BiggerPockets Podcast 006 with Arthur Garcia Transcript

Link to show: BP Podcast 006: Investing While Working a Full Time Job with Arthur Garcia

Josh: Hey everybody this is the BiggerPockets Podcast Show 6.

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Josh: Hey everyone it’s Josh Dorkin with BiggerPockets.com here with Show 6, I’ve got my co-host with me Mr. Brandon Turner. What’s up Brandon?

Brandon: Hey not much Josh, I don’t know if you heard that but that was my cat meowing in background saying hello as well.

Josh: I can hear something meowing I hope it’s your cat. Well we got a great show man this is going to be an exciting episode ahead. We’ve got Arthur Garcia with us he’s a sharp guy, he’s not only a sharp guy but I think we’re going to have some fun to come.

Brandon: Arthur is actually one of the reasons I became a BiggerPockets blogger originally actually. Because Arthur reached out to me actually called me on the phone, we talked for a while and he’s kind of got me connected with you. So I actually owe a lot of my BiggerPockets connection to Arthur so I am extremely excited to have him on the show today.

Josh: I was not aware of that so I guess I am excited as well. Let’s talk a little bit about Arthur, Arthur is a successful buy-and-hold investor in Southern California who invest while working a full-time job. And he is working towards I believe he’s working towards purchasing 25 to 30 homes during this down cycle, we’ll get into it later. But he is really savvy again he is a witty guy and I think he’s definitely going to blow some of our minds with his intelligence. So I am super pumped.

But before we get Arthur I just want to talk about the show in general. As you know this is show 6 and our 5 previous shows we’re up to 25,000 listeners so far Brandon 25K.

Brandon: That is awesome.

Josh: Did you think our little show would become the beast that it’s become?

Brandon: I didn’t and honestly I don’t know if you remember this but back in the summer I told you when we talked about having a podcast I said what I would love to have within one year’s time to be a top 20 business podcast. And I think our 1st or 2nd week we hit that, I thought it would take a year and so this has been incredible already.

Josh: Absolutely, absolutely and I want to thank everybody who has listened so far and especially those people who have taken the time to leave us reviews on iTunes, 99 if you guys have done that that’s 99 out of 25,000 so hint, hint. But listen thanks to everybody who has left a review if you haven’t please jump on iTunes and leave us one it’s really helpful. Helps get the show in front of a lot more people so definitely do it. But enough of that it’s time to get to the show and we are going to talk about what Brandon?

Brandon: We’re going to talk about buying and holding with Arthur.

Josh: Buying and holding and doing so while you are working a full-time job.

Brandon: Correct because a lot of people that come to BiggerPockets they don’t have, they are not job free. They are held down by a job and they see a lot of investors, I talk about, I don’t have a, I’m going to reread that.

Josh: You don’t have a job? Is that what you were going to say?

Brandon: I was going to say that but I do.

Josh: Because you got one now.

Brandon: I know I can’t say that anymore.

Josh: I think you do. Are you still working or did you just quit Brandon?

Brandon: I just quit. Alright let me resay that.

Josh: No I think we should run with that.

Brandon: Okay we can run with that. No it’s going to sound stupid.

Josh: Where should we take it from?

Brandon: You just said, isn’t that right Brandon?

Josh: Isn’t that right Brandon? Isn’t that right Brandon? Isn’t that right Brandon?

Brandon: Keep going. Yes that’s true Josh because a lot of people come to BiggerPockets and they have jobs and they see a lot of the investors on there who are job free and they say, oh you know it would be nice to have that. But I don’t think the people that are investing with a job I don’t think they get enough attention. And so I’m really excited today to talk to somebody who’s got a full-time job and is a full-time investor. I mean that’s not easy to do to manage both so I’m looking forward to our discussion.

Josh: Cool man well let’s get to it.

Brandon: Sure.

Josh: Hey Arthur what’s going on man?

Arthur: Hey Josh, Brandon, good to be on man, thanks for having me on.

Josh: That’s a pleasure.

Brandon: I’m excited to have you.

Josh: Yes, yes, yes, hey man so really quickly I just want to let everybody know I’m super pumped about this personally. Because when I needed a hand on the 2012 BiggerPockets Conference Arthur Garcia basically raised his hand and said yes let me help you out I’ll do whatever I can to make sure this thing’s successful. And he did he was amazing, he was our event coordinator and really did an amazing job. So Arthur I just want to thank you live on the air here for all to hear. And any way with that in mind you are a real estate investor who is doing your thing while working a full-time job.

And I think that’s something that appeals to a lot of people. So why don’t you tell us how you got started, why you got into real estate, what made you decide to start getting into the field?

Arthur:Yes, no, definitely, I guess I’m probably your typical BiggerPockets guy the one who has the day job, working for the man. And at night and when I have free time on the weekends I’m looking at ugly houses when I have a chance. So that’s a little bit about what I do it’s more buy-and-hold and keep my day job until I can maybe figure out a transition plan down the road or something else.

Josh: So we want to tell your bosses that are listening to the show that you are eventually planning to quit your job.

Arthur: Arthur, that’s not my name, that’s just a name I use. It’s really interesting because working in corporate America I learned this when I got right out of college. You are only as good as well as you perform. So I’ve always had that fear in the back of my mind that one day I’m just not going to be able to perform. And if something happened to me or if I got sick I just didn’t like being on that payroll situation where you don’t have another backup plan. So in college I was kind of fortunate I went to a private school where a lot of the folks that I was peers with came from pretty wealthy backgrounds. Of course me I showed up with my sandals and my taped shoes and all that.

