Growing an Empire From Nothing with Felipe Mejia

Mindy:
Welcome to the BiggerPockets Money podcast, show number 115, where we interview Felipe Mejia from the brand new Real Estate Rookie podcast and get his story of financial independence through real estate investing.

Felipe:
All I’m saying is personally, my time is more important than my money. When I started chasing my time, my money came after me. Think about if you’ve got a cat at home, if you have food in your hand and you’re chasing it for some reason, it still won’t come to you. When you sit down with food in your hand, the cat will come to you.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me, as always is my out of this world co-host Scott Trench. Scott and I are here to make financial independence less scary, less just for somebody else and show you that by following the proven steps you can put yourself on the road to early financial freedom and get money out of the way so you can live your best life.

Scott:
Wherever you are in your financial or life journey, you can begin rapidly moving towards a position capable of generating a great income, saving a huge percentage of that income and setting yourself up to make larger and larger investments on your way to financial freedom. Whether you want to retire early and travel the world, go on to make big time investments and assets like real estate or start your own business. We’ll help you build a financial position capable of lodging yourself towards your dreams. How is the going, Mindy?

Mindy:
If you are listening to this show, you need to go and watch the intro on YouTube because Scott has a unique background and he is definitely out of this world. Today-

Scott:
That’s right, I’m a space cadet today, although don’t go on YouTube just to watch that, it’s not really worth all that extra effort-

Mindy:
I think it’s very cool.

Scott:
… But if you like watching on YouTube, you can watch this on YouTube. All of our shows are released on YouTube, but about eight to 10,000 people who usually listen or watch our podcast on YouTube if you like to see us talking. So-

Mindy:
I love that background. You said you were a space cadet-

Scott:
That’s it.

Mindy:
… Don’t think that I didn’t catch that. Anyway, let’s get back to today’s show, which is the episode with Felipe Mejia is the co-host of BiggerPockets’ newest podcast called the Real Estate Rookie podcast. And last week we interviewed Ashley Kehr who is Felipe’s co-host. This week we’re speaking to Felipe about his journey to financial independence and he gets there shockingly through real estate investing.

Scott:
Yeah, absolutely, it is a great show and Philippe and Ashley are both amazing real estate investors with very different backgrounds. And I think that if you’re interested in learning how to get started as a real estate investor, I think they’re going to have a very helpful show. It’s going to help you walk through, get comfortable with that and hear about a lot of stories. Nobody gets started doing it perfect. And I think that’s really a big message to this, it’s here’s all the mistakes people have made, but still are finding a way to build a successful portfolio with all this.

Mindy:
Yep. And their new show airs on Wednesdays and it is out, episode one actually aired last Thursday in place of the BiggerPockets, Real Estate Investing podcast. So there is one episode out there now and make sure you subscribe to their show on iTunes or wherever you get your podcasts.

Scott:
Also, before we bring in today’s insurance sponsor and Felipe, I kind of wanted to address a question that I got from a listener and we’ll bridge the segment with a new visual transformation here. But basically, Tracy is asking, “Hey, I have a lot of money in my 401k but the rest of my money is in my home equity and I don’t have very much cash or after tax stocks or anything to invest with.” And so her question really centers around, “How do I access the money in my 401k to buy real estate?” And I’m not going to answer that question, but instead what I’m going to talk about is how I think about IRAs and real estate investing and that’s what we’re going to go with, right? And I think that’s the important thing to understand before you ever go into the tactics about how to actually tap your 401k to invest in real estate.

Scott:
So when you buy a rental property, you are able… When I buy a rental property here in Denver, I’m able to generate a lot of cash flow with very little taxable income. And the tax side of things is very important when considering whether or not to use an IRA. So for example, if I buy a $400,000 duplex, I might generate 20, $30,000 in cash flow, but I might only generate a few thousand dollars, maybe five or $6,000 in taxable income, right? Maybe I’m generating none or maybe I even generate a tax loss, right? That generates very little tax on that taxable income, maybe 1000, 2000, $3,000 depending on how much taxable income generating. When I invest in real estate through an IRA, I lose part of that advantage. In addition, there are some difficulties in controlling the investment directly managing yourself, going to work on it, those types of things. All of these things become a little more difficult with real estate when you’re investing through an IRA versus if you’re using after tax dollars.

Scott:
So why I mentioned that, well, I like to think about investing through these vehicles where if I have an IRA like a 401k or a Roth, that’s where I like to invest in stocks and if I were to invest in bonds, I would invest in bonds through one of those vehicles. The reason for that is when a stock generates dividend income that shows up with my tax return, if I’m not using it through an IRA. When I go to sell it, if I have a gain, I incur a capital gain. Same thing with bonds, right? The bonds produce interest income, which shows on my tax return. So personally I think it’s largely advantageous in most, but maybe not all cases for folks to consider buying real estate outside of their retirement accounts and using their retirement accounts instead to focus on the bonds and stocks and other things that are going to generate income that’s a little more difficult or to defer taxes on or whatever. And then the last point on this is on the exit side of things.

Scott:
When I want to go sell real estate, I can use a 1031 exchange to defer rental gains or as Felipe will talk about in the show, I can take out a line of credit on my property or I can cash out, refinance my property. So all three of those are great ways to take cash and liquidity out of your rental property without incurring a taxable event. Again, advantages that are mitigated to some extent when you go through a 401k. And so just wanting to have that discussion here, because I get that question a lot.

Scott:
There’s a lot of people who have most of their wealth in both the retirement accounts and their home equity. And if you kind of approached the problem from that, maybe it’s still a good idea to invest in your 401k and you can go into the details on that and hire a custodian to help you with that, but maybe it will also help you kind of frame the question of how do I generate enough liquidity to buy real estate outside of my 401k so I can take advantage of those tax advantages? Long-winded discussion there, hope it was helpful.

Mindy:
I have nothing more to add because you said it so well Scott. Okay. Now let’s hear a note from today’s show sponsor. Whether you already have an established rental business or analyzing your first rental deal, then you know that getting the rent right is absolutely crucial to lowering investment risk and optimizing your rental income. That’s why the go-to source for rental data is Rentometer. Property owners and investors rely on Rentometer because it is the fastest and easiest way to access quality rental data anywhere in the United States, but don’t take our word for it. Rentometer processes over 300,000 rent reports per month and gets rave reviews from their customers, many of them fellow BiggerPockets members.

Mindy:
And if you aren’t already a Rentometer customer, they make it really easy for you to test them out with a free trial, a real free trial with no credit card required and access to the full system. And if you decide to sign up for Rentometer, use promo code BP100 at checkout to get over 50% off a whole year of Rentometer pro. Remember, BP100 is a special offer only available through BiggerPockets to get Rentometer at the lowest available rate. Go to rentometer.com today to check it out. Okay, huge thanks to the sponsor of today’s show, Felipe Mejia from the Real Estate Rookie podcast. Welcome to the BiggerPockets Money Show. I’m super excited to have you on the show today. How are you?

