course.
Josh: Yeah, definitely do. Show #52. BiggerPockets.com/show52. Well, speaking of tips, why don’t we jump to today’s—
Josh and Brandon: Quick Tip
Josh: Quick Tip. Alright, today’s Quick Tip. We have a forum on BiggerPockets which is called the Success Stories forum, say that 10 times fast, success stories, and not only is that well worth checking out to get inspired by your peers, but we really, really recommend you take every little success that you have and share it because the more visible, the more public, you are with your accomplishments the more people who see that you’re doing good things, you’re being successful, and as a result you’re going to attract new investors and other folks to look into you and check you out. So, definitely recommend checking out the Success Stories forum.
I also recommend that when you’re recording a show you don’t text somebody on your cell phone. As I sit here I’m watching Brandon texting. I don’t know who he’s texting.
Brandon: My electrician.
Josh: Somewhat disrespectful, Brandon.
Brandon: You were going on, and on, you know.
Josh: Alright, so you’re having electricity problems?
Brandon: Yeah, I got a hot water heater electrical problem. Anyway, I’ll deal with it.
Josh: Nice, nice. I got a boiler problem so, you know.
Brandon: We all got problems, alright.
Josh: That is very snarky.
Brandon: I know.
Josh: Alright, so today we’ve got a pretty cool guy as our guest on the show. We’ve got Jason Hull from HullFinancialPlanning.com. He’s a financial planner, obviously, and a real estate investor who takes a little bit more of a conservative approach to his investing than some of our other guests. So, I definitely think you guys are going to enjoy hearing his thoughts, his stories, and his strategies. You know, everybody’s got a different way of going about it and I think it’s pretty fascinating to check it out. Had an opportunity to hang out with Jason at a conference a couple months ago and we had a lot of fun so it’s kind of cool to have him here on the show. I know, Brandon and he got to spend hours, and hours cooking at an airport or something. I’m sure we’ll learn more about that as we go on.
Brandon: That you will.
Josh: Yes, yes. Alright, well with that let’s hop into the show here. Jason, nice to have you, welcome aboard!
Jason: Hey, thanks for having me. I appreciate it.
Brandon: Yeah, well it’s good to reconnect again. I know we hung out quite a bit a few months back at a conference, and we hung out at the airport afterwards which was fun, too. Yeah, it’s always fun to hang out with you.
Jason: It was a lot of fun watching the people walking by, and noting the interesting fashion trends at the airport.
Josh: You guys sound really exciting. Boy, I want to hang out with you.
Brandon: Well, we had what? Three or four hours to wait for our flight so we just sat there, and chatted. Anyway.
Josh: Awesome. Really interesting, gotta tell you. Can you keep talking about that, cause—
Jason: It’s not nearly as interesting as seeing some Grammy winner at the car wash.
Brandon: That’s true. Yeah, Josh did see a Grammy winner at the car wash.
Josh: I didn’t see a Grammy winner.
Jason: Whose name he cannot recall.
Josh: Oh, stop. You guys are being annoying. Alright, can we start here and stop ripping on each other? You guys, like, seriously.
Brandon: Alright, let’s do this. Jason, how did you get into real estate investing?
Jason: Well, I was in the Army, and I got out of the Army and I had about six months between the last day that I had to show up for work at Fort Knox, and the first day of law school in Virginia, and I was bored, and I was watching Late Night television and there was this real estate investing secrets infomercial and it looked really interesting. So, I actually attended the seminar. The little free seminar that they give where it’s basically 2 hours of pitch for joining their course and this, that and the other, and hey, I thought I could make millions of dollars, no money down flipping real estate. So, that’s actually how I got into real estate investing was I got suckered into an infomercial. Fortunately, I’ve learned some lessons since then, but yeah, that first introduction it was these people that were his associates and advisors and realistically he was making a lot more money selling these infomercial products than he ever did off of real estate.
Brandon: Yeah, I think that’s true. I tend to think that about most of the sales people out there. They make far more off of the sales than off of actual real estate, but, you know.
Josh: It’s a good business.
Brandon: It is a good business. Why aren’t we doing real estate? We should just go on the road, Josh, you and I. We could have some fun.
Jason: Neither one of you has got the hair that this guy had.
Josh: We could bring Jason with us, you know, hang out at airports, pick people up.
Jason: Instead of the people that are offering the credit card offers as you walk by the gates it could be the three of us offering some sort of infomercial product.
Josh: There you go.
Brandon: There you go, I like it.
Josh: That’d be awesome. Alright, so you got quote, “suckered in,” to this whole thing. Now, did that actually lead to you getting started, or did that—
Jason: It did.
Josh: Oh, okay.
Jason: It actually led to my first deal. My first deal was in a little town right outside of Fort Knox called Elizabethtown. It was a VA foreclosure, it was a 4 bedroom, 2 ½ bath, it was your typical cookie-cutter neighborhood, and fortunately it didn’t really require anything in terms of fixing it up, getting it ready. It was ready to rent, ready to move in the first day. Of course, I thought I could buy it, having gone through this infomercial, I thought I could buy it, slap on a coat of paint, add 25% to the list price, list it and sell it which was, of course, fallacious thinking because there was a whole reason it was sold at that price. So, we wound up renting out the property for a couple of years, and we were more than covering the mortgage payment, more than covering the property management fees, but being in grad school with no other source of income the last thing in the world I wanted was a six-month vacancy and having to cover the mortgage.
So, we would up selling it and didn’t get back into real estate until 2004 so probably another four years after that. Then, and this was the article that I wrote about, the first guest post I did for you on BiggerPockets was we started doing real estate development because we were friends with a builder so we went in on a deal with him where we’d buy the lot, we’d fund the construction loan and he would do the building, and the first one was great. We made probably 100% cash on cash off of our investments, and we thought, “hey, we can do this again,” we bought a second property and it was going along fine and we needed to keep the crew together so we wound up buying more properties and we got overextended so that slowed down the real estate again until we could get rid of all those properties.
Brandon: So, I’ll link to that article cause that was a really good on that you wrote and I’ll put that in the show notes at BiggerPockets.com/show53, but for those who haven’t read the article can you kind of explain? I mean, what, exactly, were you doing with those properties?
Jason: Yeah, so we were doing spec homes, and it was in a resort, a ski resort. We had bought a lot. We had the builder go build a pretty nice second home for skiers. The first one we sold before we even broke ground. So, we had it listed, we had the architectural drawings, we had the CAD/CAM view of what it would look like, and it sold right away, and we thought, “holy cow!”
The first mistake that we made, though, was not somehow tying any changes and modifications that people wanted to the prices that they were paying so they paid the same price and we wound up getting stuck with the mortgage for six months while they’re doing modifications, but we still ended up with that about 100% cash on cash return.
We bought a second lot, we were going to do the same thing. We wanted to keep the crew together so we bought a couple of other lots thinking, “hey, we can flip this just as quickly,” and it didn’t happen that way. That was 2006, and the market for, particularly vacation homes, just fell through the floor and we wound up, we still made a profit on the second one, but by the time that had rolled around we realized we were in danger of going under if we actually built on the next two lots so we just sold the lots, and it took a long time to get rid of them.
Josh: Gotcha, gotcha. I just want to step back really quick to that first property that you bought because you said something that I actually want to repeat here, and I think it’s super, super important that we emphasize, you bought this VA home and you slapped a coat of paint on it, did a little touch up and thought you were going to yield a nice profit on the deal. Essentially you didn’t do anything, you bought it and said, “hey, I’m going to just buy it and re-sell it and make a killing,” right?
Jason: Yup. That was the whole thing that these infomercials led you to believe was, “hey, if I find the right property, and I buy it at the right price, then I can just, through the magic of wishful thinking, somehow mark it up some significant amount and make a profit off of it,” and the other thing was I wasn’t creating value, and that’s where you make money in real estate. You either buy because someone’s in a distress situation and you have insider knowledge about that distress situation, or you’ve got to add value. There’s no other way to really make money.
Josh: Yeah, perfect.
Jason: At least, in my experience, there’s no other way to make money.
Josh: No, I think I agree, and I don’t think I could have put it any better, so thank you for saving me the breath.
Brandon: Well, I think it’s interesting I went through kind of the same thing with my first, I guess you could say my second, my first flip was before the market crashed, my second one was during the market crash as I was watching all of those flipping TV shows. They were so exciting, and watching people make $100,000 on throwing some paint and carpet into a place. See, I flipped cause I got excited by the TV shows too, and in the same way that you ended up with a rental because of it. I ended up with a rental because of it, and it was great, it cash flowed every month, and it’s great, I still own it today, but it was funny how in an indirect way those TV shows, or the gurus in your case, they still led us to the place where we should have been all along, but they led us there in a very round-about painful way maybe.