But no, everybody around me was pretty well to do and it was great because those four years really taught me a lot about people coming from different backgrounds start to see similar patterns. And one of the things that these guys had in common or a lot of them did was they owned multiple properties. One of my roommates that I can think of now, great guy but his family owned I think like 20 different properties. And just talking to him over the years I got to learn a little bit about the way that he viewed money and the way that he viewed wealth. And the only way to really get any type of wealth other than just, you can save your way to making a decent amount of money in your retirement you really have to find a vehicle that is going to work well for you.

And real estate with all the different investment vehicles seem to be the most lucrative, it made the most sense in terms of taxes. You can get someone to finance 75 to 70% of your deal. I don’t know anybody that if I was going to open up a bakery nobody’s going to give you 75% of the capital to start that. On top of that you get all this great tax breaks and your tenants are paying down your debt with cheap dollars so it just kind of seem to make the most sense. So I don’t know if that answers your question. But it was something that stuck in the back of my mind and when I got out of college I had always talked away a little bit of money but out here in California right when I graduated the market was just ridiculous. From 2002 all the way to 2006 was just, I think it was nuts everywhere but specifically in Southern California the market was crazy.

I mean people was being ridiculous amounts of money for houses that they couldn’t afford I couldn’t really get in the game so I had just kind of just put my money into a 401(k) and couple of mutual funds. And nothing against those they’re definitely for certain types of people but I was slowly watching my wealth not accumulate. And then it just happened that at that time the market had crashed around 2007 or 2008, the bubble popped out here and everything just went. Houses that, in certain markets out here were selling for $400,000 were selling for like under $100 grand. I mean it just went ridiculously the other way and it just kind of that opportunity meets preparation.

I was waiting to get in I just didn’t know what to do and that’s when we decided to jump in. Yes, so that’s, and when I say we I’m talking about me and my wife.

Josh: Gotcha, gotcha, yes you know it’s funny. I was in SoCal in the early 2000’s and the big story that really jumped out at me was when I heard about a friend who was an agent who knew this cop who had just paid $1.2 million for a house. And I’m like you’re a cop wait a second how are you affording a $1.2 million house? It shouldn’t happen and with these crazy loans and all the nonsense. I mean that to me was that sign that this is just chaotic and seeing these house values just double and then some out in SoCal was, it was bananas, it was definitely bananas.

So anyway so you and your wife you guys are stoked, the timing’s perfect, you say hey let’s do it, we’re going to go buy this long-term portfolio. What happened?

Arthur: I wish I could tell you that I had all this strategic planning. And just first off I couldn’t buy a property because it was just too expensive. Like not fancy, I wasn’t like timing it, it was just goodbye house because I just couldn’t qualify for the types of loans I needed to get. So when the market corrected we were like, now it’s the time to start investing. So I put to this huge down payment on our primary residence because of course that’s an investment right? So we dropped I mean a substantial amount of money to get into a primary home and we had a little bit left over and I thought well maybe we can use this to buy our next investment.

And it just so happened that we were at a family get-together and a family friend of ours who had owned a piece of rental property out in the Inland Empire which is about an hour an hour and a half outside of Los Angeles. He had just, he had mortgaged himself all the way to the hill it was at the peak this little 700 ft.² home was worth about $400,000 in this really kind of rough kind of town. He refinanced the whole thing he bought all these different types of toys not Tonka trucks but like he bought…

Josh: Jet skis and all the fun.

Arthur: Yeah even motor home and all these different types of boats and just different things, I don’t know where the money went, it wasn’t there. So once he realized that that same property was not going, it was negatively cash flowing for a few years, he was just done with it. And anyway him and I started talking at this get-together and I had mentioned that I was interested in getting into real estate. And he just gave me this whole laundry list of how it’s just a terrible thing, rental property was no good, tenants destroy your property and blah, blah, blah. But I had up to that point I had years of all this reading different books and stuff.

I remember all the things that I read this was just like counter to all the things that he was telling me. But anyway the long story short is that he said well I’m probably going to short sell that house. I had no clue what that meant but I was like hey well maybe I can buy it whatever the short thing is. So we had worked with a realtor who was going to double end the deal. So she was going to represent him as the distressed seller. So she went to the bank on his behalf and negotiated a reduced sale. Like he obviously had a crazy mortgage on the home and in today’s market or at that time it was only worth $70,000 or $75,000 according to what the comps and everything were pulling.

So I walked in and I was the backup person so she went up to the bank and said okay look we need to short sell this for $70,000 or $75,000. Here’s our buyer which was you know, enter me, I got the property for about $75,000 and I was freaking nervous man. Because you read all these things online and you read books and you go to seminars and everyone always talking about cash flow. But I was like sweating bullets because up into this point I had, just it was all theory I didn’t know anybody who had actually been doing it except for my roommate’s dad in college.

So I’m sitting there and I have to write the escrow check for like $20 grand and I’m like sweating thinking oh my gosh is this going to work? And we signed all the documents and then I was starting to get nervous. But I knew at the very least after I had the compound account, everything, the mortgage, taxes, insurance was going to be a little bit under $500 a month. And based on the research which was a whopping analysis of just looking on Craigslist.

Josh: That’s in the best way.

Arthur: This is the beginning stages of my little investment portfolio. But I went on Craigslist and I knew that I could rent it for at least $1,050 to $1,150 depending on who I could get. But I was all kinds of nervous and we ended up closing on the house and I got really lucky because the guy who was owner of the house before me had just gone crazy on this home. He put hardwood floor in, he had recessed lighting and again I told you this is like 700 ft.² home. You need one light in that house that’s it, it’s so small that you could be in the living room and the kitchen at the same time, it’s great.