Felipe:
Mindy, I’m so excited to be here. I can’t even wait to get started.

Mindy:
Well, we’re not going to have to wait much longer, but I wanted to say that last week we interviewed Ashley Kehr, maybe you’ve met her.

Felipe:
Of course we actually only met yesterday.

Mindy:
Same, same. We only met in person yesterday. Oh, I guess that’s too many yesterdays. We only met in person yesterday for the very first time as did you, I met you in person for the very first. Why did I meet you for the very first time?

Felipe:
I don’t know. Let’s see what Scott has to think. No, honestly, we had the honor of coming up to BiggerPockets in Denver and we were going to be talking about our new show coming out very soon, announced by the end of this week, which will probably be after this podcast comes out. So we are really excited about that.

Mindy:
Actually, this podcast is airing… We tape these a few weeks in advance, but this podcast airs the Monday after your show first aired last Thursday in place of the BiggerPockets Real Estate Investing podcast. So-

Felipe:
That’s a timeline that’s hard to follow, but I love it. That’s awesome.

Mindy:
Yeah. So we just announced a brand new podcast called the Real Estate Rookie podcast. It is hosted by Felipe Mejia, who is our guest today, and Ashley Kehr who was our guest last week. Their regularly scheduled time to release their shows is on Wednesdays. So if you are listening to this show and are interested in real estate, but maybe are not exceptionally well versed in real estate, the Real Estate Rookie show will help you learn how to become the bomb diggity of real estate investors, showing my age. And we will have links to the new show in our show notes, which can be found at biggerpockets.com/moneyshow115. So I think that was a nice enough advertisement for your show. This whole episode is kind of an advertisement for your show because you’re going to tell us what you know. But this show is not about real estate, this show is about money. So Felipe, where does your journey with money begin?

Felipe:
Oh man, it begins probably in one of the worst times of my life, probably where my parents got divorced and I had never felt the use that money can be or maybe a sword, it can be used for good or bad. I never really felt the effect of money until my parents got divorced. We weren’t well off by any means when my dad was still in our picture, but when he left, we definitely felt the water at our throat, if you will. The way I explain that to people who talk to me or ask me the question about this is I was never drowning when we were with my mom raising us as a single mom, but we always felt the water at our neck, if you will. We always knew that it was there. So when my dad left, so did the finances go. Traditionally in Latino homes, the mom stays home, the dad goes out and work and that’s kind of how that went. So when my dad did leave, so did the finances and what my mom did with the little money she did have saved up was she built out the downstairs of her home.

Felipe:
They had three bedrooms and a bathroom. They’re in substituting my dad’s money when he left, what we did was we rented out three bedrooms downstairs in our single family home, that was a ranch style home. They’re in bringing in $1,500 more and then I saw the power of money. I mean, literally months before when my dad was around, we could go out to eat whenever we wanted, I could get the shoes that I wanted. And then thereafter it was like, “No, wait a minute. Now we got to start budgeting.” So I was able to feel both sides of money pretty quickly when I was young and then going forward from there once my dad did leave, I ended up stepping up as quickly as possible into the role of bringing money to the home just because I felt I was supposed to do. So I started just taking odd jobs, little here and there, mowing lawns, I mean, just doing whatever I could to bring in money.

Felipe:
Once I started getting a little bit older, and my big taste of money was when my mom got remarried and I would ask my stepfather if I could go to work with him. He was a flooring installer, but I told them not to treat me just like his stepson or anything, I said, treat me like one of your employees. I really want to earn adult money. I didn’t even know what that meant when I was 16 but I would say, take me with you, work me the way that should be it because I really want to make adult money. I didn’t know why, but I knew I didn’t ever want to feel that water at my throat that I felt when my parents got divorced. But that’s kind of where I started noticing the effects of money, the power that it has and I knew I didn’t want to feel that again.

Mindy:
How old were you when your parents got a divorce?

Felipe:
So I was 11 going on 12 and my mom got remarried when I was 16, so those three years is where we really felt the pressure of money. Then when my stepdad came in, he really alleviated and helped us with that and that’s where I started working. I haven’t stopped since then.

Mindy:
So what did you do with this money once you earned it? Did it all go back to the family or did you save it?

Felipe:
So at first it was helping a little here with mom, and when I say helping with mom, I mean by not asking her to buy me my stuff anymore. So when I started working with my stepfather, I bought my own shoes, I bought my own clothes, I bought my own cars, I bought everything for myself. And there’s something about working for your things that you end up valuing a lot more than when someone else buys it for you. So that was a big stepping stone that I realized really, really quickly at 16, I was like, “The money that I make,” like I said, “Can alleviate me of feeling that drowning sensation.”

Mindy:
Did you go to college after high school?

Felipe:
Yes. So after high school I went to college and my mom actually paid for my college in cash. We weren’t big fans of debt, so we would all come together and do that. So my mom paid for my college in cash, but I was responsible for everything else in my life, rent, books, car, insurance, I mean everything in my life I was responsible for except the burden of college because my mom wanted to make sure that I got that higher education. The way she did that was my mom actually cleans houses, she still does that this day. She has a pretty large company. She cleans high end homes here in my city in Nashville, and she collects basically cash or check every day. So she does three or four homes a day.

Felipe:
They pay 150, 200 bucks a house, that was how she was able to be home when I got home from school when I was younger and things of that nature. But to answer your question about college, I did go to college. My mom paid for it cash. I ended up graduating of bachelor’s degree in three years because I saw that my mom was paying for it. So I needed to finish quickly. So I would take 21 hours semester to graduate as quick as possible.

Scott:
Did you go to school locally?

Felipe:
No. Well, I went about an hour out of Nashville to a city called Cookeville, Tennessee.

Scott:
Okay.

Felipe:
Yeah, so I went out there. My grades hurt a little bit because I wanted to graduate so quickly, but my diploma doesn’t show my grades and never been asked for them. So it doesn’t matter.

Scott:
Fair enough. Well, this is awesome and just kudos to your mom for managing the situation and accumulating so much to be able to cover college at least for a portion of that, a single mom.

