BiggerPockets Podcast 152 with Ben Leybovich, Brian Burke, and Serge Shukhat Transcript

Link to show: BP Podcast 152: Building Wealth and Passive Income with Rental Properties with Ben Leybovich, Brian Burke, and Serge Shukhat

Josh: This is the BiggerPockets Podcast show #152.

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Josh: What’s going on everybody? This is Josh Dorkin, host of the BiggerPockets podcast, here with my cohost the man of the hour it’s Brandon Turner. What’s going on, man?

Brandon: Josh Dorkin, not much. What’s going on with you?

Josh: Man, I tell you what, I cannot wait for today to be over.

Brandon: I’ve had those days.

Josh: Do you want to know why?

Brandon: Why? What’s going on today?

Josh: Because then I don’t have to hear you talking anymore about these books you’ve been working so hard on.

Brandon: Oh, funny guy. That’s right. I’ve been talking a bit about them, haven’t I?

Josh: You have, you have. You’ve been working really hard, man, and, you know, I don’t feel bad at all for that. “Oh my god I worked such a long day,” yeah, I know.

Brandon: Yeah, I know.

Josh: Cry me a river, buddy.

Brandon: It’s gonna be good. It’s been a few long days, but it’s gonna be worth it.

Josh: It is, it is. Alright, man, well, we have a very, very different show today with a very unique format that’s unbelievable.

Brandon: The conversation was so high-level yet still, like, really good for everybody. I don’t care if you have 1,000 units or you’ve got zero properties, so good.

Josh: Exactly, exactly. So today we’ve got an unbelievable show and before we get into it we do have a few things to talk about.

Brandon: We do.

Josh: So let’s just kind of get this thing going.

Brandon: Yeah, let’s get to it. So we’re going to talk about actually two new books that we just released on BiggerPockets. However, if you don’t care about books, or you don’t like reading, or you don’t want to read about rental properties go ahead and skip forward to the 8-minute marker or so on this podcast and you don’t have to listen to us talk about it, but if you want to listen let’s talk about it.

So, basically, we officially launched The Book On Rental Property Investing and The Book On Managing Rental Properties so today is the official podcast launch day. So today’s podcast launch day! Woohoo! That is today.

Josh: Yes, it is. So the first book, The Book On Rental Property Investing, you authored that. The second book, The Book On Managing Rental Properties, was authored by yourself and Heather Turner, that would be bride of Godzilla otherwise known as your lovely wife.

Brandon: She did.

Josh: She did. So tell us really, really quickly what are the books and what is the difference between them because some people might say, “oh, well why do you have these two books?” and whatever so tell me the deal.

Brandon: Sure. Alright, so there’s a book on rental property investing and the book on managing. So there’s two of them total because we originally we released, what was that? 3 years ago? J’s book? Was that? Something like that?

Josh: It was about 3 years ago, The Book On Flipping Houses and The Book On Estimating Rehab Costs.

Brandon: Exactly, yeah. So like 3 years ago we released that and it was huge. People loved it. Everyone who wanted to flip houses learned a ton and a lot of people have found success from that. Then last year we released The Book On Investing in Real Estate with No and Low Money Down also very, very popular and it’s done very, very well.

Josh: Yep.

Brandon: But ever since then people love those books, but the vast majority of our audience don’t necessarily want to go out and flip houses for the rest of their life; what they want is financial freedom. They want to be with their kids more, they want to travel more, they want to retire early, they want all those things in life that come with passive income and we didn’t have a book on that so that’s where kind of these two books were born out of.

Josh: Nice, and, you know, the BiggerPockets audience is probably, I think, it’s a little higher than 60% focused on buy and hold so it just makes sense that we did this.

Brandon: Yeah.

Josh: Alright, so, like I said, we’ve got these two books. It was originally going to be one so how did they kind of end up getting split apart here?

Brandon: Sure. Actually, yeah, it started out as one book. My wife and I sat down and we were like, “we should co-write a book on buy and hold rental property investing,” so we did that and we sat down, outlined it and we realized very quickly that rental properties is actually two completely separate, yet connected, things. That is, like, the real estate business, like the acquisition and the planning and the big picture, and then it’s the management part. If you don’t have both those things, like I’m a firm believer, if you don’t have both those things nailed down you’re going to have a hard time succeeding.

For example, you could be really good at finding deals, really good at that, but if you don’t manage correctly or you don’t manage your manager right you’re going to fail. If you’re really good at managing, but you’re terrible at finding deals you’re going to struggle and you’re probably going to fail as well. So that’s how it became two complete books. It’s over 800 pages combined, 400 pages apiece.