Josh: Nice.

Arthur: But you know he put granite counter tops, brand-new cabinets I mean this thing is in cherry pristine condition. But I had seen all these like Flip This House Shows so I was like the front yard looks like crap, so I put seed down and installed all the sprinkler system and put a fence. Anyway I probably went a little bit nuts on the rehab part because it was already turnkey but we ended up getting a renter in the long story short and they rented it for I think $1100. And I’ve got to tell you once I got that first check and I deposited into the bank account, and of course you know you can do it at the ATM now.

But I walked in with my crisp nice $1,000, $1,100 check and I handed it to the teller and she just looked at it like, okay no big deal. Well for me, like for me I was like you don’t realize you’re talking to the next Donald Trump man. This is a guy on his way up. Putting that first check in is really what started the addiction, I really got hooked after that I thought wow, I can’t believe someone was paying me to live in something that I own. And it just that was worth the whole thing fueled my passion for real estate. And then, I could keep talking but…

Josh: No, that was a long story long by the way, not long it was very short.

Arthur: Alright, hey you asked man.

Josh: No that’s a great story Arthur, that’s awesome I can totally resonate with that. That’s one of the best feelings in the world to being able to drop off that check so that’s cool. You mentioned your mortgage, you had a mortgage of around, your payment was about $500 a month and you’re renting it for $1,100 some. But I’m curious if you could talk about that mortgage like getting that first mortgage. What can you tell us about that? How did you get that? Did you just go into a bank or what did you do to finance your first deal?

Arthur: Yes so my ‘first deal’ was my big investment, my home, no. This is the second house that we were going to get but really and most people know this on BiggerPockets. But this is kind of a good point, getting loans 1 through 4 is actually not that hard. Typically for a single-family home you’re only going to have to put about 20% down, maybe 25% once you get closer to that 4 loans. So the first 4 are actually pretty easy, you could go to like any big bank and most of them will lend all the way up to 4. I didn’t have to start getting creative with my financing until I got past that hump.

And then once you get to 10 it’s really more creative. But what I did for the second property is we just used the same broker we had used the first time and it wasn’t too crazy.

Josh: Okay that makes sense.

Arthur: They gave me a second loan so.

Josh: No I think that’s great, I think people will often think that you have to be crazy and you have to be creative. But I think people forget that sometimes you can just go to a bank and drop-down 20 - 25% and get a loan. There are banks that still lend today.

Arthur: Yeah it’s interesting because you go to all these real estate clubs and everybody is trying to figure out how to get the owner to carry back the paper or to take on the existing mortgage, the subject 2 stuff. Which I think there’s definitely a place for that. But if you have a day job like I do and you are working full-time and you don’t know how to do all the ins and outs and you want to get started just getting regular loans at least for the first few properties aren’t that difficult.

Josh: And I think you touched upon a really important point there and we talked about this in the ultimate beginner’s guide with which we just came out with which you can get at biggerpockets.com/ubg. But we talk about when you have a job like, there is so much power there for you to be able to get a mortgage. I think a lot of times people with jobs think oh I wish I was like that investor who doesn’t have a job. But when you have full-time job there is so much potential for getting loans and building wealth quickly because you don’t have to rely on being creative necessarily. You can just rely on the power of your job to get you there and I think that’s huge. So props to you.

Arthur: The other components are somebody who is just getting started or who hasn’t maximized their 10 loans yet is hard money loan is expensive. Like where just closing on our property this week where I’m paying about 12% on that which is nice right?

Josh: Oh yeah.

Arthur: Here we go, 12% interest on that. But anyway when you are first starting out you are getting locked, especially now locked fixed rate debt for 30 years at 5% give or take. So I mean you do really have an advantage over somebody who can’t get those types of loans. So I think if you are just starting maybe you don’t have that 20% to start with partnering with somebody is great way to, maybe either to lend your credit score for a percentage of the upside. Or work on doing a 50-50 split if you guys figure out some creative way to do that. But those are the types of deals we’re doing now because we can’t get that good financing anymore. So anyway kind of a side note to what you are saying there Brandon.

Josh: Alright Arthur that’s great. Alright Arthur well listen man, it’s so, your focus thus far and my understanding is that you’re a buy-and-hold guy. You’re not in their flipping houses, you’re building large portfolio and your goal is to build long-term wealth via cash flow via that portfolio correct?

Josh: Okay, that’s great. Now why did you decide on that? Was there a specific reason? Obviously you are working a full-time job so flipping might be a challenge potentially and some of these other strategies are more and more of a challenge while you’re working. Or was there a specific strategy towards why just the buy-and-hold?

Arthur: At first it was like I was telling you the last story where it was just hey someone is going to pay me. A the time I thought cash flow is really that $500 that was going to make from what I paid on my mortgage to what I got from my rent.

Josh: Oh you forgot the expenses part.

Arthur: Yeah, we just started saying like hey I got to get a new water heater. Oh Jeez there goes a whole month. But over time you actually start to see how those actually add up. The idea behind it was okay how do I create something that’s going to create another stream of income without me having to be involved every day? I didn’t want to be actively working in the business which is kind of funny because it actually ends up taking a good amount of time still. But that was the idea behind it but I like the compound aspects of rental property like I was saying before.

You got the mortgage paid down which you are getting through amortization, you get a hedge against inflation so your down payment has a way to just continue multiplying a lot faster than other vehicles. But there is something more that I thought was really interesting and maybe I can take this time to talk about it. The market in Southern California and again this is probably just specific to California but as I bought that second home I was like this is cra-, we’re seeing to be in a real opportune time. I started really to take the time to get educated, I went to a bunch of local seminars, real estate clubs in the area and more importantly I found three or four really, really solid investors that were willing to, I don’t want to say mentor me but they gave me time.