Felipe:
Absolutely. She’s pretty amazing in that, she’s always been really good with money in that she’s always taught us not to hold onto it tightly. And the way I explained that to people is we don’t try to hoard all our money and put it in the ground and try to save it all. It’s always about investing. It’s all about reinvesting. It’s about strategically using your finance to build more finances, to weigh money against more money. And even when I have these conversations with friends, I always get the comment, “Oh, Felipe life’s not all about money,” and I really want your listeners to hone in on this part right here. Everyone always says this, “Money is not important Felipe. It’s not the most important thing in your life.” And I always tell them, “No. No, it’s not. But money does positively affect or negatively affect, depending on how I use it, the most important things in my life.” I cannot feed my son love, I can feed him food. So I need money to buy food, right? So money is important in that it affects everything that’s important in my life.

Scott:
Yeah. No, I love it. So it sounds like your introduction, so money was very powerful in a lot of ways, a lot of perspectives growing up. I noted that there was a little house hacking component in there that you’re exposed to at an early age. Did that come into play in your own personal journey after you graduated college? Or what happened after college?

Felipe:
Sure. So I realized the importance of money, like I said, that it affected the most important things in my life. But let’s backtrack a little bit, when I graduated high school, my mom didn’t give me a car or ring, roses, she gave me her half portion of an investment in a mobile home that she had with my stepdad. So she gave me her half portion. I bought my stepdad out of the other half and that’s how I had my first rental property where I had a tenant pay the lot fee, which was 350, that was his rent. So I lived for free. So all that to say one, I’ve never paid a mortgage even until this day. I’ve always had my mortgage paid by cash flow. So what I found out quickly was that that liberated me of one of my most heaviest expenses was my mortgage payment or lot fee when I had the mobile home.

Felipe:
So yes, my mom taught me the house hack when back from the divorce, I saw how that saved her and our family basically from being torn apart by renting out rooms in the house. So I did that with the mobile home that my mom gave me and that’s how I was able to live for free during college as well. I never had a mortgage in that instance either. And his rent has always been going up and Victor, the painter is still with me to this day and still rents that one of my houses.

Scott:
Awesome. Okay. So you graduate college and you have no debt or at least no student loan debt. You’ve got a mobile home you own and are renting out and you’ve got a… Do you have any assets? Have you been able to talk about cash for example, throughout this period?

Felipe:
Right. So during this period I was really intrigued by money in that I wanted to learn as much as I could about it. And one of the first things that I wanted to know was why and how is money transferred, this paper money, what is it backed by? Where can I go somewhere and say, “Hey, give me the value of this money.” And I very quickly realized that money in the United States isn’t backed by gold like it used to be. So a lot of people believe that, “Oh, our money is backed by gold.” But that’s not true anymore, to answer your question, every dollar I make goes back into an investment or leveraged against debt to buy more cash flow. So when people say cash is king, I always try to reiterate with, what’s your king backed by, and I would say cash flow is king.

Scott:
Fair enough. Okay. So, but in terms of a layman’s understanding of this, out of college, you had a mobile home and did you have any cash at that point?

Felipe:
Yeah, so when I graduated college, I was still working with my stepdad on the weekends with his flooring company. And I think I came out with 45 or 45 to 5,000 bucks. I mean, it wasn’t a lot, but what I did was when I came out of college, I sold the mobile home and used the little savings that I had, sold the mobile home for 12,000, I believe. Wow, it feels like forever ago. $12,000 and I put a down payment on a single family home here in Nashville.

Scott:
Awesome. Okay, so what does this journey look like in the first year? You sell that, you buy the single family home and you’re working, I presume. What are you working at?

Felipe:
Sure. So my goal with college was to become a police officer here in Nashville. That was my goal from the beginning, I’ve been born and raised here, I love my city. I still do. I’m bilingual, I speak two languages. I was like, “I’m going to be a great asset to the police force, especially with the Latino community.” What happened was, funny enough, God had other plans. I got in three days later, verbatim, quote, “Felipe we have enough Latino police officers. You’re welcome to leave,” end of quote. That’s the last conversation I ever had with a police officer, and I was asked to leave. I went back and then got in trouble for going back on grounds because I was told to leave. So I thought it was banter, I thought it was part of the whole training portion or whatever. Nope, that’s just how it was.

Felipe:
So, I sorrowed for a little while, it completely sucked. I spent a bunch of my young twenties trying to get back into different police departments and it just wasn’t meant to be, I mean, it was just door closed after door closed after door closed and that’s where I found real estate and money, had always been in my background and I had such a passion for it, so I didn’t follow any more my mindset, I followed more my passion and that’s why I’ve been successful.

Scott:
Awesome. So what does that look like? So, what year do you kind of stop the search for joining the police force and begin focusing on that and what is your position like at that time?

Felipe:
Yeah. So once I got denied from the police department, I started doing just little side jobs, Ubering here and they’re, cleaning up construction sites, just trying to make money until you buy real estate, but at the same time still pursuing the police department, which never ended up working out. And then once I focused 100% on real estate is when I really took off. But after I sold my mobile home and bought that first single family is when I saw the power of passive income cash-flow, if you will, through real estate. And eventually I said I have to give up this police department search and just focus on what’s really paying the bills and affecting my soon to be eventually family and all these things, and I’m glad I did. I’m glad it worked out the way it did actually. I have no sour towards it now.

Scott:
Great. So what year would you say you kind of stopped that hunt for the joining the police force?

Felipe:
Sure. So let’s see, I graduated in 2012, 13, 14, 15, so about 2015.

Scott:
Great. So 2015 you’re a little disappointed in your not being able to pursue your career that you were looking at. Are you married at this point?

Felipe:
Yes. So me and my wife… So backtrack to the single family home. Once I bought that, I was down again to nothing. I think I had maybe two grand in the bank. It was a super struggle there. So that’s why I ended up going back to what my mom had taught me, which was house hacking. So what I did was I brought, remember Victor, the painter from the mobile home, I brought him with me and he rented a room in my house once I sold the mobile home and I AirBnbed the other room and I lived in one.

Scott:
Okay, got it.

Felipe:
Yup. And then in 15, 16 in that year, met my wife, she had a townhome, we AirBnbed her townhome, started getting more cash, but we never went above a certain threshold. Once we had 30, 40,000 in the bank, we would invest it. I knew that it wasn’t important to have a ton of money in the bank. It was more important to invest it.

Scott:
Well, let’s look at this. So in this period, your first home, you buy it in 2012, the single family, it sounds like, right? And you start renting it out and AirBnbing it, you’re down at $2,000, you are I assume living for free or close to it. How are you building up cash then? Are you getting paid during your search to join a police department or are you doing other odd jobs? How are you earning money in that period?