Jason: Well, and it’s okay. If you’re a flipper and you’ve got the skills and you know how to redo a kitchen better than someone else, or do it for cheaper, or whatever that’s fine, but have a back-up plan. I didn’t have a back-up plan. The back-up plan was, “oh, crap, and I’m now in grad school, what do I do?” And I had no income, that was the other thing, I was in grad school, I had no income except for my summer internships and that certainly wouldn’t have been enough to cover a mortgage.
Josh: Alright, so what kind of real estate investing are you doing today?
Jason: I invest in single family homes. Our portfolio right now is 7 single family homes, and 1 condo. The condo is where we’re unintentional land lords, it was a place that we lived in, we moved, we couldn’t sell it so we rented it out to cover the cash flow.
Jason: I primarily rent in single family homes. If a duplex, or a quad came up and the numbers were right I’d do it, but for me I feel like where we live, and kind of the network I have in place, and the understanding of the market I have an informational advantage investing in single family homes versus something else. I’ve been approached for commercial properties, and I just don’t know that market, and I refuse to invest in a market I don’t know about where I don’t have some sort of informational advantage. We were talking earlier about people who watch the HGTV, the real estate flipper shows, whatever, and they think that they can do it, or you invested, you bought, you flipped in a rising market. There’s something called attributional bias which basically says if something good happens you attribute it to yourself, if something bad happens you attribute it to external factors, and that happens. It happens in the stock market, and it happens in real estate investing so for the stock market if you happen to invest in Google at the IPO and it went up, and now you think, “oh, I’m this great investor,” it may just be that the market rose in general. I mean, the SNP 500 was up 23% last year, you could have just caught the rising tide and may not have the skills that you think that you have. So, it’s really important to be able to separate out what are my skills versus what was the market giving me?
Josh: You know, I think that’s kind of similar to how I go to the restroom every time my team is losing and then they turn it around.
Jason: Yup. Superstition.
Brandon: Well, I was thinking that Marc Cuban said in a quote that in a bold market everyone is a genius, that’s kind of the same thing, right?
Jason: Yup. It’s the same in a rising housing market, and it wasn’t until 2008 that we suddenly found ourselves with our pants down, and just like the back-up plan was, “oh, crap,” now we have our pants down.
Josh: There you go.
Jason: At least our pants were down when we had the, “oh, crap,” moment.
Brandon: I feel like that’s where all of the gurus tend to come from is they were the geniuses in a bold market and so they then put out all this, “I’m a professional. I know everything in the world there is to do”. You know, I really hope that’s what sets apart BiggerPockets from everyone else, like, I really hope almost more than anything else is that Josh and I never, even though we’re hosting this podcast, we never claim to really know what we’re doing. I mean, we have our experiences and we have what works for us, and what doesn’t work for us, but none of our guests, no one claims to be “the expert” at what we’re doing here, and I like to think that’s what sets things apart.
Josh: Well, I think that’s a good point because we’ve had some folks who are more experienced than the three of us multiplied ten times over, and yet they still will talk about the fact that they’re just figuring things out.
Brandon: Like, last week we asked Ken McElroy, “what are some of the mistakes you’ve made?” And his answer was: are we talking about just today? That was perfect. I love that. We don’t have it all figured out at all, and I hope the people listening to the show know that. I mean, we talk about numbers and properties we buy, but this is a game that we’re all playing, and we’re all playing it together. I think that’s what makes it exciting.
Jason: And in real estate investing, or just investing in general, the idea is that you want to take multiple cracks at something that has a reasonable chance of doing well so that if one of them does great, great. If one of them fails, that’s okay too. It hurts a little, but it’s not going to sink you. The people, and to me this is the hardest thing to think about when you’re getting in, it’s hard to diversify. You’ve got to take that one crack that’s going to take a significant amount of capital, or a significant amount of risk and it’s gotta work if you want to keep rolling it; Otherwise you’ve got to be patient, and you’ve got to wait, and you’ve got to accumulate enough capital to where you can have 8, 10, 12 properties so that you can diversify your risk away.
Josh: Yeah, yeah. You know, you bring up something interesting that I didn’t put a ton of thought into until now; A lot of people come out, they try it, and they expect to succeed and a lot of them fail, and you’re not always going to get a hit on your first shot. What really does set people apart who are going to be successful and make it are the people who say, “okay, you know what, just because I didn’t have a great deal on this first deal doesn’t mean that this isn’t a good place for me to make money,” that would be like buying some stock and losing a little bit and saying, “well, I’m done with stocks. Stocks suck”.
Jason: I see that a lot.
Josh: You do. You hear it a lot, and we see it a lot in real estate, and I guess I kind of want to encourage newer investors, if they didn’t do as well on that first deal that they thought they were going to do, give it another shot. Don’t just quit. Don’t just give up after that first try because you never know what’s going to come next, and you’re going to get better. The past is going to educate you, hopefully, and you won’t make the same mistakes.
Jason: And Eddie Johnson, who’s on the US National Soccer team, I just heard an interview with him and he had a great quote, even though the quotation doesn’t necessarily apply to what we’re talking about, and he wasn’t talking about real estate investing, he was talking about soccer, and he said, “you don’t fail if you don’t make it. You fail if you don’t make it and you give up”. So, if you’re a first time investor, and it’s two things; One: make sure that you’ve got that contingency plan. Hey, if I can’t flip this, can I rent it? If I can’t rent it at the price I want, what’s the price I need? What are the things that I can do to salvage the deal? Secondly, if it doesn’t work out make sure that you’ve got some sort of process review. Did you make a mistake somewhere along the way? Have a mentor, or someone who’s experienced in real estate investing, or a wise agent, not some brand-new green behind the ears real estate agent who’s just trying to get a 3% commission, someone who’s actually helped people walk through investment deals, and ask, “hey, where are the steps? Where could I have improved?” If your process is good, sometimes it’s luck. It’s just like investing. If you have a good process as long as you’re doing, and sticking to, your investment thesis, and everything is okay, you know, sometimes there’s gotta be luck. You just can’t dodge luck, and you have to expose yourself to the upside of luck too. If you bought, and bought, and bought in 2008-2009-2010 probably by 2015-2017 you’re going to look like a genius.
Josh: Yeah. That makes a lot of sense. Well, so you started with that one property, you did a few of those spec builds, what came next? I mean, obviously you said you’ve got a couple properties and now you’ve got seven properties, seven single families and the condo, what kind of came in between?
Jason: So, I started my own software development company and ran that for seven and a half years, and actually sold it and so I started having some significant cash flow out of that. So, we wanted to get back into real estate investing. We knew it was a good long-term kind of steady growth vehicle, not just for the income but a little bit of capital appreciation. Although, we don’t buy expecting capital appreciation. Anything that comes is gravy. As far as we’re concerned we buy it for the income and I have to make the numbers look right. We’ve yet to hit my ideal which is that BiggerPockets 10% cash on cash return. Haven’t quite gotten there, we’re at about 8.7%.
So, that’s what we started doing with our sales proceeds was acquiring these single family homes. We had decided back in 2007 that we wanted to move to Fort Worth so we actually bought a foreclosure back then, and that was our first investment property. Then, as we started getting our funds from the sale of the company we just, every time we’d get a little bit of money we’d call up our property manager and say, “hey, we’re ready for another one,” and we gave her our parameters which were the BiggerPockets guidelines, and she goes hunting for us.
Brandon: What are those? Oh, Sorry.
Josh: Hey, that’s alright that’s what I was going to ask.
Brandon: What are those guidelines? What do you mean?
Jason: Yeah, so it’s two sets of guidelines that we live by. One is the assumption that you can only spend 50% of the income that you make, and you set aside 50% for the expenses. We don’t use leverage so we buy all cash so for us it’s 50% profit, or cash flow to our bottom line. Then the other one is that we’re trying to get a 10% cash on cash return annually based on the purchase price. Now, we haven’t gotten there, we’re usually in the 8s, but for us because of our plan so that we’re financially independent we want to get to what I call PIRE, Passive Income Retire Early, which is you can retire, your expenses are covered by 50% of your rental income plus a little bit of margin not accounting for depreciation.
So, we wanted to get there as quickly as possible so we were willing to trade buying the properties now to accelerate the timeline rather than waiting, and waiting, and waiting for the incremental 1%.
Brandon: Let’s touch on that again. You said PIRE and you said that was Passive Income Retire Early?