Josh: Yeah, nice. Yeah, when I opened up the mail and saw it that thing is an absolute beast. Each of them is a beast so it’s awesome. Cool, so with those books if you buy them through BiggerPockets you can get these videos, these really exclusive kind of videos, that we did totally, well they’re not free you’ve gotta buy the books, but the videos we put a whole lot of them into the package. So tell everybody, really quickly, about those.

Brandon: Sure. So, yeah, I did interviews with some of my closest kind of real estate friends. Smartest people that I go to for advice when I have a question about real estate. I grabbed 8 different guys, Ben Leybovich, Chad Carson, Al Williamson, Brian Burke, Bill Sirius, Kevin Perk, Enrique Jevins, and Serge Shukhat and three of them are actually on the show today because after talking to them I was like, “we need to get them all back on the show and do a big round table,” so three of those guys are on the show today.

Then after that I filmed a video called The Truth About $30,000 Houses, another one on the mistakes that investors make, and then one more an hour long of me just analyzing a deal in depth. So there’s all those videos. It’s like 10 hours or so of video content that comes with it.

Oh, and I almost forgot! Forms. We included, like, 30 forms with the thing, 34 I think? 33? 34 forms. Anyway, landlord forms that people can get and they can download those as well.

Josh: Nice. Cool. Awesome.

Brandon: Yeah, anyway.

Josh: Cool, that’s great, man. So, alright, before we get into this, pricing. Our typical pricing, we do books at $25 a piece so tell everybody kind of what the packages are and then let’s just kind of get to this thing.

Brandon: Sure. So the price is $49 for digital. For both books you get $49 and all the bonus stuff, what is that? A total of 11 videos or something like that? Anyway.

Josh: A retail value of $2,437.

Brandon: Yeah, these are $9,999. Anyway, $49 for digital, $69 for print and digital you get it shipped to your house. However, for people listening to this podcast right now here in December of 2015 when we launched this, if you buy it before December 17 actually everybody can get $20 off that so that means it’s only $29 right now for the digital. You get both books digital and all the bonus videos for $29 or $49 for everything including two physical books shipped to your house, but you have to buy it before December 17th and you have to get them on BiggerPockets in order to get those bonuses.

Josh: Right on, man. Cool. Alright, go to BiggerPockets.com/RentalBook, that’s BiggerPockets.com/RentalBook and you can your hands on it.

Brandon: Oh! I forgot.

Josh: Oh, really? Yeah?

Brandon: The audio book!

Josh: Oh, look, there’s more!

Brandon: No, “but wait,” no, the audio book. So last time I did not record The No and Low Money Down book, the audio, and everyone gave me a hard time because I did not record it. Everyone makes fun of me all the time because we had a Canadian record it and apparently he says, “ey,” a lot. So, this time I recorded The Book On Rental Property Investing by myself, my own voice, that’s 12 hours of audio. Anyway, we’re going to actually throw that in as well for free for anybody who buys before the 17th of this month.

Josh: That is reason enough not to buy this package. Who the hell wants to listen to Brandon talk?

Brandon: You can listen to me talk for 12 hours.

Josh: 17 hours.

Brandon: 12 hours.

Josh: Yeah, that’s still enough.

Brandon: Anyway, that we’re going to sell for $29. You can buy that alone for $29 if you want to, but it’s also free if you buy any of the packages on BP before the 17th so there you go.

Josh: Got it.

Brandon: So all that cool stuff.

Josh: Alright, shut up, let’s do this.

Brandon: Alright, moving on. Moving on.

Josh: Alright, you guys, we’re going to skip the Quick Tip. That was—

Brandon: That was our Quick Tip.

Josh: That was too much. Oh, yeah, that was the Quick Tip. So with all that said we’ve got to thank the sponsor of today’s show so let’s bring them on.

Brandon: B2R Finance is a new commercial lender offering loans specifically for rental investors. B2R Finance can help you unlock equity from existing properties so you can get cash out now. Cash out refinancing allows you to leverage your current investments to help you grow your existing portfolio. B2R is an asset-based lender which means your loan is based on your property’s appraised value and cash flow, not your person debt to income and that is huge. It opens up a lot of opportunities previously not available to rental investors. So if you need a loan call B2R Finance at 855-910-0227 or visit B2RFinance.com today.

Josh: Alright, guys. Big, big thanks to our sponsor and we really do appreciate it.

Brandon: Yep.