Felipe:
Okay, what happened was, so I wanted to be a police officer and you’re not getting paid while you’re looking for that. So I took odd jobs. One of the odd jobs that I had was, I was a translator for Metro Nashville Public Schools. So I was an interpreter or a couple of different little middle schools or the Latino kids that their parents had to come in for IEP meetings and I would translate the meeting telephonically. So you speak in English and I’m literally telephonically speaking it in Spanish so that the parent can understand and that was how I was making a little bit of money. But on the side of that, like I told you my mom cleans houses, she ended up hooking up with a contractor who builds very high end homes out here and he would hire me to clean his construction sites.

Felipe:
So what I did was I would send guys to clean the construction sites. I would make a couple hundred bucks off of them while I was working at Metro Nashville Public Schools, eventually leaving that job to do more full time construction work, if you will, for more money for sure.

Scott:
Got you. And so you were able to accumulate how much by the time you make your next investment or meet your wife, whichever comes first?

Felipe:
Sure. So I ended up saving about another 15 to 20 grand and that’s when I told in that year, then my wife and I said, “Hey, there’s equity in your property. I have cash, let’s sell your property and buy a single family home.” So with 10 to 15,000 saved up from the construction sites, and this is something I would tell your followers as well, if they’re looking for money to invest or if they’re looking for money or how to get it or whatever, don’t be ashamed or don’t be too hard on yourself on the not so pretty jobs because you would be surprised as to what they pay.

Felipe:
We would make close to 400 bucks to clean a construction site that took us two hours. You tell me a job that pays you… And I would be able to pay my guys 20, $25 an hour and they loved it. Are you kidding me? They’re, “20 bucks, 25 bucks an hour to clean? For sure.” And it was literally picking up the shavings or the cuts from the guys that are putting in the framework and we would clean the same construction site five times. So we would make three to 500 bucks part time that we went depending on how long it took. And it was after framing, after drywall after dark work, after certain things that went in and these builders were building tons of houses and I just had my pick of the litter. It was great. It was great money. It was ugly work, great money.

Scott:
Awesome.

Felipe:
I like that. It was ugly work, great money

Scott:
No, I love it. So, from 2012 to 2015, you’re able to accumulate about 20 grand in liquidity throughout this process?

Felipe:
Yup. Just saving everything I can.

Scott:
Awesome. And you’re being creative, entrepreneurial, you’re also working during this period and I love it. And so in 2015, 2016 that’s when you buy this first house. And this seems like a turning point in your career here, is that right?

Felipe:
Yeah, absolutely. So that’s our first rental property. My first single family was in 2012 moving to 2013 where I sold the mobile home to buy my first where I moved in and I was able to save the money, Scott, because I didn’t have a mortgage. But that’s why I was able to save up more money, anyways, but yeah, we finally got that second home, it seems for some reason the second home is a lot harder than the first home. So we had to save up all the money. For some reason saving up the money for the second home is so much harder than saving it for the first one. I don’t know why. Scott, I don’t remember, when I read your book, I think you say something about that.

Scott:
No, I think it’s interesting you say that because I think the first $25,000 in liquidity is the real challenge in all this because I think you’re going to have a different perspective perhaps because your house hacking the whole time. But I think most people… If you’re starting out and you are 23, you need to save up 15, 20, $25,000 so you can put it down on a house hack, so you can eliminate your mortgage. And once you’ve done that, you accelerate dramatically your ability to save up, making that second house much easier than the first one, I think, at least in my case.

Felipe:
You know what, I think I agree with you. I agree with you because my first home that I bought was bought because of the gift from my mom with the mobile home-

Scott:
Yep.

Felipe:
… So I was able to kind of bypass that. Okay. Now, that light bulb moment. My second one is actually my first one because that’s the one that I had to fully fund it by myself. So you’re right, hypothetically, that was my first one and like I said, that one was saving up money, luckily my wife had some equity in her property and we were able to buy that next single family home, which we still have.

Scott:
I love it. So, you buy the second single family home, which one do you live in?

Felipe:
Right. So we moved into the one that we bought with my wife because we were able to take advantage of the three and a half percent down because we were going to reside in that property. So we rented my other one which gave me cash-flow, which allowed me to save up money because we didn’t use any of that money and I was still working at this time, still in the construction sites, just ugly work, good pay and just saving everything that I could. And at that time we didn’t have any kids, so my wife was working as well and basically we just saved everything we could. It was a way that we knew we were going to continue to buy real estate from this point and we were just going to have to save every single dollar. There wasn’t any raising capital or borrowing money.

Felipe:
It was save as much as you can and then put that next money down on that next property. One of the things that I love to tell some of the people that I help with real estate and money as well, is that when you’re saving up money, you don’t need to go out like your friends. You don’t need to buy the car that your friends have out of college. You don’t need to live in the house that your friends have. I mean, I saw my cousins who are my same age buying homes, two, three times the same value as mine. And in my mind, I’d be like, “Man, it’d be really nice to buy that house right now.” But no, I’m going to save my money and buy another rental property. I’m going to save my money and buy another rental property. Just old school, just save up as much as I can. So don’t fall into the whole Joneses thing.

Scott:
No, love it. So over the course of two or three years, it takes you that long to accumulate the first 15 to $20,000 through what you’re doing-

Felipe:
Yep.

Scott:
… Then you buy this next house and rent out your former house that you were living in. Well, FHA loan, and that implies to me, doing some quick math here that you’re saving a couple hundred bucks a month throughout that first three year period. It sounds like there’s a massive acceleration here after you get married and buy the new house. Is that what I’m hearing? That you’re able to start accumulating far more than that, maybe a thousand plus or $2,000 a month in liquidity?

Felipe:
So the thing that accelerated us the fastest was, if you remember I said we didn’t have any kids, so I was AirBnbing my first home. I moved in with my wife, I found a second home and we AirBnbed two rooms and the bonus room while we were living in that house. So me and my wife Airbnb-ed our home that we were living in so that we could save money. Again, never paid a mortgage, like I said earlier, there’s truth in that. I’ve never paid a mortgage. We Airbnbed the whole time that we were living there and that was how we were able to save $2,000 because we had no mortgage on the first one and no mortgage on the second one.

Scott:
Love it. Awesome.

Mindy:
So was your wife on board from day one?

Felipe:
Seriously? No. I feel you asked that on purpose. I love that.

Mindy:
I did ask that on purpose because I want to know if she was on board because this is a big question that we get in our Facebook group is, how do I get my spouse on board? I want to be financially independent and they don’t agree. So it sounds like there’s a story here.

Felipe:
Yeah, there definitely is. No, if I’m not mistaken, she was not on board at first where we were living to have Airbnb there but because… Something that helped me a lot was when we were dating, she saw it happening. It wasn’t something that I had to explain to her, she saw me Airbnbing when we were dating, when I had my first home. She saw the finances that were coming in from that and I said, can we do this with our house here? I don’t remember the exact conversation, but I remember she wasn’t on board right away doing it at our house. And if I’m not mistaken, we started out slowly with just one room, maybe just the weekends or not all the time, but quickly she saw that we were going to be able to get out of that situation and move into the next property and so forth and so on a lot quicker.