Josh: Yeah, that sounds good to me. I like this whole PIRE concept
Brandon: Yeah, let’s talk about that a little bit more. What was it, again, you said? Then we can dwell on that a little bit.
Jason: Yeah, it’s Passive Income Retire Early. So, there’s the whole FIRE; Financially Independent Retire Early, and FIRE is based on effectively can I take 4% of my assets every year and live off of those? So, based on Bill Bengen’s Safe Max Withdrawal Rate. I like to go one a little bit further which is I don’t want to be actively managing withdrawing from my stock portfolio, I don’t have a stock portfolio I’ve got a mutual fund portfolio, every month or every year for living expenses. I’d rather just have checks come in.
So, for us we are using our rental property portfolio to create that stream of passive income that will help us bridge early retirement all the way through to social security when we’ll slowly start selling our properties and converting it back into assets because as a 60-something year old I don’t want to be calling my property manager every month and having those, “well, what should I invest in next?” I just don’t want to fool with that when I’m that age, and my property manager is going to be that age. She’s probably going to be retiring so I have that risk. So, if you had a pension it’d be the same way, if you had annuities it’d be the same way. For me it would be kind of like I had a stream of annuity payments, and so I want to be lazy when I retire.
Brandon: That’s a great way of putting it.
Josh: It really is, and I think the people who get it obviously see it in the same light. I don’t know, I’m the kind of guy who focuses on cash flow as well, I’m not a big appreciation guy. I think get it where you can if you’re building, or buying in an area of growth, at least in my book you’re still going for the cash flow, but then all of a sudden you’ll get the appreciation bonus, right?
Jason: Yup. What I don’t want to do is depend on this appreciation, get to age 65, find out it’s not there, and then have yet another, “oh crap,” moment where I’m going to suddenly have to go back into the job market after having been out for 20 something years? No, to heck with that.
Josh: Why no leverage? How come you’re buying all cash? Why don’t you buy all cash, do a re-fi, take cash out and use that to expand the portfolio?
Jason: You know, I looked at that and for us it doesn’t accelerate the timeline any. So, the leverage doesn’t really get us into a position of PIRE any quicker so somewhere between 2 and 3 years from now we will achieve PIRE based on what we’re buying and what we see coming in. leverage doesn’t move the needle any in terms of achieving PIRE, and we’ve got the assets to where we feel the cash flow would be there, we could back it up, it’s a very, very low risk proposition it doesn’t get us incrementally more properties that cash flow incrementally more. So, I’ve evaluated it, if I had a ten-year time frame then based on where I am now and having enough cash flow from my rental property portfolio to support leverage then I would do it.
Josh: so, it’s just based on the timeline?
Jason: Yeah, it’s solely based on the timeline and that is the one exception to the no debt rule that I have is if you have enough cash flow from your rental properties—and I know this is all mental accounting. I mean, you can have income from your job and other things too, but I just like to keep it clean mentally. If you have the cash flow from the income properties to more than cover a long term vacancy in your rental property, and for me that was 2 to 1. So, I had to have 2 properties that were cash flowing to cover 1 leveraged property in order for that to work out, then I’m fine with that. I really don’t have any heartburn about that, but for most people they over-lever. I’ve been there. I’ve been over-levered. I’ve had the lots that were mortgaged and having to write the mortgage check every single month for five years while waiting for the dad-gum things to sell. It sucks, and I don’t want to be in that position.
Brandon: It makes sense cause you said your timeline’s maybe two or three years for this. I mean, I’m pretty sure for return on investment you can probably achieve the 10% that you’re wanting if you leverage. That shouldn’t be difficult at all.
Brandon: But does that 2% difference make a difference on a 2 to 3-year time frame? Probably not. Not enough to sacrifice that risk. So, again it just comes back to—
Jason: It’s like the people that completely optimize for having no income tax and then wind up spending that money like, “oh! I can get 2%,” you can’t get 2% but, “I can get two tenths of a percent in a money market fund,” but because the money’s there they wind up spending it and then they defeat the purpose. So, it’s that same thing is does the leverage really move the needle for your long term goals? If you’re trying to accumulate a portfolio of 30 properties and you’ve got 10 already and you want to lever up 3, 4 or 5 then that’s probably fine then as those get paid off you use the cash flow from the other 10 to pay off the debt on the 3, 4, or 5 that you’ve got and then lather, rinse, repeat. I’m fine with that.
Brandon: Yeah, it reminds me; We asked a question on Facebook a couple weeks ago and it got a ton, a ton of comments. I think we’re over 100 comments now, and I basically asked if you had $100,000 would you put it towards a $20,000 down payment on five different properties, would you buy $100,000 property all cash, or would you put that $100,000 as a 20% down payment on a $500,000 apartment complex. So, if you had $100,000 there’s a lot of different options you have based on leverage. It was a fascinating, fascinating Facebook discussion because it’s so different. I mean, every person argued a different point, and well over 100 comments on that Facebook thing. I mean, I encourage people go check it out at Facebook.com/BiggerPockets.
Jason: I’d tell you what we’d do is we’d buy two $50,000 properties. You diversify your risk a little. I’ve found that, there’s a breakeven point of course, but where I am I will get more of a return on cash from two $50,000 than I will off of one $100,000 and we just experiment.
So, we lived outside of Fort Worth up until about 3 months ago and we had a 3/2.5 a typical started home, started community and we sold it, and we are parlaying that into effectively two rental properties and we could’ve rented the property out that we had lived in and probably gotten $1,100 in rent, or we parlay into two rental properties that each got $900 in rent so where we are it makes more sense to buy two of the smaller properties. Then, if you want to then use those two and lever up, and buy another $50,000 property go for it, and then let the cash flow pay those off and just keep rolling because I know mathematically leverage is the right answer. I know that, and I’m cool with the mathematics, but all those people that hawk their credit cards to put a down payment on that first flip property, or put a percent down or whatever, you know what it’s like to go to bed at night going, “oh. My. God. What if I don’t get through the eye of this needle? I am screwed.”
Brandon: I have been there 50 times in the last 10 years. Over, and over.
Jason: You probably eliminated a couple of years out of your life for it, you know?
Brandon: Probably. You make a really good point.
Jason: Anyway, if you’re young, if you’re 20-something and you’ve got a useful degree, you’ve got a good job, and good job prospects and you’re employable, I mean, if you’re a civil engineer you’re generally employable versus an arts major or something, and if something bad happens and you’ve kind of got that income to be able to cover it and you want to take the risk? Fine. As long as you make and informed decision and you know what you’re going to do if things don’t work out, great, but don’t go crazy and over-lever yourself. I mean, I would not do the 5 properties at 20% each even though you’re diversified, theoretically you’re diversified, but now you’ve got five times the mortgage payments and if the worst case scenario happens you’re going bankrupt. That’s something I think you can avoid. You can lever smart without risking bankruptcy.
Brandon: And not just five times the mortgage payments, but you’ve also got five times the phone calls from property managers, and you have five times the insurance documents that are being sent to your house every day because something’s wrong. Just administrative stuff the more properties you get people don’t think of that, I think, we think in terms of math and numbers, but there’s a lot of admin stuff that goes on behind the scenes. My wife spends probably 30-40 hours a week just doing admin stuff on our properties. It’s horrendous.
Jason: And I use a property manager. If you lever five then you can’t afford the property manager, you’re out managing that property yourself, and it depends on how you value your time, but I value my time a little bit more so I’m willing to hire the property manager because the only time I hear anything is like, one of our tenants died in the house. Which is a terrible situation, it was at Christmas, it was on his daughter’s birthday, I mean, it was all sorts of sad, but obviously we help out in those situations, but otherwise I don’t hear anything except for, “hey, your tenant for this property lost a job, he moved, I’ve already got it rented out,” or, “the hot water heater went, and here’s how much it’s going to cost, and here’s the bill and it’s already taken care of”.
Josh: Sounds like you’ve got a good property manager.
Jason: I have an awesome property manager.
Josh: Well, can we talk about that? Because the world is easy when you have an awesome property manager and when you’re in a situation where you don’t it sucks cause I’ve been there and it’s absolutely atrocious and you’re up just as much, if not more, than the guy who’s got all his money on credit cards. So, how did you come about to find your property manager, and, really, what makes them a good property manager?
Jason: So, she is a second generation property manager. Her mother had a real estate firm, and then did the property management and then the mother just wanted to do the real estate so she handed off the property management portfolio to the daughter. So, we interviewed a couple of potential property managers when we first bought, and she actually came in at the lowest price, not percentage-wise, but at the lowest rent. She said, “hey, you know, we could try and rent out for $1,200 and it might sit vacant for six months, but I know if I rent it out for $1,000 it’ll get rented,” as opposed to every other property manager that was saying $1,200, $1,200, $1,200.