So I called them and I would ask them questions and as long as I didn’t take too long to ask them questions they were pretty helpful. And what we started to see here in the markets like the Inland Empire or the Central Valley some of these older regions maybe two hours out of Los Angeles the prices actually slingshot the other way. So you had that home for $400,000 that should have never been priced at that point but it slingshot the other way to $70,000 which it should have never gone that low. Because the cost to rebuild in that same market was around $200-$220,000.

So the thinking behind it with these other investors who are really, really smart we’re doing and this is no credit to me this is all them is they were saying well look if you can buy below the cost to rebuild then you’re going to get that $70,000 property and that new construction for that same house in that same area will be around $200,000. If you can cash flow with and hold on to it for however long it takes for that thing to get to 130 - 140 at that point you can decide how you want to exit. If you want to refinance and grow your portfolio further or you know take half your portfolio paid on the other half.

Or do a 1031 which is when you sell your property and exchange it for something for a little bit more cash flow may be more units. So that’s what all these guys are doing so my mindset actually changed after I bought that second home. It was instead of trying to be, okay I’m going to own this house for 30 years it was more like where we’re going to use the cash flow to pay for the expense and to hold on to this property and try to get as many of these single-family homes as we can in this downturn.

Because California is cyclical and as we can acquire as many as we can. If we can get to like 30 properties or 20 to 30 properties and let them appreciate $50,000 in equity we could cash out at that mark and maybe be 2 million or 1.5 million in equity at that point. And then we could like I was saying we could either pay off half of the portfolio or live off the cash flow or take back some paper. Anyway it was at that point we actually said wait a minute this is not just a hobby that we want to do on the side we could actually make a legitimate business out of it. So from there we not only just cashing the rent check from that one house we had we said you know what we need to do everything we can to really take advantage of this downturn in the market.

So from there we went I talked to my wife and she was like uh-oh, when Arthur gets his little ideas and sits me down he’s about to throw a curveball. I said alright look here’s what I think we should do. And she’s like, what is it? We need to sell our home. The big investment that I was telling you about, that first one I bought. And she was like really do you think? So I said we have money tied up in this home. We get rid of it, we live in an apartment for a few years we can probably pick up three or four more houses just from this one sale. And she was kind of hesitant but she’s like look you seem to know what you are talking about so let’s give it a shot.

So after we owned the home for about a year we put it right back up on the market our neighbors thought we were crazy our family members were like you’re completely out of your mind what are you doing, you just bought this home. And our real estate agent was really happy he was the only one that was excited. We sold the house we actually got a little bit more than what we paid for it, it wasn’t intentional but hey I’ll count that as a successful flip. And then we went gangbusters we were looking for every opportunity we could to buy as many of these. And it was a certain type of home it wasn’t, we weren’t going to pay anything more than $50-$80,000 in our market.

And we were planning on we were just going to hold on to these properties until we could get to a point where we felt they appreciated enough to liquidate them. So it’s really hard because there’s a lot of properties in that price range at that time but they weren’t in good neighborhoods so we had to really be very specific and we couldn’t finance them as quickly as we wanted to. Because my wife was working part-time so I was the only one that could qualify for all the mortgages. So after you get your credit run about 20 times it gets more difficult and you have to find different lenders to work with. But that’s how we worked with gangbusters and tried to buy as many as we could and that’s what pretty much what happened after that.

Josh: So it’s interesting because as an investor you don’t want to be a speculator. But you said something that actually you should resound to a lot of people and it certainly did to be. Which is the market was underpriced and you knew the market was underpriced. Because the cost to rebuild was far higher than the current value of the property. So you knew that if you were to acquire these properties at that value that at some point they would hopefully appreciate.

Now, I’m just curious because in this case it works for you but why don’t we look at a place like Detroit for example where you can buy a house for a model car. And $5,000 bucks and you got the house certainly it cost more than five grand to rebuild. What was different and what convinced you that this was, what’s made that any safer than potentially buying a property in as super depressed area like that?

Arthur: Yeah, no, those are some really good points and that’s why I was trying to say that what I was doing or what I am doing is really based on what has happened historically here in California. But in addition to that my complete forecast is off track and I missed it by a long shot to get that $50,000 in appreciation it takes 20 years instead of the next three or four. I would be completely okay with that because the way we are structuring the deals is that even if I can’t get to that level within the next relative short future each of these properties are cash flowing. We have solid financing behind all of our units, I’m not doing this for a day job so I’m not living off of that rental income.

It’s just a secondary thing that we are doing on the side after hours and one of my mentors is actually a BP member I don’t know if I can call him mentor. But Steve Landis is a guy that I look up to a lot out here in Southern California. And him and his partner met with me a few months ago and they kind of pushed it on me and said at some point you have to draw a line in the sand and make a bet where you think the market’s going to go. And as long as you have your deal structured correctly you’ve got equity, your cash flowing you are always going to be in a very offensive position in your properties.

So that’s how we tried to strike all of our deals even when we do partnerships we always try to make sure were buying the right kinds of property. And because I’m not trying to do 50 houses a year it’s completely scalable at least in the amount that I need.

Josh: Well you know I think as long as you’re being smart about it and acquiring these properties that do cash flow you already talked earlier about having that, oh expenses are more than mortgage and taxes and insurance there’s more to it. So obviously factoring in all the expenses into your equation. If you got all the cash flow at the end of the day appreciation that something additionally it’s a bonus. And so it clearly sounds like that’s kind of the path that you’re taking.