Felipe:
To give you the easy answer and what I would tell others to get their spouse on board is don’t tell them, show them. Show them the numbers, show them if a track record or pull up history data, whatever is going to best help with your wife. I’ve had some friends who tell their wife, every time we buy a property or we going to do Airbnb, I’ll take you on a vacation. I mean, just appeal to your wife. Don’t force anything on her. Don’t tell your spouse… I say wife because I’m a man married to a woman. I would say, hey, don’t tell them what you’re going to do. Have a communication, have a conversation about it, take her out to a nice dinner and say, “Hey, I really want you to see this.” Maybe give her a book that talks about it and trade. Say, “Hey, I’ll do something that you want me to do if…”

Felipe:
Maybe she wants to go ballroom dancing, I don’t know, but definitely explained things. Have a conversation. Don’t just say, “Hey, this is what we’re going to do.” Because not only are you going to have the little troubles with Airbnb or whatever you do, but the last thing you want is to have troubles at home.

Scott:
Yep. Okay. That’s awesome. Okay. So, we’re now up to two properties that you’re going nuts on Airbnb with. Do you live in actual Nashville or in a suburb?

Felipe:
So, I lived in actual Nashville, right now I don’t, but yes, when we were doing, we were actually living in Nashville and the laws with Airbnb were really gray when I started. So I do not Airbnb in Nashville anymore because the laws are a little bit more black and white. But when I was Airbnbing, it was a lot more of every individual HOA or every individual city within Nashville had their own subsidy laws and it was kind of more like if your grass was overgrown, if your neighbors said something, you got in trouble, but if you didn’t it was okay. It was kind of like that for a long time.

Mindy:
Okay.

Scott:
Got it. So you have two houses, you are Airbnbing them, you are both working full time. What is the next move for you guys?

Felipe:
Right. So the next move was… It’s crazy. God, you’re like in my head, I was able to save up so much money so fast, but I wasn’t bankable. Meaning that I was self employed, but I wasn’t self employed for two years yet. Not having the wisdom and knowledge of investing. I didn’t know that I could partner and do some of these other things. So what I did was I just started saving up as much money as I could for two years and I saved up $60,000 and we bought a condo in cash.

Scott:
Awesome. And that was in Nashville as well?

Felipe:
It was, we bought a condo here in Nashville. Well, it’s the sub-city inside of Nashville called Antioch, where I bought that condo and we rented it out for 1200, I believe. Yeah, I think it was $1,200 and all cash-flow because we paid for it in cash. We could not refinance, but that wasn’t my game plan anyways. So I just cashed 1200 bucks and we were able to save again a bunch of money a lot quicker. There’s a trend there, I guess. As we continue to save and invest, we’re able to save more because we didn’t have those mortgage payments and we didn’t have some of those big hefty bills that people have. So we were able to save all of our coins. So even if we were making more money, we never spent more money, if that makes sense. We always just kept saving it because we wanted to keep investing.

Scott:
I love it. It’s a snowball. The first one’s the hardest, just kidding but-

Felipe:
Yeah, it is. I agree.

Scott:
… Okay, so you’re starting to accelerate here. It sounds like you also are… I imagine, so let me know if this is right, that you’re not accumulating consumer debt with credit cards or car payments and those types of things. Is that right?

Felipe:
That’s absolutely right. So I believe that there is good debt and bad debt. Dave Ramsey would hate me because he doesn’t live too far from us here, but Dave Ramsey would completely disagree. But I would say that there’s positive and negative debt. There’s cash flowing debt and then there’s consumer debt. So no, we stayed away from consumer debt as much as possible. Every dollar had to bring back another dollar. As a man of faith, I always was prone to knowing that the Lord has blessed me with financing and one day he might ask for that back and for my faith, I’m not going to just say he gave me a dollar, I’m going to give him a dollar back, right? And it doesn’t work that way. He trusted me with money, then I need to be able to multiply that. So that’s a big thing for me. So I need to always be flipping the dollar, if you will.

Scott:
All right, hope you’re enjoying the show. We’ll be right back after a word from today’s show sponsor.

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Felipe:
Line of credit. An LOC is a line of credit. So let me give you an example. If I have a rental property that I bought for $100,000 cash, I will go immediately to the bank and say, “I have this property that’s owned out, here’s the lease on it,” and I get a line of credit to 80% of the value of that property. So if I add $30,000 worth of value to it by my own sweat equity or whatever, I’m able to go get even more money than I paid for it, and that’s my cash per property. So, we’re building that out now, every time we add a property, we’re going to try to have a line of credit on it for its own reserves so that we can invest the cash.

Felipe:
So remember cash that you have, if it’s worked money, like you’ve traded an hour for a certain amount of money, I’m going to invest that. If I have money already invested, I’m going to have a line of credit on it to reuse it if that property has an emergency of such, so every one of my properties will have a line of credit.

Scott:
So, do you pay off all your properties then?

Felipe:
We paid off one property so far and that’s just because we want it to become our own bank in that we didn’t want to have to go ask the bank for loans when buying more rental properties. If I could bring 20% it’s rare that a bank will say, no. So I just use the line of credit from my first rental property. The cash-flow pays it off as quick as possible and then I can just keep rinse washing and repeat.

Scott:
Okay. This is a very interesting way to think about reserves that I think makes a lot of sense. It’s a reasonable way around this problem. I mean, if you’re going to have a completely paid off property, even if that property loses half its value in a downturn, you’re still going to have a hefty line of credit that you can have access to at that ratio, is that kind of your thinking?

Felipe:
Yep. For a good 10 years, you’re under contract, you closed with the bank and they have to honor that for 10 years. Doesn’t matter what the market is, it doesn’t matter who’s sitting in the office and that big white house, it doesn’t matter, that bank has a contractual agreement with you to have you that money at 10 years. So my property is its own cash reserve, if you will, for the next 10 years. And then after that we’ll see what happens. If I sell it or whatever,

Scott:
And this is very different than, for example, putting down a 25%, let’s call it Nashville prices are pretty high, I imagine. So a $400,000 house, putting $100,000 down, getting a 75% loan of $300,000, if you’re using a line of credit against your $100,000 In equity, that could be a dangerous liquidity trap that you’re putting yourself into because if the property goes down in value, you may not be able to access that line of credit. But if you’ve got the property paid off entirely, you don’t have… So in other words, how much is your property that’s paid off that is used for line of credit? How much is that worth?

Felipe:
It’s worth 200 and I have a 150 line of credit on it.