Josh: That’s great, yeah.
Jason: And I would rather it be rented because it doesn’t take long for that opportunity cost to make it a bad decision. It only has to be vacant for 3 months before that’s a poor decision. So, we obviously interviewed her more than that. She’s the president of the local chamber of commerce so she’s really tied into the community, she’s very active in the community, she’s part of the Lions club, she’s part of the rotary so I think because everyone knows who she is, and she’s doesn’t advertise. She’s got this little dinky office you can drive right by. It’s literally on the other side of the tracks. You could totally miss it, but she’s very, very involved in the community. She’s got kids who are active in sports so everyone knows who she is. So, anytime someone has a problem either I have a property that I need to get rid of, or I need to go live somewhere who do they turn to? They turn to her because she’s so well-connected in the community, and it’s a small community. Probably 13,000 people, but aside from the Mayor, she’s probably the most well-known person in the community and that is an enormous asset. That is worth its weight in gold. I have not haggled with her over any pricing because the last thing in the world I want her to do is start treating me as anything but her number one client.
Josh: That’s great, and what were the other attributes about her that made you choose her above and beyond the other folks that you interviewed when you first started meeting her?
Jason: I think it was because she had a reasonable portfolio size. So, when we first started using her she probably had 80-85 properties under management. She’s now probably got 110. So, she’s got enough to where she does it, she’s got that network of the painter and the roofer and the handy man and all that good stuff so that you don’t get hosed on pricing, but she doesn’t have 500 properties to where you’re just a drop of water in the ocean, and she’s overwhelmed and she can’t service everyone, and she had a waiting list. She was like, “I already got people that I can just give em a call and I can put them in here. I’ve got waiting lists ten people deep of people that are ready to go,” so between that and the connection with her mother. Her mother was the realtor, her mother had the deal flow. Now she’s got the deal flow so other investors that want to get rid of their properties, or someone hears of something somewhere with someone doing something because she’s always at the games, or talking to people or whatnot; I think all that kind of together made it really worth-while.
Brandon: That’s cool.
Josh: Yeah, you know, your point about pricing is one that I think most people probably wouldn’t even think about upfront, but as an investor, not on the rental side, but on the sale side, if I go and I interview a bunch of real estate agents to sell my house the one who comes at the top price is definitely not the one that I’m looking at right away because you’re taking a risk the higher you go above the median price of these folks that you’re interviewing. I’d say the same is potentially true on the rental side. If everybody’s saying rent is somewhere between here and here and somebody says, “you’re probably going to mitigate your time loss by dropping it X%, and, frankly, overtime we can always raise it and get it up to the next point,” it might not be a bad strategy to get the ball moving.
Jason: Yeah, and I’m willing to do a dangle. To say, “well, we’ll try to rent this property at $1,250 a month. Let’s leave it out there for a couple of weeks if you don’t get any bites we’ll drop the price,” I’m okay with taking an aggressive approach, but making it time-bounded as opposed to, “I’m going to wait until I get $1,250 dad-gum-it,” cause then you may be waiting for months and that’s money that’s not coming into your pockets. It’s not an expense, it’s not a check that you’re writing, but it’s still lost money.
Josh: I mean, look, the bottom line on a rental property is this: if you’re not renting the unit there’s two reasons for it; It’s overpriced, or the place looks like crap. I mean, really there’s nothing else to it. So, people ask all the time on the forums, “I can’t get tenants, what do I do?” Drop your price.
Brandon: There’s an article I wrote on the blog a few weeks ago called The Two Most Painful Words a Land Lord Will Ever Hear and the words were “I’m moving” because vacancy is the worst. That is the highest expense, probably, that anybody pays over the course. I mean, yeah, eviction’s going to cost you, with damages, $5,000, but over the course of all your properties vacancy is always going to probably be your highest expense.
Jason: Absolutely, and she’s delivering 8% over our portfolio properties, and has us in some long-term leases so I actually expect that number overtime will go down, and to me, based on the BiggerPockets numbers, they assume a 16% vacancy rate. Well, she’s making 8%, I’m paying her 10%, really I’m only paying her 2% based on your averages of vacancy rates.
Brandon: That’s a good way of looking at it.
Jason: So, she’s more than worth it.
Brandon: Yeah, that’s cool.
Jason: Yeah, she’s totally making up the money.
Brandon: So, Jason, you are a financial planner. That is what you do for a career so it would be a shame not to touch on that kind of aspect of your life, and how that affects your investing. So, first of all, for those who don’t know, what does a financial planner even do?
Jason: So, my job, as I see it, is to first and foremost help you figure out what’s important to you in your life, and what your goals are, and then, and only then do I start talking money. The first thing I do is make sure that you’ve got a safety net for everything bad that could happen to you, and then and only then do we talk about how much you’re spending, and how much you’re earning, and only after that do we talk about how to invest.
So, for whatever reason, and probably because this is what all the strip-mall financial advisors do, and this is what they show on TV, and CNBC and all this, but everyone seems to think that financial planning equal investment advice. While I am a registered investment advisor, which means that the FCC believes I can offer investment advice, it’s only 20% of the overall picture. I think 80% of it is really figuring out your life, aligning your goals, aligning your actions towards it, and aligning your spending against what’s important in your life. Then making sure that if you step out in front of the beer truck tomorrow, and either get killed, or get maimed that you aren’t in some horrible Medicaid nursing home as a result of it. So, to me that’s the important stuff. What is it you wanted to be when you grew up? What do you want to do when you retire? When do you want to retire, and is that realistic? Then we start talking about how do you invest to make that happen.
Josh: Hey, so, my wife is going to be at a restaurant in town next week. Can you accidentally bump into her, and talk to her about our spending? I love you honey!
Jason: Well, I think that’s a conversation that the two of you need to have. The funny thing is—
Josh: Well, I bring it up—
Jason: Well, half of what I do is marriage counseling!
Josh: That’s what I was going to say, and ironically it’s not an issue for us, but I do bring it up because I think it is an issue for most people. I think where most people fail is in their ability to communicate with one another about their spending habits.
Jason: Yup, absolutely. There’s another podcast on another place, that’s not nearly as cool as BiggerPockets, where I talk about advice for newlywed couples, and 52-53% of divorces are caused by money problems. To me money problems is a euphemism for poor communication, and you can be tight on money and not have money problems. You can have a lot of income, and have money problems and it’s because you’re not communicating. You haven’t sat down, and really built the relationship with your spouse that you agree on what’s important, and that you’re both going in the same direction.
To me when people say, “oh, it’s his money,” or, “it’s her money,” or, “he earns this, I earn that,” that’s a red flag. You’re not communicating. It’s we. You made those vows that said two shall be joined as one, and if you aren’t thinking as one then you have communication problems and you have marriage problems, and that’s not something that a financial planner is going to magically make disappear overnight. You’ve got to do something else with regard to improving your communication so that you can get your goals in place so that you have a plan and you execute on the plan. Then it’s not a money problem, it is maybe we don’t earn the money that we want, and here are the steps that we’re taking to improve it, or we spend too much in certain areas and here are the things we’re doing to reduce our spending.
Josh: I think that’s great, and I think you’re right. A vast majority of the people I know who have gotten divorced it was completely due to financial issues, and it could have been predicted up front easily if these guys had communicated.
Jason: The sad thing is in premarital counselling you get a preacher, or pastor, a priest, a shaman, whatever—
Josh: A Rabbi?
Jason: Yeah, I’m sorry, a Rabbi. Well, having not gone through Jewish premarital counseling… But they’re people of the cloth so to speak, and they probably don’t earn a lot, they don’t spend a lot, they probably haven’t been exposed to a lot of money problems so they gloss over it in the premarital counselling. I mean, I remember mine was, “do you have money problems?” “Well, you know, we’ve got credit card debt, but we know about it and we’re addressing it,” and, “well, okay!” And he went on to talk more about sex, and where you’re going to live and this, that, and the other than the money part was that quick on the money part. So, there’s got to be something else. Before you get married, when you get married, and during the marriage to have that communication.
Josh: And, just to clarify, you said your preacher wanted to talk to you about sex?
Josh: Alright, I just—
Brandon: I think in my premarital counselling we had that discussion as well, awkward. So, I’m wondering then, do you advise against couples from having separate checking accounts, or is that a different issue? Cause I know some people, like Dave Ramsey he’s very against that, so what are your thoughts?