Josh: With that said, let’s do this. Today’s show is going to be amazing. Stay tuned. Alright, Ben, Brian, Serge, what’s going on guys? Welcome to the podcast. It is absolutely amazing to have you here.

Brian: Hey, how’s it going, Josh?

Ben: Wonderful weather in Ohio!

Brandon: Wonderful weather in Ohio. I don’t even think that’s a possibility. Isn’t Ohio either always too hot or too cold?

Ben: There’s sun outside, dude.

Brandon: Alright, I believe you. Serge, how you doing buddy?

Serge: Doing fantastic.

Brandon: Good, good. Alright, so as people can tell we’ve got 5 people on this podcast. We’ve never done that before. It might be a—

Josh: It might be a cluster.

Brandon: It might be, but we’re going to get through this. What we wanted to do was we wanted to do a show on just rental properties and I wanted to invite the three guys that I call when I have a rental property question, like, these are the three guys that I call more than anybody else to discuss issues and when I want to learn something these are the guys, more than anybody else in the world, that I learn from. So I thought it would be kinda cool to get these three on a show and ask them about rental properties. You guys up for that?

Serge: Let’s do it.

Brian: That’s interesting.

Brandon: What was that, Ben?

Ben: These are the guys I call too. Except for you, Brandon, I don’t call you cause, like you know, what would be the point? But these two guys I call.

Brandon: You just call me to complain. You call me to complain that Brian won’t pick up his phone.

Josh: Okay, I’m going to have to be referee. I can tell how this is going to go. Ben, Brian, shut up. Let me get to the first question here gentlemen. First of all, you guys are all, you know, as Brandon said, folks that he turns to, that lots of people turn to. So, before we get into this I’d love to get an introduction from you guys so let’s start with you Ben, then we’ll go to Brian, then we’ll go to Serge. Ben, give everybody about a minute or two about who you are. What’s your background? What’s your investing story?

Ben: I was born in former USSR. I came to America, immigrated to America, in 1989. I’ve played violin since the age of 5. I went to top 5 conservatory in the United States at Cincinnati. Discovered I had multiple sclerosis. I was given the diagnosis, was told not to choose a career that would require fine motor skill and yet not to do something stupid. So, you know, in that spirit I went into real estate. You know, cause I didn’t want to do anything stupid so this seemed logical and reasonable.

So I don’t do anything in real estate that is not a long-term hold situation in one way or the other because if I get taken out I don’t want to leave my wife having to unravel stuff. So, you know, syndication in a partnership where by there’s a chain of command that people wouldn’t get stuck is different. Aside from that it’s just long-term holds. I don’t do flipping, I don’t do sub2’s I don’t do any of that jazz.

Josh: Alright, right on. Cool. Awesome, awesome. Alright, Mister Burke, talk about yourself.

Brian: Well, I guess I would say I’m the anti-Ben. So everything that Ben is I’m the exact opposite.

Ben: I love you too.

Brian: Well, I don’t know about that. I started in real estate—

Ben: No, I promise, seriously.

Brian: Yeah, right, sure. I started investing in real estate about 26 years ago. I’ve never really been a long-term buy and hold guy. Most of my stuff has been get in and get out. Some of it get in and get out quickly, others not so quickly, it just depends. So, I guess when you say buy and hold that could be defined differently depending upon how the recipient views holding. You know, I think of buy and hold as forever and I don’t do that so I’ve done a lot of flips, about 700 of them. I’ve done a lot of rental property, I’ve had about 1,000 units at one time or another. I’ve got just under 1,000 units right now. Most of that is relatively short-term hold, you know, kind of a median term 3 to 5-year type of thing. So that’s kind of my real estate career in a very short nutshell.

Josh: Nice.

Brian: The rest of it was all on podcast 3 and podcast 76.

Brandon: That is was. I didn’t mention this, I was going to mention this, this is the first three-peat podcast for anybody and we decided to do a triple three-peat so this is like a nine-peat, is that correct?

Brian: Well, you just did that cause I was campaigning to be the first three-peat podcast and you just couldn’t settle this, could you?

Brandon: I could not settle this without having a three of you tie.

Josh: He didn’t want to pick favorites.

Brandon: Yep, no favorites here. Alright. So, Brian—

Ben: I would have to shoot myself if he got to a third podcast before me. I mean, c’mon.

Josh: Do us all a favor, Ben.

Brandon: Alright before we go on to Serge I just want to ask, cause as long as you said this Brian, why not hold forever? We heard Ben’s reason for why he wants to hold forever is cause, you know, if something happens. Why don’t you want to hold forever?