Scott:
Great. So you have no dollars in reserve, you have $200,000 in reserve to manage your portfolio-

Felipe:
Exactly right.

Scott:
… Yeah. So this is not a hyper aggressive approach to reserve. It’s actually a quite conservative approach to your reserves.

Felipe:
I’m very conservative. I’m not a risky investor and I’m too scared. I’m too scared. We keep about between 30 and 70, that’s a big number, but when you’re a real estate investor. So, we keep between 40 and $60,000 cash always in reserve, and the rest is heavily invested in our real estate with the backing of a line of credit that’s guaranteed for five to 10 years depending on how they want to structure that deal, then that’s our reserves if we do have an emergency with the property.

Mindy:
Okay.

Scott:
I love it. That’s a great rock solid position in a lot of ways. But let me point out something here, when you first started out, you used up all of your liquidity, more or less. You used up your $5,000 in cash and you sold your only asset to get going on the house hack, which is what you have to do in a lot of ways to get going in this business and that’s the challenge is you’re using it all up right there to get going. So I think that’s just an interesting thing, like what you did to get started. Sometimes you got to play a little bit riskier at first and then I imagine rapidly built out a more conservative position. You didn’t sleep well until you did that.

Felipe:
That’s exactly right Scott. I mean, that’s spot on. You’re a smart man. That was exactly that first couple purchases were super scary. Even up to the condo, that was probably the last one that was scary for me. I remember sitting up there on my computer contemplating like, “Man, we’re going to have $6,000 leftover when we buy this property. We’re going to have no money.” I have three houses and $6,000, that’s not a good position to be in, but I knew that cashflow was king, not cash in for me. And I said, this is going to be the proof. It has to be the proof for me. Well, I had to put myself to that test and I took that plunge and it’s been a great decision.

Felipe:
We ended up selling that condo, made about 20 grand on it, plus a year of cashflow and purchased a six unit apartment complex the moment I became bankable because as we had talked earlier, I was two years of self employed. I hadn’t finished my two years of self-employment yet, so I saved up as much money as I could as well as that condo and I sold the condo, put a little bit of cash and bought a six unit apartment complex.

Scott:
Awesome. And so what year was that? What year was that transaction there?

Felipe:
That was 2016 going into 2017, I believe.

Scott:
Awesome. So at this point, 2016 going to 2017, you’ve got a commercial asset, you’ve got two houses and I imagine that your cashflow is just continuing to accelerate and stockpile. So could you walk us through the next couple of years to your current position?

Felipe:
Absolutely. So let’s go from there to where I’m at now. So what we did was, the six unit apartment complex I bought in the college town that I had graduated from in Cookeville, I was cash flowing about 16, $1,700 a month. It was great. But during that time, interestingly enough, Scott, I want you to listen to this, to remember this. I figured out the difference between rich and wealth during this time and for me defined wealth versus rich, the X factor there is time. So we had reached financial independence at this point and we had realized that that’s fine and all, but I didn’t have my time. I was financially free, I didn’t have to work anymore. I wasn’t on the construction sites, if you will, but I wasn’t time free. I was still running back and forth managing the properties, running around like a chicken with my head cut off. The money was great, but I wasn’t on a path to wealth.

Felipe:
So we sold the six unit apartment complex, made maybe 20, 30 grand on that sell plus the cashflow that we had made for the year that we had it. And that is where I read the book Life on Air. During this time, my wife had reached out to Brandon Turner and met him, got connected and he said, you should read this book called Life on Air, and I did. And that’s when I had the epiphany of, “Oh, I’m chasing money. I’m not chasing time.” And that’s where I think a lot of times people also mess up is they just chase the money and use money and in turn money uses them. When you chase time, I don’t know what it is about it, well, when you start chasing time, money chases you. And what I mean by that is, for example, this podcast that’s coming out with BiggerPockets that me and Ashley Kehr are going to be a part of is because I have the time to do it. That makes sense?

Scott:
Yeah, absolutely.

Felipe:
If I had a W two job or nine to five, I would have to say, no. Well, I have the time to do it. I sold the six unit apartment complex. I bought a house that was paying me less in cashflow, but I now had all my time back and now I was leveraging my time to buy more properties that even if they paid me a little less in cashflow, they gave me the time with my family.

Scott:
Yeah. So, when you had the six unit apartment complex were you’re not able to outsource that to property management for example, is that why you had to sell it to get your time back?

Felipe:
Sure. So I could to answer your question, but it was going to cut too much into the cashflow, whereas if I sold it, bought a house cash in Nashville, the cashflow was going to be the same as if I had a property manager out there.

Scott:
I see. So, you are not, in other words, underwriting some of these early properties to property management. You’re not factoring that into your your assumption process and that beat you later because you had to sell them when you actually realized, “Hey, I’m buying myself a job managing a commercial property an hour and a half away from home as opposed to passive income.” Is that what’s happening?

Felipe:
That’s exactly right. So I was facing the money versus chasing the time. So what I did was, okay, it’s going to cost me 400 bucks to have a property manager that’s going to put me down to closer to $1,000 a month. Why don’t I just bring that money back to Nashville cashflow 13, 1400 on a single family home that if there’s an emergency I can run down the road and manage or I can leverage some of the people that I know here to do that for me and it’s not going to cost me the same as a six unit apartment complex.

Scott:
Great. I love the thought process there. So what year was this, was it 2017?

Felipe:
Yep. Going into 2018 and then from there on out we’ve just repeated the process of buying rental properties here with that line of credit from that initial property that I bought cash. We’ve done a flip here and there for some extra money, but that just comes with part of being in real estate.

Scott:
No, I think this is great. I like that book Life on Air as well. I think there’s a lot of great things in it. For those listening be warned ahead of time, there is a little bit of a religious tone to that book. So some people, that’s not their cup of tea, so don’t pick it up if that’s not you. But I think there’s a good message in there about deleveraging your position and how that’s not going to get you the clearest path to total ROI, but it can get you to the end goal maybe, which is a great life, a little faster if you think about that as part of your overall plan. So great book on that front.

Scott:
And it sounds like what that did for you was it turned you out of how do I make the most amount of money to how do I get a reasonable return for the least amount of time? Which sounds like after that you were just able to continue accumulating and buying properties at just a slightly less aggressive rate but still at a steady clip the next couple of years.

Felipe:
Yeah, exactly. From there I was able to just focus my time on finding those rental properties that were going to cash flow easy and give me my time back as much as possible versus chasing the properties that were going to give me more money but less of my time or take up more time in funding a property management company, because even when you find a property management company, you still have to manage that property management company. So, it’s never truly just you’re done sipping margaritas in Cancún or whatever, you’re always going to have a little bit of your management in your properties. So what I tried to do, like I said, is find the properties that have the least amount of management because they’re going to give me that money that I need to continue to reinvest that money.