Jason: For most of your expenses you do keep a joint checking account. We keep separate individual checking accounts for our, I call it, “blow fund” which is your, as long as it’s not illegal, immoral, or unethical, I don’t care what you spend the money on. So, we each set aside a little bit of money each month that, you know, if she wants to go buy Jimmy Choo shoes, great, if I want to go buy something for the man cave, great, no questions asked. As long as there aren’t police knocking on the door, or there’s going to be some sort of lawsuit that comes as a result of the purchase, we don’t care, but we do have a joint account for our regular expenses.
Josh: You may want to rename the “blow fund” to something other than the “cocaine fund”.
Jason: Now you know what I spend my money on!
Josh: So, here’s a question; How does somebody find a financial planner who isn’t just about, “hey, you gotta pick this stock, you gotta pick that stock,” you know, you want somebody who’s going to help you with the budgeting. You want somebody who’s going to talk about your death. You want somebody who’s going to talk about life insurance, and wills, and trusts, and help with that above and beyond all the other stocks, and bonds, and real estate.
Jason: So, I’m biased because I am one, but I believe you should pay a fee only financial planner. That’s the actual term that we use. Someone who will either charge you a flat fee, or by the hour that is not going to sell you a product, that is not going to try to sell you front-load mutual funds or anything like that.
I also, aside from cases where people don’t have the mental wherewithal, so, for example; If you’re 75 years old you probably want somebody to manage your money for you because you are more susceptible to making cognitive errors, particularly mathematical errors, than a 25 year old is going to, but in most cases if you’re young enough, and you’re savvy enough, and you’ve got your head straight you don’t need someone to manage your money for you, and they’re going to charge 1% of your assets that they manage for that “privilege,” and it’s usually to underperform the market, and there to me I have a conflict of interest because let’s say you’re a BiggerPockets listener and you go through a financial planner who does assets under management. Well, his incentive is to get as much of your net worth under his management as possible so he’s going to tell you to sell your real estate portfolio and give it all to me and let me manage it which is why I think having someone who doesn’t manage money who—the other part is they have to have a fiduciary duty.
So, if you’re a CFP you have to have the fiduciary duty, if you’re a registered investment advisor you have to have the fiduciary duty, and what that means is that I’m going to put my client’s best interest first, and not my own. Whereas if you get a sales person they don’t have that legally binding fiduciary duty, and there’s a psychological bias that if you trust me I can screw you over, and you’re not going to care. It actually has been shown, and proven over, and over again through blind trials that if I can get you to trust me I can screw you over and you’re not going to care. How many people are going to think, “oh, Bernie made off. He was a good guy; he was fun to hang out with at the country club. Sure, he took $10,000,000 from me, but he was fun to go drinking with!” Same idea.
Jason: Not that, don’t get me wrong, financial planners are not out to screw you. I’m not saying that, but there is an underlying subconscious conflict of interest when you have someone who is paid based on how much of something he can do for you, and an hourly planner is going to have a conflict of interest too because they’re going to get paid more the more they work for you so it’s up to you to say, “hey, I’m going to bound. Here’s what I want, and I don’t want more than,” I usually say it’s 12-16 hours. If someone wants more than 16 hours’ worth of work, then you’ve got to have a pretty special case. You have to have a special needs child, you have to have a very high value of net worth, there has to be something that separates you from 80-90% of the people that are out there.
Josh: Gotcha, gotcha. Well, so what are fees? I mean, I’m not asking for yours, but—
Jason: Oh, mine’s $150 an hour.
Josh: $150 an hour, okay.
Jason: Yeah, it’s on my form ADV, it’s on my website, I’ve got nothing to hide.
Josh: Is that typical, is that high-end, mid-end, low-end? Where does that fall?
Jason: I think it’s going to be average for the industry. You know, I’ve got—I’m what’s called a CFP certificate so I passed the CFP exam, I’ve only been a financial planner for a year and a half, but I also built and sold a company. A multi-million-dollar company, and I’m financially independent. So, I’ve been there, done that, got the t-shirt so I kind of have the credentials as well as an MBA from a top-ten school. Although that doesn’t guarantee I know crap about personal finance, but it does mean I know numbers, and I have my own rental property portfolio so I can, again, speak from a position of having done it. So, fees generally for me would be $1,800-$2,400, higher end you can go $5,000, if you just want a check-up it might cost $500.
Josh: Yeah, gotcha. Alright, so that brings us to the next thing that I think is really important about financial planning, and I think it’s the fact that most financial planners don’t talk about real estate. At least the commission guys, because, again, it’s not in their interest, and rarely, rarely, I mean, look at any of the financial magazines. Most of them look at real estate as an aside. CNBC they’ll talk about real estate at a macro-level, but they’re never going to dig in. Fox Business, or Wall Street, nobody really covers it, and we do, BiggerPockets, and I think we do a fantastic job of it, but why the heck are the people who are responsible for educating us about the world of money not talking about real estate?
Jason: Well, it goes back to the incentives. If you think about it if I can get you into a REIT, or into some sort of REIT mutual fund that I’m going to get 1% out of every transaction then that’s where I’m going to put you, and it’s a whole lot easier to just say, “well, go into this REIT,” than to educate someone on what it takes to be a successful real estate investor. Honestly, and I can’t say this with certainty, but I imagine a lot of financial planners eat their dog food. So, if they’re saying invest in ABC mutual fund, they’re invested in ABC mutual fund so they don’t have the experience. They haven’t done it. They view it as an asset class in a macro sense and we all know that real estate is very, very local and what works in Fort Worth, Texas doesn’t work in Charlottesville, Virginia so it takes some general knowledge. I tell clients who are interested in investing in real estate, “here are the BiggerPockets rules, here’s the links, go read, get smart, don’t pay me $150 an hour to regurgitate what you can go read,” so really all I do is validate. Hey, if you want to do real estate investing, and this is your approach, then this is how you think about it, and this where you go get smart, and then if you want me to validate your numbers and your models? Sure, that’s $75, or $150 to validate your models versus however many hundreds or thousands it’s going to take for me to teach you what I know which is basically what you guys do.
Josh: Yeah, and well, how about balance? Real estate investors tend to be all or nothing. 100% real estate, and nothing else. They don’t want to be in the market, they don’t want to deal with. Then, non-real estate investors they typically don’t touch it, they don’t mess around with it. So, where is the balance, and should there be? Frankly, I think there should be some kind of balance between it, and how do you manage it, then?
Jason: So there should be a balance, but it may not be 50/50. So, if you are a seasoned real estate investor and you can eye a deal, and you can find a deal, and you can swing a deal, and you’re going to make 10%, 12%, 15%, and you know it, you have enough experience that you know what you’re going to get, then why would you invest in something that’s not in your wheelhouse? So, I’m a fan of investing in what you know. I’m an entrepreneur so I invest in small business, and real estate is kind of that secondary area of my expertise, but we fund our IRAs fully, my wife has a SEP 401k. We will invest in those and those go into the stock market and they go into mutual funds and they’re boring old index funds because I am too stupid to figure out what the market’s going to do tomorrow and so are 99.9% of investors.
Josh: That’s not true, that’s not true, Jason, you are far smarter than really stupid.
Jason: So I’m marginally stupid. Even, and let’s just assume I’m smarter than the average bear, I still can’t beat the market so what about all the people that aren’t smarter than the average bear, or all of the people that think that they’re above average drivers that fall prey to the Dunning-Kruger effect? So, we do fund those because—the Dunning-Kruger effect is, I know, I’m sorry—
Josh: As we make big giant eye balls.
Jason: The Dunning-Kruger effect is where you think that you are better than the average person with no actual reason to believe it. So, the common one is what 93% of people think, that they’re above average drivers, that’s the Dunning-Kruger effect. Oh, I drive, that guy’s an idiot, I must be a good driver, Dunning-Kruger. So, there’s a lot of people in the market that are falling victim to the Dunning-Kruger effect that think that they can watch two shows on CNBC, they see Jim Kramer going, “buy-buy-buy-buy,” and, “sell-sell-sell-sell,” and, “hey, I can do that”.
They also fall victim to something else called apophenia which is, you know the numbers the come across the ticker on CNBC?
Josh: I think he’s making up words now, Brandon.
Jason: Nope, a-p-o-p-h-e-n-i-a, apophenia. It is where you start to see patterns in numbers that don’t have patterns, or you’re at the roulette table and it’s been red the past seven times, it must be red next, or it’s going to be green because—no, black. It’s going to be black. That’s where you’re seeing patterns where patterns don’t exist. So, we fall prey to all of these behavioral biases when we invest, and you can fall prey to them in real estate investing too, but if you’ve got enough experience, and that’s what you’ve been doing for a long time you know how to swing a hammer, you know how to run a deal, why would you invest in something that you don’t know about?