Arthur: And to go with that point too, I mean appreciation is like, I look at that as the icing on the cake. But what we have here at least in this market in Southern California you have a, I think that we’re going to start to see the prices revert back to the cost of building and it’s already happening, let me give you an example. We just purchased a home I think about I want to say about three months ago that we got for $59,000 and the home that across the street the exact same one because the last four or five months our market has just been ridiculous. Cash investors flooding in, hedge funds, people paying waiving their appraisal contingencies have completely buoyed the properties. Now that same home was selling for I think $85,000 and that’s just in a matter of like three months. And I’m not saying like it’s going to continue to grow at that pace but it’s definitely going to start to get closer and closer to that cost to rebuild. So I mean it’s depreciation but I’d like to think that we’re locking it in, due to the construction costs we’re just trying to factor that part into our equation as well.

Josh: Yeah that makes a lot of sense. Earlier you talked about how the first 4 deals were pretty easy to finance. After 4, did your strategy change at all in financing? I mean it must have, you couldn’t just walk into a bank can you? Or is that still what you do?

Arthur: No, not any more. But one of the things we started to learn is after that third deal, we got the third deal and the fourth deal, whilst we started to get deal number three deal number four deal number five, deal number six, as we started getting higher I started to learn the difference between a broker and a direct lender. And that was kind of an eye-opening experience. Because when we were working with the broker the underwriting guidelines while we were in escrow I can’t tell you how many deals I almost lost. I was so upset because we’d have like a smoking deal with like a lot of equity and it was in a good neighborhood.

And then our lender couldn’t follow up because they were outsourcing all the underwriting and here I was standing there trying to close to get this deal and I knew if we couldn’t close in 30 days we were going to lose it. So what that caused me to do is to go back and this is one of the things that I do now with anybody who wants to work with me and be like a mentor type thing. I always tell them to put the list together of all the lenders in their market and to just go down the list and try to learn as much as you can about the financing aspect of the deal. So you can understand the underwriting guidelines right from the beginning.

Because there’s all these overlays that each of the lenders require and some of them are a lot more lax and some of them are more detailed. So knowing what those perimeters are before you get to that point is super helpful. Anyway so going back to me that exactly what I did after about our fourth mortgage. I was like okay who are the people that we can build a relationship with. And I found a couple of lenders who were not only willing to just lend me money after that fourth or fifth property but they were willing to help me move my financing around to kind of give me coaching. To say okay here is how we need to move your money here, here’s how you can finance this deal so that I could get to those 10 loans as quickly as possible. I don’t know if that answers your question.

Josh: Yes, do you have any advice for finding those lenders?

Arthur: Yes, actually I think well my super creative way of finding out the lenders in my market was I literally Inland Empire, direct lenders, mortgage brokers and then the on Google. And whatever popped up I put like in an Excel spreadsheet. And I’m not kidding you I probably called about 40 different loan officers and I talked to everybody from hard money guys to guys who were just working at a Community Bank. All these different aspects because you don’t know where those rat, those, not rat holes, you don’t know where those rabbit holes there could be rats. But you don’t know how far they’re going to go and I’ll give you a good example.

One of the folks that I spoke with had, it was this community bank and he gave me the address and he said I think we can work with you. And I said okay well I’ll go out and meet you and he said I think we, we can’t give you a mortgage but we can give you a home equity line of credit. So okay great so I drive out to go meet him and I like drive up to this Walmart and I’m like, Walmart? I got to have the address, well no the address is right. So I walk in and of course you got the whole colorful landscape that Walmart offers. People with pony tails and back tails and little children running around with no shoes.

So I go there and I’m thinking this is crazy but right in the middle of the Walmart there was this little community bank and I walked in I talked to the branch manager. And I bring in like a, I was wearing, it was funny because I walked into Walmart wearing like a suit because I wanted to be like professional and then everyone in Walmart it’s like no one’s wearing shoes. But I go in there and, if you get sued by Walmart…

Josh: I was just going to say if Walmart decides to be an advertiser we’ll just…

Arthur: Exactly it will be just like blank at that point.

Josh: I do not condone Arthur’s activities nor his commentary about Walmart. We certainly appreciate Walmart as the centerpiece of the community and clearly when you walk into Walmart there is a shoes only policy. So be sure to show up at Walmart with shoes thank you.

Arthur: You can show up with shoes, you don’t have to have teeth though. But anyway, so I walked in and I talked to the branch manager, we start talking, I spent about a good hour and a half with him. And he tells me that he can extend out 4 different lines of credit to one person. So I thought well that’s, there’s 4 extra loans for me right there. But then he goes what’s this is another thing about working with us once you build a relationship I’m going to introduce you to Dale. So he brings the over, they of the portfolio manager so he actually does, these rare things that you hear about it’s like the chupacabra.

You know like, you hear about portfolio loans? But it’s hard to find them and this guy comes out and he does portfolio loans. So this one bank literally opened up 14 different opportunities for me to continue making purchases.

Josh: Wow, nice, nice, that’s awesome.

Arthur: So anyway that’s how I did it Brandon, they set up a list and then not being afraid to just call everybody. A lot of them say the same things but every once in a while you’re going to find somebody who has less overlays or is willing to kind of say here’s how you could do it if you still want to do this.

Brandon: Maybe in a Walmart.

Josh: Maybe in a Walmart.

Arthur: May not have teeth but they’re there.

Josh: That’s really, really good advice. I think people often times they’ll call one lender or two lenders and that’s it and they’re like oh they’re all the same. But I’ve always found that some lenders are really, really good even though they have the same rules. Most banks have the same rules and the same guidelines but the actual banker that you work with or the lender that you work with often times can find creative ways. Not illegal, not immoral just creative ways to make it happen. Oh yeah we have this portfolio loan or whatever so I think that’s a great tip.