Scott:
Love it. Well, how would you describe your workload before and after this transition? How many hours a week were you putting in?

Felipe:
70 hours a week. Back when I was doing the apartment complex down in Cookeville, an hour there, an hour back, plus the time that I was there, but in turn now I would say my properties take up maybe an hour or two per property, 14, 15 hours-

Scott:
A week?

Felipe:
… Unless I’m in the middle of a flip or something. Yeah, a week. Unless I’m in the middle of a flip or getting one ready for tenants, typically they don’t take any time.

Scott:
Awesome.

Felipe:
They are great. I love them. They give me all my time back.

Scott:
So what I’m hearing here and I’m trying to relate this to kind of some of the other stories we’ve heard, it seems like you really put in the slog, if you will, for a couple of years here, two, three, four years. And that’s what you kind of needed to get over the hump in terms of you created this snowball effect where it becomes relatively easy to continue to accumulate capital and accelerate your position and at some point after you kind of hit that top of that hill and around the down-slope you decided, “Hey, why am I working so hard, I’m still going snowball to that goal. I just don’t need to keep pushing with full out effort anymore. I can kind of ease off and enjoy my life,” is that kind of what I’m hearing through your story?

Felipe:
Yeah, that’s absolutely right, Scott. One of the biggest things that I tell people is don’t chase money as hard as you think. At first I did, at first I worked really hard, saved up a bunch, invested, worked really hard, save a bunch, invested. But then I got into a point where I realized that my time was more important than my money. And then I started using my time more strategically. If it wasn’t my best… If I wasn’t using my time that helped me with me and my family and how I was going to be interacting with them, it just wasn’t something that I would take. I would literally have two deals in front of me and I would allocate funds according to the property that wasn’t going to give me the most cash flow, but that was going to give me most of my time back.

Scott:
Got it.

Mindy:
That’s a really great way to look at real estate investing because nobody starts to invest in real estate and think, “Oh, I can’t wait to spend every waking hour taking care of problems and I can’t wait to work 40 hours a week and then go work 30 hours a week in my real estate to get $100 extra a month.” That’s not the way that it should work. I do see a lot of people focusing on the money aspect of it and on BiggerPockets forums, these small multifamily properties are touted as this amazing, perfect investment.

Mindy:
And when you said you sold yours after a year, my first thought was why? Well, because I can make the same amount of money on a property, on one unit and our closer gives me the same as the six unit an hour away. That makes so much sense. And I think that some people don’t necessarily account that into their… Or take that into account when they’re running their numbers. So that’s a really good point. I’m glad you made that.

Felipe:
Yeah, I think I love the multifamily sector. If that’s what you’re chasing and that’s okay, I’m not saying that my way is right or that someone else’s way is wrong. All I’m saying is personally, my time is more important than my money. When I started chasing my time, my money came after me. Think about if you’ve got a cat at home, if you have food in your hand and you’re chasing it for some reason, it still won’t come to you. When you sit down with food in your hand, the cat will come to you. It’s the same concept.

Scott:
Yeah. I think a big part of it also is just underwriting to property management because I managed my own properties for the first five years of being a landlord. I recently switched over to a property manager, right? And that in greatly enhanced my return, but make no mistake, it’s a dollar per hour activity. I’m just trading my time for part of this return. So the reality of that is that property management is a commodity. It costs a certain amount, usually about 10% of rents, plus your leasing fees. If you’re not writing that into your underwriting or you’re dependent on not paying property management in order to cash flow your property, you’re buying yourself a job. You are not necessarily buying yourself passive income. And that’s I think what I’m gathering, the lesson that you just learned here was, “Hey, I’m going to buy myself passive income and property management is much less expensive for me in Nashville than it is an hour out.” Yeah,

Felipe:
Absolutely. I realized that it wasn’t as important for me anymore to save up all this money by trading my time for it. It was more important for me to invest that money in other avenues that are going to produce more money. So right now I am in a place where I’m still in growth mode where what I would like to get to is continue to use my money to buy back my time. And the next big purchase for me is not going to be a rental property, it’s going to be a full time staff, one or two people that’s going to manage all my properties for me. So I don’t traditionally rent, I don’t want to buy a house, rent it and make as Mindy said $100. My cash flow is about $1,500 per property just because of the way I structured my investments. So I will buy two more properties at a certain point and I will hire someone full time to manage that whole portfolio to continue that growth that we have.

Scott:
Got it. And that will reduce your cash flow but improve your time. Love it.

Felipe:
Yup. Absolutely.

Mindy:
Perfect. Felipe, is there anything else you would like to share with our listeners before we move on to our famous four.

Felipe:
Chase time, not money.

Mindy:
Chase time, not money.

Scott:
All right.

Mindy:
Okay, that’s great. That’s really great advice. We haven’t heard that yet. It’s now time for the famous four, these are the same four questions we ask of all of our guests. Felipe, are you ready?

Felipe:
Absolutely.

Mindy:
What is your favorite finance book?

Felipe:
My favorite finance book would be a book out of the Bible called Proverbs. So I read that book before I became a man of faith and I realized how important that was and how those same little nuggets in each verse, I’ve read them in books. I have tons of books up here from Life on Air to The Wealthy Gardener and everything in between. And it all talks about the same stuff that I read in Proverbs. So I try to read the book of Proverbs once or twice a month and then just kind of continue. So that’s one of my favorite financial books.

Scott:
Awesome. Have not heard that one before. We’re going to get consulting-

Felipe:
Even if you’re not a christian, I mean, read that.

Scott:
… Yeah, and so one of these days… Yeah, that’s his advice. All right, what was your biggest money mistake?

Felipe:
Oh, Jesus. I purposely didn’t talk about this until now. I bought a Nissan 350z cash when I went to college-

Scott:
All right.

Felipe:
…. That was a terrible mistake.

Mindy:
But it’s a beautiful car. That’s a terrible mistake.

Felipe:
It was a $16,000 mistake that I still pay for a high insurance because of that car.

Mindy:
Oh. Oh. It sounds like you got yourself into some trouble with that car. You still have-

Felipe:
I was, that’s how I got to college and back.

Mindy:
You still have that car?

Felipe:
No. I sold that as soon as I figured out the importance of money and how to use it. I got rid of that car so fast.

Mindy:
Okay.

Scott:
Did it get you to and from college very quickly?

Felipe:
Very quickly. I’m thankful for that. And I’m going to be a hundred percent honest, part of that was my wife. She was like, “We need to get rid of that car.”

Scott:
All right. What is your best piece of advice for people who are just starting out?