The reason that we invest in index funds in our IRAs is because that is what we will use when we get older to fund our lifestyle. When we’re in our 60s we don’t want to have properties anymore. We’ll start to slowly de-cumulate our properties and sell them off. We’ll have this nice batch of money that we can live off of so that’s for the future, the income from the rental properties is for now and the immediate future, but it is a good ballast so that later on, when you don’t want to deal with real estate, you’ve got it there, it’s already set up, you’re taken care of.
Josh: Nice. Sorry, I was just going to say I just learned about baccarat, and I was at some casino a couple months ago with my buddies, and it’s a fascinating game. If anyone listening gambles and you’ve never tried mini-bacc it’s actually really fun, but the whole thing about baccarat is you’re trying to find these patterns, and basically it’s a two-way bet. You bet for the banker, or you bet the other way, and you’ve got these guys and there are these cards and they’re charting all this stuff—
Jason: Oh, yeah!
Josh: And it’s like, “oh, you’re trying to find patterns,” and I play, and I have fun, and, like, what the hell are you doing guys? I mean, this is a flip of the coin. You are literally giving it a coin flip and you cannot chart a coin flip. You know, I think a lot of people fall victim to the fact that investing in a lot of things is really just a coin flip for you unless you understand the business, and I think that’s why Warren Buffett is one of the most admired people.
When you think back to when the stock market bubble was happening, and Buffett’s like, and around 2000 or so I was a stock trader back in the day, so I used to really watch the market closely, but he’s like, “dot com? I would never invest in a dot com. I don’t get it. I don’t understand how it works. I don’t care how crazy these prices are going. I’m going to invest in Coke, I’m going to invest in the Railroads,” you know, whatever it is because it’s predictable and understandable to him, and I think it’s an important point. Don’t go spreading your money into things you don’t get just because someone tells you to, “hey, I got this latest and greatest thing you should back me,” don’t do it! I’ve done it, I’ve been burned, and I hate seeing people lose their money. I mean, my mom, I knew so many people who lost their shirts because they were investing based upon advice from some financial advisor, or stock broker, somebody else who said this is the hot thing. If you don’t get it, you don’t understand it, or you don’t get how it works what are you doing?
Jason: And chances are if you know something and you’re really good in an area you can leverage that knowledge into profit easier by starting a small business, or by doing something else, consulting and what not, than by investing in stock.
So, the company that I sold does search engines for websites. So, if you go to Zappo’s and you look for red shoes, and you find red shoes that’s what we do so I knew that industry cold. There was one company called Autonomy that we had a pretty easy time stealing their customers because it was hard to work with, it was kind of clunky, it was out-dated, blah, blah, blah, and Autonomy was a publicly shared company, and if I had used my insider knowledge, I mean legal insider knowledge to, say, short Autonomy I’d have gotten killed because HP paid over the moon for Autonomy. So, even though you know something you can’t control it, and to me in order to be successful and to profit off of your investments you have to have differential knowledge, and you have to have control.
Josh: Can you have control in real estate?
Jason: You can control the deal. You certainly can control the deal, you can control the tenants, you can control what sort of improvements you make, you can control what sort of property manager you use. Sure, can you control 100%? No, you can’t control 100% in anything, but you can control a lot of the variables whereas in investing in stocks you might have differential knowledge, but you don’t control the psychological behavior of every other investor in the market. So, that’s why I index fund.
Josh: And that’s why people buy real estate. That’s why people who get that buy real estate. Over the years that I’ve been doing this I think that’s one of the biggest psychological reasons that I tend to hear from people is that I have some control of my destiny with real estate. I don’t have control with anything else. You know, I can set the price that I pay. If I don’t want to pay it, I don’t pay it, you know, I can control a lot of factors and mitigate my losses.
Jason: And with enough experience you can say, with a reasonable set of expectations, what is it that I can get if I sell it? What can I rent it for? How much will it cost me to improve it? Then you can back into how much do I want to pay in order to get the return that I’m looking for, and you also know, when you have enough experience, that that deal that looks so great that you want to jump on isn’t the only deal that’s ever going to come around.
Brandon: You know, another trait that I like about real estate, not that we want to make this obviously the real estate versus stock show, but in real estate, and with small business, so you’ll appreciate this, is that you can leverage creativity in place of cash where you can’t do that as well in other industries like stocks, or index funds, things like that. You can do a little bit of leverage, obviously, but that’s why I like to recommend, if people are interested in real estate, if they’ve got $5,000 they could do so much more with that $5,000 in real estate than they could anywhere else. Now, they could lose it also very, very easily, but $5,000 towards direct mails sending them out to motivated sellers you could turn that $5,000 into $20,000 or $30,000 fairly easily because that’s a business, it’s not an investment as much.
Jason: Yeah, if you’ve got $5,000 and you can contact a bunch of motivated sellers and you can get in contact with people with money you can get in the middle where money changes hands and that’s a way to make money. I mean, that’s a way to make money in any business. It doesn’t matter if it’s real estate, it doesn’t matter if it’s financial planning, it doesn’t matter if it’s software development, if you can get in the middle when money exchanges hands and takes a little bit of it then you’re in good shape. Either that or you have to be able to create value. So, if you can take the $5,000 and go in with someone and be the person that paints and sands and does all the work. You know, you buy the material and you do all the work, and the other person is fronting the finances and then you split it 50/50 you’re probably going to get a pretty decent return on your cash.
Brandon: Yeah, we talked, actually, with Mike Simmons a few weeks ago on one of the, I think it was episode 50, and he talked about that’s how he flips houses. He partners with people on a 50/50 deal and they provide 100% of the financing and the repair costs, and he manages the whole deal from beginning to end and they split whatever they’ve made at the end 50/50. So, he’s leveraging his creativity for his not using cash, and it’s a fantastic business model. I love that model so really cool.
It’s also really nice to hear, I just want to add, like I don’t have a 401k, I don’t even fund my ROTH IRA, or I don’t do any of that and I always feel bad like, “oh, I really should,” but it’s nice to hear you say—like I know I can get 20-30% return on my money right now. In my market I know for a fact I can get 20% without even having to try that hard. So, it hurts me to put that into a stock or a mutual fund that I know is not going to earn more than 10% so it makes me feel better to hear a qualified person tell me I’m okay.
Jason: So, I would say, and this applies to all your listeners, is if you can, if you’re eligible for it, is open a ROTH IRA and put $100 in there, whatever the account minimum is. The whole reason for that is that there is a 5-year time frame that a ROTH IRA has to be open and funded for 5 years before you can withdraw your contributions tax-free, or, I’m sorry, penalty free, and so even if you just put $100 in there your clock starts so in 5 years it can become your floating liquid fund. Your emergency fund if you need it because then you can withdraw your contributions penalty free because you’ve already cleared your 5-year window.
Brandon: That’s a great tip.
Jason: And because of the way the taxes go it winds up being 3 years and 8 months if you do it right, but yeah. If you could open up a ROTH IRA and you’re eligible, do it because that money—here’s the difference between investing in the stock market and investing in what you know in real estate. Let’s say you fund a ROTH IRA, let’s say that you meet the income thresholds and you fund the IRA and you pay the taxes now. You are done paying taxes. So, in 30 or 40 years when you’re at social security and you’re trying to manage for tax thresholds so that you don’t go into the next tax bracket you’ve got this pile of tax-free money that is available to you. So, there are advantages, there are tax advantages, for doing some investing in the market in IRAs just so you’ve got those kind of tax-deferred, or tax-free options later down the road.
Brandon: And just so people know I’m not saying I’m not going to do that. Like, I want to, I still feel bad that I don’t do it, but lately the last few years it’s just been like Kmart blue-light special around here so it’s really hard for me to take that $5,000 and max out my ROTH for the year when I know that I—
Josh: Where do you invest? What town is it?
Brandon: Podunk, Washington, isn’t that what you call it?
Josh: Oh, okay.
Brandon: There you go.
Jason: But those are the best places. Podunk, Washington is the best place to invest because there is an informational disadvantage. There’s probably 2 or 3 good ol’ boys that know everyone.
Josh: Yup, that would be, Brandon.
Brandon: Ha! I’m the good ol’ boy.
Josh: No, Brandon is literally the second most famous person in his town to the Mayor.
Jason: And that’s where you want to be. I would rather invest in Podunk, Washington as a real estate investor than invest in, say, Atlanta where it’s probably everyone’s an educated buyer. Any distress is going to be pounced upon by 50 investors, you don’t have that informational advantage that you can act on in some of these markets. So, I mean, would I want to live in Podunk, Washington? Ehhh…
Josh: I’m just saying, see!