Arthur: Let me give you another little tip here, something you wouldn’t find necessarily in a form post. And the one person for my, I wrote an article for BP a couple weeks ago about how to do this. And one of the guys called me and he was like there’s no way to do this, once you get 10 loans it’s impossible. And I said well who is buying the property?

He said it’s me and my wife and I said okay does she have a W-2 job? He said yeah and I said are the loans in both of your names? He said yes. Well why don’t you go back to the same loan person that you’re working with and have each of you qualify for the loans. Because, just because both of you are on a title it doesn’t mean that you have to both take out the debt. So one couple can literally get 20 Fannie Mae loans if they are buying the right types of property.

Because if you’re cash flow positive and you’re working with the right lender they can use that cash flow to basically count the extra debt you are incurring. So literally if you find one bank and they’re willing to work with you, you can do 20 loans and 8 home equity lines of credit. So that’s 28 loans that will definitely get you to where you’re wanting to go at least.

Brandon: That’s awesome.

Josh: Yeah great advice, definitely. Cool man well let’s get back to the job thing.

Arthur: Yes, yes.

Josh: You’ve got a J-O-B and you work during the week, how do you actually you particularly Arthur, how do you invest while you’re working? How do you manage tenant calls? How do you manage finding deals? When are you working When are you doing your real estate?

Arthur: So having a J-O-B, working for the man…

Josh: Does he have teeth?

Arthur: He has teeth and he has a checkbook too which is why I like him. The thing is is that well the first we got started we had all these units that we were just darting to acquire. And when you have like two properties are three properties or four you could still manage it doing both. But once we started to get and people started to pay late and tenants who had you know their mom was sick you had to go and try to evict them, my market is to hours from where I live. And that was mostly just because those are the only places where the numbers made sense in Southern California.

So for me to go out there and post a 3-day notice or to try to evict someone it’s just I’m wasting a lot of gas, I’m wasting a lot of time. And I remember going in my tenant one day, it’s this lady nice lady but speaks really broken English and she’s salts of the earth but she’s taking care of her sick mother. So I go there and knock on the door, she opens the door and her mom was just like sitting there in the living room, she’s got no shirt on and she’s like kind of sedated and she’s like 90 years-old and like I don’t know if she didn’t know that I was like you know that her mom was exposed. And I just said you know what? After seeing that which no one should ever have to see, it’s just, there’s a reason we should not see these.

After that happened I pretty much figured out we have to find a way to scale this. And for me it was reading a couple of posts by Michael Zuber who’s a, he is an awesome contributor to the BP blog and he is somebody that I would like to call my mentor even though I don’t necessarily talk to him on a weekly basis or anything. But he’s provided a lot of guidance and one of the things he had told me early on property management for him because he’s in a similar industry as I am it’s just the cost of doing business. So that was really the biggest change for me after that first year I was moving over to property management.

They don’t manage the properties as good as I used to, I’ll be the first to admit it and they don’t care of it as well as you would. But it’s the opportunity cost that I am giving up by not managing the situation myself. So I just look at it as sunk cost. When I find a deal I just have to find a deal with that much more meat on the bone because I’ve got another mouth to pay for. So that’s how we do it so that’s one component to property management. The other component is we have a really good contractor in our market who when he overcharges me on a few things I kind of let them know hey you are overcharging me. But I want you to know that I’m going to let this one go because I want them to understand that like there’s have value here, there’s relationships that we are trying to build.

And I will give an example with that same guy we were buying houses two weeks ago and he looked at two properties for me. Came back called me in about half an hour after he walked through those properties and said, this one is going to cost 12 grand it’s in a better neighborhood. But this one that is going to cost you 5 grand to rehab, it’s in a worse neighborhood but you can get in cheaper so I would go with that one. And not having to drive out there, not having to do a detailed inspection on the whole thing, he’s worked with me on all the properties that we own and he does all maintenance on my stuff.

So you just you need to find ways to build systems and that’s pretty much what we spent the last 3 ½ years doing is building systems are working with local realtors and making connections so that we start to really know our market and have people doing a lot of the work for us so we are just more managing things. And one more side tip is we work with contractors that only work with us on email. They’ll take phone calls and stuff too but there’s a lot of these handyman guys that just don’t do email and just out of sheer simplicity for my life it’s just easier to have somebody who works with me on email. And that’s was just kind of one of the big changes because a lot of times they’ll just give you a quote over the phone or they will text you and it’s just that helps me a lot.

Brandon: Yeah that’s great.

Josh: It’s a really good tip I think the, finding somebody who will work the way you work is really, really important and you’ve demonstrated that. Can you talk a little bit about property management and this contractor as far as management? It’s definitely true it’s hard to find somebody who is going to manage a property as well as you would if they are not going to, they are not going to put the love behind it so to speak. But how did you find your property manager and do you have any tips for other folks who are looking for somebody? Because you put a lot of trust in these guys, so what would your advice be?

Arthur: I guess the thing for me is I’m still looking for that great poverty manager so maybe someone could call me. Now we, me and another investor friend of mine where buying in the same market I took a list of 10 people he took a list of 10 people and we just kept calling different folks figured out what their placement fees were, how much they, to manage the property on a monthly basis. Do they charge for sending somebody out to the property? Because a lot of times they will send a handyman out there and they will mark it up 20% and they get to keep that spread.