Felipe:
Man, don’t be afraid of the ugly job that pays good. Don’t be afraid of that plumber job. Don’t be afraid of a job that’s not going to go away. My mom cleans houses and I asked my mom, I said, “Mom, what happened in 2008, how did we get through that? I don’t remember a lot.” And she’s like, “What happened in 2008?” She didn’t feel anything and didn’t know anything about it. She cleaned houses. I mean, people still got their house cleaned. They were worried about making money and never cleaning their house. So she was never without a job. So I would tell people, don’t be scared of the ugly jobs that pay well. There’s a lot out there. A plumber won’t get out of his truck to go to my construction site for less than $200. That’s a lot.

Scott:
Yep. All right, what is your favorite joke to tell at parties?

Felipe:
Oh my gosh. I was so scared of this question because I don’t know. I don’t have a good answer. Can I hear one from Scott? I guess Scott has a lot. I don’t have a good one for this, I’m so sorry guys. I’m not-

Mindy:
Why did the people not like the restaurant on the moon?

Felipe:
Why?

Mindy:
Because there was no atmosphere.

Scott:
Ah, excellent.

Mindy:
That’s not excellent, that’s a terrible joke.

Felipe:
That’s a terrible joke.

Scott:
Stephen King has a son named Joe. No, I’m not joking, but he is. Think about it.

Mindy:
Oh, that’s horrible.

Felipe:
Ah, that was really good. I like that. That was really good.

Mindy:
No, but does he really have a son named Joe?

Felipe:
Does he have a son named Joe?

Scott:
I don’t know.

Felipe:
That would be fun.

Mindy:
Okay. Felipe, where can people find out more about you?

Felipe:
So you can find me on Instagram @felipemejiarei, that’s F-E-L-I-P-E-M-E-J-I-A-R-E-I. That’s where you can find me and a lot of my posts that I talk about everything real estate and money, how I finance deals, how I save up my money and how much I love BiggerPockets. You’re going to see a lot of that stuff on there as well, and just the influence that you guys have had on us. So we really appreciate you guys, but that’s where you can find me.

Mindy:
What about on iTunes at Real Estate Rookie podcast.

Felipe:
Real Estate Rookie podcast, let’s go. That’s right. By the time this show comes out, that’ll be going hard and strong. I’m going to invest all my time that I have into that. I’m so excited about that podcast genuinely because I have a passion for teaching investors, especially rookie investors, how to start and how it’s not impossible. If a five, six, five seven Hispanic kid from Deep South can do it, anybody can do it. This is something that takes a little bit of hard work. There’s no way around that. There’s no borrowing, there’s no this… It’s hard work, invested for a certain amount of time is going to get you the wealth that you are looking for, 100%

Mindy:
I could not say it any better.

Scott:
Very excited for the show.

Mindy:
I’m super excited for this show.

Felipe:
Thank you guys for the opportunity as well. And I want to take this moment to think BiggerPockets for the reach that you guys have and the millions of people that you guys have positively affected with what you guys do. You guys go in day in and day out and just grind it out, but there’s millions of people out here that just listen to shows like this and are impacted positively, especially me. I mean, I’m definitely an attribute to this and luckily now Scott and the BiggerPockets team has trusted me as part of a team member. So I’m really excited about that.

Scott:
Love it. We’re excited.

Mindy:
This show is going to be awesome. Yeah, we’re super excited too. Okay. Felipe, thank you so much for your time today and we will see you soon. The Real Estate Rookie show comes out every Wednesday morning at midnight. So go ahead and subscribe on iTunes or wherever you get your podcasts because that’s where you’ll find them, everywhere. Okay, Felipe, thank you so much.

Felipe:
No, thank you guys. Have a good rest of your day.

Mindy:
Okay, Scott, that was Felipe Mejia. How did you like that episode today?

Scott:
I thought it was fantastic, Mindy. I thought he had a lot of great answers to his approach. I think he had a unique approach. I love that he started aggressively right out of college and I liked the way he has slightly less traditional ways to think about finance reserves and all that kind of good stuff.

Mindy:
Yeah. As he was telling his story, I kept hearing him not mention anything about reserves and I thought, “Oh, please have reserves. Please have reserves.” I like his approach to reserves. Having a line of credit backed by your paid off property is a great way to deploy all your cash while still having reserves in case of an emergency, which is the whole reason that they’re there. And like I told him after we stopped recording, you don’t have a new furnace and a new air conditioner and a new hot water heater and a new roof on every single property all at the same time. Maybe if a hurricane comes through, but for most part, that’s not going to happen. So you don’t need that much reserves when you get into these larger amounts of properties, but you still need to be able to cover several repairs at once.

Scott:
Well, let’s look at this too. If you’re going to use a line of credit as your reserve facility, you need to have a conservative position. If I’m going to have 30, $40,000 in cash, I’d want to have a much larger line of credit if I’m going to use my line of credit as that, because I want that buffer. When properties go down in value, it will be a little harder to access that line of credit in reality than the current situation of that. So the way he’s handling it is, I have, for example, probably less property than Felipe buy a significant amount, but on my three properties, I’ve got about 30. $35,000 in reserves across them, and that’s in cash. He has $230,000 in reserves.

Scott:
He’s got all cash property and paid off and he’s got 30, $40,000 in cash he has for his personal life. And so that is a much more conservative position than I have, but it allows him to keep that his reserve invested in a property that’s hopefully appreciating at three, four, maybe a little bit above that percent a year. So he’s getting a better return on that reserve than I am, but certainly much more conservative overall position I think.

Mindy:
Yep, and like he said, towards the end of the show, my way isn’t better than your way. This is just how I do it-

Scott:
Absolutely.

Mindy:
… His way isn’t better than your way for reserves. It’s just something different and when people are having a hard time finding those reserves, this is just another option that you could have. So I really liked that he shared that with us.

Scott:
Absolutely. I think his approach is wonderful. I would just caution you the listener not to consider a dollar of line of credit, equally conservative to a dollar of cash in the bank. I think if you’re going to use lines of credit as your reserve, like Felipe, you’ve got to have a much larger cushion than someone via cash equivalent. That’s more of my pin point there, which he does.

Mindy:
Yep. Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
Okay. From episode 115 of the BiggerPockets Money podcast. I am Mindy Jensen and he is Scott Trench, and what? Ground control to major Tom, how do you do… What’s a space one, Scott? Come up with it. You’re super quick.

Scott:
We are leaving in 10.

Mindy:
10.

Scott and Mindy:
Nine, eight-

Scott:
Seven.

Scott and Mindy:
… Six, five-

Scott:
Four, three, two, one. Goodbye.

Mindy:
Bye. (singing)