Brandon: I like my small town! No, but I agree. I agree completely. The rural thing is, you know.
Jason: And that’s what a real estate portfolio is, is rural. We invest in rural. We live in urban, I mean, we live in downtown Fort Worth, but all of our investments are in rural because that’s where the informational advantage is.
Brandon: Yeah, there you go.
Josh: So, as we come to a close here we’ve got a section of the show that we like to call our…
It’s time for the Fire Round! FIRE!
Jason: As opposed to PIRE it’s FIRE
Josh: Yeah, and that was your Beevus and Butthead rendition of the Fire Round
Brandon: Alright, so these questions all came from the BiggerPockets forums somewhere in there. A lot of them are kind of personal finance questions because you are a personal finance pro, but they are all kind of relating to real estate as well. So, these questions we’re just going to fire them at you and you get to fire them right back at us. Number one: pay off debt first, or invest in real estate?
Jason: Pay off debt.
Josh: There you go.
Jason: Do you want me to explain why, or…? How fire-y is this fire round?
Josh: Yeah, I was curious too, Brandon. I mean, because that was probably the most terse response we’ve ever had.
Brandon: That’s what we like about the fire round, though, now that we’re going on about it. No, I think that’s great. I mean, I like quick answers.
Josh: There you go. Alright, so how do I buy on an online auction site?
Jason: Well, I just did this. This is my second one that I’ve purchased. So, I’ve used Auction.com, there are others, but I use Auction.com. I narrow it down to the area that I was looking for, and applied kind of the same rules, the same BiggerPockets rent rules and purchase price rules, but then I used a little psychological trick. So, what happens with the Auction.com auction is when you make a bid it extends the auction by 2 minutes. So, if you’re trying to be a sniper right at the end and get the last bid in, and it emails you when you’ve had your bid beaten, but the email lags. It takes about 30 minutes for you to get the email link. So, instead of bidding early what I do is I wait until the very last second and I put in my bid because if the person was winning and doesn’t know it and isn’t watching they’ll get beaten without notification.
Josh: That’s very sneaky of you, Jason.
Jason: Oh, I am very, very sneaky.
Josh: That’s a very good idea. Alright, so do you have any other quick tips on how to buy at an online auction beyond that? Because I think that’s an awesome tip.
Jason: Yeah, on the closing you have to have your money ready. They are going to want you to close usually within 15 business days. They’re going to want a wire of at least a down payment right away, if not the full purchase price. There are a lot of them that are all cash, but those are usually the best ones because there are many, many fewer buyers in those than in the financing accepted. So, I tend to troll the cash only ones because the pool is a lot smaller of people I’ve got to beat.
Josh: And we’re totally screwing up this fire round cause I’ve got more questions for you. What typical price range are you looking at on these online auctions?
Jason: For me it’s in the $40,000-$60,000 range and I can rent those out, and I mean, you usually have to do about $10,000-$20,000 worth of repairs, I mean, they are foreclosures for a reason, but I can rent those out for $1,000-$1,200 a month.
Brandon: Nice. So, you’re getting the 2% rule, that’s good.
Brandon: That’s good, that’s very good. Well, cool. Josh, are you content?
Jason: He’s never content.
Josh: I’m always content.
Brandon: Third question: I’m in the military based overseas, how can I invest in US real estate?
Jason: Save your money. I was stationed in Germany, and one you don’t want to invest overseas because you are going to be a true absentee land lord, you’re going to have to deal with their property laws. You may have to deal with FBAR and FAFTA so—
Brandon: What are those?
Jason: FBAR and FAFTA are the two rules that have to do with expatriation and repatriation of money from overseas and it’s the reason that a lot of banks don’t want to deal with US expatriates is because once there’s more than $10,000 there’s all this reporting requirement. Anti-money laundering is basically what they’re looking for. So, you don’t want to have to deal with all that especially if you’re not a national of the place that you live in. So, save up your money. That way when, cause eventually you’ll come back to the states, and then you’ll have opportunities, and that way if you stack up all your money you can be a cash buyer, and cash buyers to me have much better negotiating leverage than the finance buyers. I mean, there’s nothing more powerful than going up to a distress seller and saying, “hey, I can offer you X, and I can close this week because I’ve got the money”.
Brandon: Yeah, that’s very true. I haven’t been in those shoes yet, but—
Jason: You’ll get there, you’ll get there.
Jason: That’s what you’re aiming for really. You want to be at that point because then I could undercut a finance buyer by 15% because of the uncertainly. Will the loan close? Will it get funded? How long will it take? Will I get foreclosed on before then? I can say, “hey, I can solve your problems this week,”
Josh: Yeah, and the other interesting thing about the question, you know, we’ve got some active military guys who started their careers while overseas and they encourage it and I think there’s a good argument to both sides, but it reminds me of the house that’s actually behind mine. This house has been for sale now I don’t even know how many months. I mean, it’s, you know, 9 months, 10 months, who knows? While everything else is turning quickly this thing’s been on the market. The owners are overseas, they’re Germans, they live in Germany and they’ve relied on this property manager/real estate agent to kind of take care of it and handle it, and she’s an absolute and utter disaster. Every decision that she’s made has been a bad decision, and it breaks my heart because I’ve reached out to them and I’ve said, “hey, guys this is what’s happening and it’s wrong and you need to do this,” and they’re like, “well, we trust her. She’s supposed to be an expert, she’s a licensed real estate agent so she knows everything about everything,” and you’re just watching their money just sink. You know, they got to pay the note, they’ve got to pay all this stuff and they can’t get out from under this property, and it’s heartbreaking. It’s all about their inability to manage it long distance.
Jason: Yup, and if you’re going to do long distance management then you’d better know the area that you are trying to manage. So, we have one condo in Charlottesville, Virginia, we have a great property manager, I trust that everything will work itself out in the end when we sell it, but we know that area. We lived there for 12 years. I wouldn’t want to try and invest in an area just because someone else said, “oh, hey, Podunk, Washington’s a great place to invest in,” there’s so much more risk! You may get the same numbers, but the downside is so much greater because if it doesn’t work out these people in Germany they’re mentally committed. The switching costs of finding someone else who is, arguably, better, I mean, you could probably swing a dead cat and find a better realtor, but for them they don’t know that. They think I’ve got to fly back to the US, I’ve got to spend a week, I’ve got to interview everyone, we have to go through all this paperwork, blah, blah, blah. It’s this enormous mental hurdle and they’re not comparing it to the thousands of dollars that they’re losing as a result of a poor decision. So, yeah, I mean, the flip side applies, if you know an area and you’ve got a couple of properties and then you’re going to PCS to Germany and you’ve got a property manager who’s worth a crap that’s fine, but if you’re trying to start from Germany, or Korea, or Japan, or whatever and invest in the US? Just bide your time. There’ll be deals when you come back, they aren’t going away.
Josh: Hey, really quick, what’s PCS?
Jason: Permanent Change of Station. Military people will know what that means. It’s when you go from one post, or Fort, or Base to another one.
Josh: Gotcha, and I do want to point out really quickly that Podunk, Washington is now, officially, the new Detroit.
Brandon: Thank you.
Jason: So, Brandon will be buying houses for $100.
Brandon: That would be nice, that would be wonderful.
Josh: Yeah. Alright, last question in the Fire Round, running a little long here, but ROTH IRA, Regular IRA, 401k, which is better? Which is best?
Jason: I prefer the ROTHs. In the absence of any other information I prefer the ROTHs, and the reason for that is for the flexibility that affords you when you are in retirement to manage your taxes.
Jason: And, also, once you have that 5-year seasoning in that ROTH IRA it serves as your emergency fund if you need it.
Brandon: I’m going to go open up a ROTH IRA with $100 today, just cause you said something.
Jason: It’s the contributions that you can withdraw penalty-free, not the earnings.
Josh: So you’re thinking about money, and I’m thinking about a steak. He’s talking about seasoning, I’m thinking about getting some food here.
Brandon: Speaking of that; Have you ever had Johnny’s seasoning? They sell it out here on the west coast, most amazing seasoning in the world. It’s incredible. Try it out. Johnny’s.
Jason: Somebody from Podunk Washington that makes him talk about it.
Josh: Yeah, little do we know that Johnny is Brandon’s best friend.
Brandon: No, no!
Josh: And he just got a free commercial on the air, nice job, Johnny.
Brandon: No, they sell the stuff for like $3 at Costco for a 60-ton jar of it and it’s incredible.
Jason: There will be 25 links to Johnny’s seasoning in the show notes.