So there’s all these different things that we did we called all these different folks. And there was one guy in town that was kind of a, at the time he was a smaller operation now he’s kind of blown-up. But between my investor buddy and myself we kind of leveraged him and said look if you will work with us, if you will waive your placement fee and if you will lower your monthly rate down will you consider working with us? And the idea of getting all these properties at once just made him salivate so he was completely on board. So now we pay I think $70 a home to have him manage it so it’s not a percentage on a rent, it’s just, that’s what he charges, he doesn’t charge a placement fee.

And as far as the contractors go he lets us use our own people and they let, he will actually pay it so they will build the management company directly. But there is no I mean I will be honest with you there is no great way he’s not the only guy I use. I use about three different ones and I’m still trying to find new people who will because it’s a tough business because you get somebody who you really like and then they end up doing something different. Because it’s typically that it’s usually run out of some office where they are an assistant they’re not really a property manager. So you really have to try to find someone that you’re going to be okay with and comfortable with and then just go with the expectation knowing you still have to be actively managing your property.

Even if that means like alright did we place a tenant? Okay every time I go on my market I still drive through all the homes that we have and just to say okay well this one needs, the fence is falling down, we need to trim that tree back so I’m still really involved. The thing I don’t want to have to do is I don’t want to be driving there seeing someone’s mom naked on the living room couch. Do you know what I mean? So that’s really what it is and honestly some are better than others but it’s just a matter of interviewing them and kind of rolling the dice to some extent.

Josh: Yeah, I mean I’ve had some really, really bad luck with property managers and you know the biggest piece of advice is that I’ve got is, you keep an eye on your property manager. You definitely want to watch what they are doing. Like you said you might have a property manager, you go by the property and the fence is falling down. Where the hell were they property-, where were they? What were they doing? That is their job but they’re not going to catch all that, the attention to detail it’s, I’ve have never heard somebody say, hey I’ve got the greatest property manager ever. You will never hear that coming out of the mouth of a real estate investor and it’s really messed up.

I mean, that’s something that people should be priding themselves upon. But yeah just keep an eye out for these guys and watch what they are doing. And I think if you’re doing that then you can be a little bit more comfortable. Because like you said you don’t want to walk in and put the 3-day notices in and deal with the naked grandma’s and all that stuff.

Arthur: That’s the only thing people are going to remember from this podcast, people with no teeth and some naked ladies.

Josh: This is BiggerPockets Show 6 with Arthur Garcia, biggerpockets.com/show6. This is the naked grandma episode of podcast.

Brandon: There you go.

Arthur: Tune in, tune in.

Josh: Well that’s great. We’re starting to get towards the end of this show so can we talk a little bit about what a good deal looks like for you and your method of analyzing those deals?

Arthur: Okay no long stories, I’ll try to give some meat here so that, so when I first started for me it was at 20% cash trunk cash return, that’s what I was looking for that’s what I was happy with. And that is for the long, for people who maybe don’t know what that is that’s when you get a percentage of your money back on the yearly basis that’s about 20% of what you put into the property to get the home. So I don’t know I can think of quick math but it’s when you get about 20% back from what you put down.

Josh: Invest $100,000 get $20,000 back.

Arthur: There we go, okay, yeah.

Josh: Is that quick, is that fast?

Arthur: There we go. I was like trying to… Yeah.

Brandon: Look at Mr. Math over there.

Josh: Hi I’m Mr. Math.

Arthur: That was how we first started and then as I got better, well I had to get better at buying property. Because like I said, when you first start off and getting a 30 year fixed mortgage at 4% it’s going to be pretty easy to get 20% on your money it should be anyway if you are buying the right kind of house. Once you have to put 30% down or now sometimes I have to put all cash to get homes you’ve got to really find other ways to do it. So the new metric I have is and carry a property for 10% cash on cash if I could get 90% or 80% of my capital back out within the first 6 to 14 months of ownership of that property.

So I may carry a property in cash flow maybe a few hundred dollars a month and then in 6 months refinance it via a HELOC. And now my initial capital’s mostly pulled back out of it and maybe have $10,000 in the deal and I’m still bringing in the $500 a month or something like that or $400 per month. And now I have my working capital to go back and deploy and do another deal.

Josh: How do you be careful, how do you make sure that you’re not spreading yourself too thin?

Arthur: That’s a really good point. I think a lot of it comes from planning and I think the biggest thing is cash reserves. One of the things that a lot of people talk to me sometimes or email me I want to get into real estate and all this stuff. And I say well if you want to do buy-and-hold you need a little bit of cash. I’m not going to be the guy here telling you can buy with no money down there is ways to do that. But you’re going to be making almost no cash flow on those types of deals or there’s a reason the guy giving you the property for no money down do you know what I mean?

So I’m a big advocate of you’ve got to have ample cash reserves maybe either, it doesn’t all have to necessarily be sitting in your bank. You might want to have a home equity line of credit that’s not fully tapped out that’s got money sitting in there. Or you just have to be prepared for the worst. And like I said every property we get if I can’t refinance out of it I’m okay with that. Like if I have to sit on this property for 5 years or 10 years only making this amount of money I’m okay with that because there’s typically something I can do to the property to manipulate the value down the road. Or have a strong equity position in it. Like maybe I can enclose that patio and make that a third bedroom.

Or add an extra bath or enclose the garage. So there’s usually a couple of ways to get out of it but you do have to be careful because if you start to scale a little too fast you can get kind of paint yourself in a corner.

Josh: Yeah, yeah, no I agree completely. I think one thing you said though that’s really, really important for people to know is having multiple exit strategies. You know you said you would be happy if one thing happened you would be happy if another thing happened. And I think that’s key right there you can’t have one way out of the situation and that’s the downside of using a hard money lender. A lot of people jump into hard money and they say well I got a year I have six months to sell this so no worries. And that doesn’t always work out that way I know that happened to me and I know it happens to a lot of investors. Sometimes the property doesn’t sell or sometimes you can’t get the refi that you want and you got to have an exit strategy.

Arthur: Yeah that’s exactly right you got to know exactly what you are looking for and make sure that there is, each property you get like there’s another way to add value. Or you’re buying under market you can do something to manipulate the price so that’s a great point.

Josh: Nice, nice, alright man well listen. As we come to a close here we always have a set of questions we like to ask and I guess we’ll start with, what’s your favorite real estate book Arthur?

Arthur: Okay, I came prepared for this one.

Josh: He’s been listening to the show and has notes.

Arthur: So I’m going to say something like The E-Myth, no I’m just kidding. It’s like everybody said that one.

Brandon: I just bought that, I now have it.

Josh: I actually was previewing it on the Kindle myself the other day so that’s pretty funny.

Arthur: There’s this really good book called Rich Dad Poor Dad guys you should check that one out too.

Josh: I’ve never heard of that.

Arthur: No it’s actually a good book but the one I would say for someone who is wanting to invest in as a buy-and-hold person and keep their day job. It’s by William T. Nickerson, How I turned $1,000 into Three Million While Holding a, or in My Spare Time. I think it’s something like that. I’ll send you the link on it but yes it’s how I invested $1,000 and it became $3 million.

Josh: I just read that a couple weeks ago and it was really good. I actually just sent it in the mail to another BiggerPockets member because that book’s expensive. It’s been out of commission for a long time but it’s a really, really good book.

Arthur: That’s a great one I really, really like that book.

Brandon: Nice, nice. Well I don’t have to ask the next question. What’s the next question Arthur?

Arthur: My favorite business book?

Josh: That’s exactly, that was going to…

Arthur: I may not be sharp on my numbers but I know when questions are coming.

Brandon: 10%.

Arthur: To add value to the viewers to the listeners here I thought I’d bring one in that no one’s brought up yet. My friend Nicole actually mentioned this one to me, it’s by Mark Cuban, How To Win at the Sport of Business. And I’ve just been reading that book and it’s kind of a motivational, I really like Mark Cuban I think he’s like pretty sharp on stuff.

Josh: Oh yeah big fan.

Arthur: So it’s actually a series of blog posts from his blog and he just kind of put them in one book. BiggerPockets should do something like that.

Josh: I like the Ultimate Beginner’s Guide.

Arthur: Wait a minute.

Josh: BiggerPockets.com/ubg.

Arthur:Yeah but that book is solid both of them, the one by Mark Cuban and by Brandon Turner both are really good.

Josh: And Josh, and Josh.

Arthur: Yeah of course Josh.

Josh: I take umbrage at the fact that I get no credit on the book that I was part and parcel to so.

Arthur: Okay by Josh Dorkin and Brandon Turner, another good book right up there with…

Josh: There you go. And speaking of Mark Cuban we would love to have you on the show if you’re listening by the way.

Brandon: There we go.

Arthur: Go Mavericks!

Josh: Alright man you’re a SoCal guy, you got any hobbies, are you a surfer? What do you do for fun?

Arthur: Long walks on the beach at night, that’s always a popular one out here. I just got into working out now I’m a big cross fit guy so I do that on my spare time.

Josh: So you could do cross fit while Brandon’s doing his P90X, you guys can do it over Skype or something.

Brandon: That’s insanity P90X was so last year.

Josh: Alright last question for you Arthur.

Arthur: Me and Brandon will watch each other work out.

Josh: Alright last question Arthur, I ask this question to everyone because I love this question. What do you believe sets apart the top performers the ones that are successful and those who come and go quickly?

Arthur: Oh here we go. Are you ready for it?

Josh: I’m ready.

Arthur: The art, this is a Joshua Dorkin term here, the art of the side-hussle.

Josh: That’s so yeah.

Arthur: I think that’s the big differentiator because you know what? It’s like anything real estate is like any other business any other thing in life. The people who get the best results are the ones who put the time in. So whether that’s going to a few seminars or taking the time to call a couple of investors, good stuff. So I would just say to people who go that extra mile, knock on strange doors to try to get information that you need to make your business more sound.

Josh: That’s great man that’s great. Well listen, everybody you can find Arthur on BiggerPockets we’ll have his link to his profile in the show notes. Again for those of you who are paying attention to those show notes it’s biggerpockets.com/show6. Otherwise, where else are you, are you on Facebook, you’re on Twitter, G-Plus? Are you, where else can people connect with you?

Arthur: I have a blog, thebuyandholdguys.com.

Josh: That’s right you do, thebuyandholdguys.com it’s a great blog by the way. I…

Arthur: You can go there or you can find me on BiggerPockets so either one.

Josh: Yeah, cool. Listen, listen this was great, lots of fun, we really appreciate having you on the show. I think people are definitely going to learn a lot from what you had to say so thank you so much.

Arthur: Thanks guys it was great having this conversation it was fun.

Brandon: Yeah it was fun, thank you Arthur.

Arthur: You guys take care.

Josh: Alright everybody and that was our show with real estate investor Arthur Garcia. As we’ve said a couple times before this has been shown number six and you can check out all the links and additional information on the show notes at biggerpockets.com/show6. It’s kind of hard to keep focus as Brandon is making faces at me through the other side of Skype but I’m going to keep going.

Before we go we just want to say thanks to all the great reviews again on iTunes and if you haven’t left one please do so in your iTunes player. Also don’t forget to check us out on Facebook at facebook.com/biggerpockets. This is Josh Dorkin signing off.

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