Brandon: Alright, moving on! It’s time for our—
Brandon: Alright, these are the famous four. We ask every guest these questions. Number one: what is your favorite real estate book?
Jason: I don’t know that I have a favorite real estate book as much as a class of books, and that would be any book that teaches you how to be handy around the house. So, as a beginning real estate investor I think you do not want to pay other people to do what you could do yourself so learn how to paint, learn how to sand, learn how to hang dry wall, etc. There’s books, there’s YouTube videos, whatever it takes to get yourself that baseline knowledge. You don’t have to be a carpenter, but if you can rip out drywall, rip out cabinets and replace them, put in flooring, and paint you can add value. So, that would be that baseline of education wherever it is, wherever you get it. I don’t have a personal favorite, but I have a personal favorite class.
Brandon: Nice, I learned all my stuff from my Home Improvement 1-2-3 book from Home Depot, it’s the big orange one they have on their shelf.
Brandon: Yeah, I learned almost everything from that book.
Jason: And go to those free Home Depot classes, and Lowe’s offers them too. The Saturday morning classes where you can learn the basics.
Brandon: Great tip, great tip.
Josh: Yeah, there you go. Now, meanwhile some will argue that that is not a good use of time; swinging a hammer, but we have covered that in other podcasts. I think that—
Jason: If you don’t have money then you trade time.
Josh: There you go.
Jason: Once you have money, you know, I don’t do any repairs, but that’s because I have a higher value and use of my time, but if I was 25 years old and just starting out darn skippy I will learn that stuff rather than whip out the credit card and dive further into debt and risk it to have someone else do it.
Josh: Good point, well played. Well played. Alright, sir, favorite business book?
Jason: Entre Leadership by Dave Ramsey. Ironically he wrote in his book a lot of stuff that I was trying to implement in my company so it could just be attribution bias like, “oh, I did this and then Dave Ramsey said it’s good therefore Dave Ramsey is good,” I don’t agree with his investing advice, I don’t agree with all of his personal finance, but Entre Leadership is a good book. The second one is The Goal and I forget who the author is, but it teaches you how to run a business, and I think real estate investors need to think about I am in a business. I run a business, and you need to think about profits and PNL statements from the get-go so The Goal for how to think of it that way, and then Entre Leadership as you start to expand, or as you have your team so you’ve got your property manager and your handy man or whoever, how do you treat them? How do you make sure that they are in line with you to make sure you succeed?
Josh: Is that the book by Eliyahu M. Goldratt?
Jason: Yes, yes, that’s it.
Brandon: Wow, look at Josh, he can Google.
Jason: We’ll have a link in the show notes.
Josh: I’m really good with Google.
Jason: Yup, there’ll be the link in the show notes after the 25 Johnny Appleseed Spice.
Brandon: Johnny’s seasoning.
Josh: Alright, let’s see. So what about hobbies? What do you do for fun?
Jason: I’m a huge soccer fan. We went to the world cup in 2010 in South Africa, we are not going to Brazil, but I am a huge, huge soccer fan. I like to be active, you know, I’m your typical go to the gym 2 or 3 times a week type of guy. I like to cook. I suck at cooking, but I’m getting better. I read Jim Ferris’ Four Hour Chef so I’m trying to use all of his little slow cooker and slow carb recipes.
Josh: There’s a Four Hour Chef, now?
Brandon: I made his steak the other, I don’t know, month or two ago.
Jason: The sexy-time steak?
Brandon: Yeah, the sexy-time steak! It was incredible! I mean, the best steak I’ve ever had hands down.
Jason: Is it because of the steak, or was it because of the sexy time?
Brandon: I don’t know; it was a combination. Excellent, excellent steak, though, yeah people need to check that out.
Jason: I make the Fiohato, or Fishawato, once a week.
Brandon: I don’t even know what that is.
Josh: A who? It’s another word he made up.
Jason: Yeah, it’s a Brazilian national dish so if you look in the table of contents and you go in recipes and then you go in main courses it’s one of those. It’s a slow cooker recipe.
Brandon: Nice, I’ll check it out. I have it sitting in my cupboard.
Jason: That was a quick tip!
Josh: I’m glad the BiggerPockets real estate podcast has become Brandon and Jason talking about cooking.
Jason: You know, so if you’re successful in your real estate investment endeavors your rental income will pay for your lifestyle so that you can cook nice things and you don’t have to eat Ramen cakes, or you can go out to eat! Your choice.
Brandon: Nice. Good connection.
Jason: Making smart choices, being wise with your investments, and having a good rental portfolio really does buy you a lot of lifestyle choices that you might not otherwise have because you think that you’ve got to have a job, or you’re dependent on the stock market fluctuations. It does buy you that lifestyle after a while, but you’re not going to get there your first day. I’ve been doing this, I’m 40 now, we’ve really been actively investing in real estate for the past 7 or 8 years, and I had to build and sell a company to get there. It’s not an overnight win, but if you do it right it does buy you a lifestyle that you can enjoy so that you can do these cooking things or whatever.
Brandon: Yeah, that’s cool.
Josh: By the way, since we’re on the topic, I did get a nice Vitamix for Christmas and that is a bad machine right there.
Jason: So you’re juiced?
Josh: I am juiced, I am soup-making. That thing is insane. So, for anybody listening it’s expensive as all hell and well worth every penny that you spend on it because that thing is not a blender. It’s like a rocket ship.
Brandon: Nice, alright final question. Let’s get away from the food cooking. What do you believe sets apart the successful investors from those who give up, or fail, or just quit or never get started?
Jason: It’s different things. So, the people who never get started they never overcome fear. You’re always worried that that first investment that you make is going to go straight to zero and you have to overcome that because otherwise you’re going to stuff your money in your mattress and 20 years from now that money buys you half of what it buys you now so you have to be able to take risk, and you can’t get reward without the risk.
I think what separates, over the long term, a better investor is one: if you’re investing in the stock market, you’re not trying to beat the stock market. Over time you will loser. That is a losers game if you’re trying to beat the stock market. For real estate investors it’s you’re not chasing deals. You set up your process, you set up your numbers, you understand your parameters, and then you only pull the trigger when you find a deal that meets those parameters and if you have to go 6 months, a year, 18 months without pulling a deal so be it. That’s fine. There will be other deals. So, don’t fall victim to the thought of, “oh my god I have to do a deal,” you don’t have to do a deal. You have to have a process, and a backup of that process. If you do that then you expose yourself overtime to high priority outcomes, and enough of those and you’ll end up winning.
Josh: Good advice.
Brandon: Good advice, nice job.
Josh: Alright, Jason, well listen, it’s been a pleasure, somewhat.
Jason: Depends on who’s listening, huh? If they’re still around.
Josh: I’m picking a fight with the Army guy who can squash me. I’m shocked that Brandon hasn’t yet challenged to see who can kick your butt.
Brandon: Well, we already know the results of that one.
Jason: You know, I boxed in college and I floated like a bee and stung like a butterfly.
Josh: Nice, that’s awesome. Alright, man, it’s been a pleasure. Definitely appreciate you being on the show and I want to thank you for participating on BiggerPockets, and just being a part of the community. We really do appreciate the involvement so thanks for your time!
Jason: Thanks for having me, and thanks to everyone who’s actually stuck out all the way to the end listening to this podcast.
Josh: Nice. Alright everybody that was Jason Hull. Hopefully you picked up a couple interesting tips; Both in the real estate, and personal finance realm. I thought there was certainly some interesting strategies that Jason undertook and we absolutely appreciate him coming on board. I know Brandon is walking away not only with new recipes, but also with a new account to open up, right?
Brandon: Yeah, I’m going to go open up that ROTH IRA with $100 today.
Josh: Do it.
Brandon: I will.
Josh: Yeah, I think if people walk away from our shows with just one piece of advice then I think it’s well worth the time they spend listening to them, and I know that I do so hopefully others do as well. So, again, thanks to Jason for coming on board. Otherwise, this is show 53 of the BiggerPockets podcast, and you can find the show notes at BiggerPockets.com/show53.
We want to thank everybody who’s been active on BiggerPockets. Of late the site is starting to really blow up. Lots of action, lots of new folks hopping on. We are at over 150,000 members, over 700,000 forum posts, or is 800,000? I don’t know, it’s up there, and it’s just getting busier and busier which is a whole lot of fun because we’re seeing more and more people share their successes and the quick tip up front about the success story was added because of that. It’s pretty exciting to see people be successful.
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So, thanks for listening. Thanks for sticking around, and Brandon why don’t you take it away?
Brandon: Alrighty then. This is the BiggerPockets podcast show 53, this is Brandon, and Josh signing off.
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