Brian: Well, I just look at real estate as a series of opportunities and what you’re doing is you’re looking for the opportunity and strategy that’s working in any given location at any given time and that isn’t anything that can be held in perpetuity. Things change and climates change. So it doesn’t mean I don’t hold things forever, I do have about 40 or so rental units that I own personally that I may hold forever and use that as my retirement plan, or maybe not, it’s just not a very dominant portion of my business strategy.

Brandon: Okay, that’s cool.

Josh: Right on.

Brandon: And Serge?

Serge: I’m probably somewhat of a hybrid of these two guys. Definitely not a buy and hold forever, but don’t do a lot of flips. I do longer term flips anywhere from 1 to 4 years. I buy with a cash-flow outlook with a horizon anywhere from typically 2 to 5 years; a mix between single families, small multi-families and medium-size multi-families. Right now I’m focusing on the anywhere between 40 to 100 unit multi-families primarily in secondary markets. I love secondary markets that other guys are scared of. I like looking at the riskier properties that people outside of primary markets, primary MSAs, that other investors may not see or may not know or would be scared to manage. I try to find my competitive advantage in both managing these properties through my property management company as well as finding stuff that other guys can’t find. You know, I’ll purchase maybe one asset a month, sell one asset every six months and just constantly update and keep the portfolio dynamic.

Josh: Nice, and what shows were you on previously?

Serge: Oh, man. I don’t remember the numbers. Two of them.

Josh: I think 60 and I don’t remember what the other was.

Brandon: Yeah, something like that. We’ll put it in the show notes at BiggerPockets.com/show152. We’ll link to all you guys’ shows and we’ll probably talk about it on the intro and outro as well of this I think. Okay, very cool. So, yeah, I like the fact too that you guys all have kind of different strategies of using buy and hold investing or rental properties. You use them three different ways which is kind of cool. So, maybe real quickly, can we ask, just so people listening have an idea of your markets because your markets are very different as well I know that, can you guys give us a quick 15 seconds what is your market like? What is a low price house that you would buy? Or what does a single family house typically go for and what’s more the—basically what is your market like? We’ll start with Ben.

Ben: Well, you know, in the Midwest you understand what you’re dealing with with the Midwest. You know, you’ve got declining population, you’ve got very low-tech coming in, you’ve got cold weather in the winters. So all of—

Josh: All you need to do is move to California and they’ll have a declining population too, Ben.

Brian: Yeah, that’s right. I’ll be the first one.

Ben: Which is taking everybody. Actually, I was thinking about this, Arizona is taking Ohio population and California populations. The place I need to go is buy a house is next to Serge, not Brian.

Brian: Good idea.

Ben: But in terms of price points, you know, turn-key is very popular in Ohio, Indiana, Kentucky area because, why? Because you can buy a house, I call them pigs, you can buy a pig for $15,000 to $20,000 that you can put some lipstick on and you can sell it to a schmuck from California for $50,000. You can do that in Ohio very, very easily and you can rent that for $650. The only problem is it’s a pig and the cleanup is going to cost more than $650 a month. So, you know, that’s Ohio.

Interestingly, on a SFR level the balance is not here because you can spend $90,000 for a nice 3-2 brick ranch in Ohio, in Columbus and Cincinnati, in Lima even, but you’re going to rent for $800 or you can buy a pig that you can rent for $600. So really you don’t get the spread in the rents which is why, in my opinion, unless you do cash purchases, or even if you do do cash purchases, SFRs don’t work well in my market which is why I focus on multi-family.

Brandon: Okay, Brian?

Brian: Well, I have two different primary strategies. My largest focus, currently, is on multi-family and I’m looking for properties over 100 units in size. I’m doing that in major Texas metro markets, but I’m also looking at other markets that have a significant, substantial growth story so i.e. not the declining population Ben markets. Again, I’m the anti-Ben in that respect. So, you know.

Ben: I’m not looking over here either. We’re not so different.

Brian: So on the multi-family front, you know, primarily just looking for job growth, income growth. Prices in that market are ranging anywhere between $35,000 and $75,000 per unit depending upon property class and location and so on.

On the single family side, I only do that here in northern California where I’m based. It just isn’t worth my time to travel cross-country for a single family house. So I have bought a number of single-family houses in northern California and price points here when I was buying them were between $80,000 and $250,000 but nowadays you’re looking at $200,000 to $450,000 for pretty much the same houses compared to 3 and a half years ago when I was buying them.

Ben: You guys listening to this you need to pay attention to the wording very carefully. What Brian just said is, “when he was buying them 3 years ago,” I’m sure we’re going to get into that and explore that topic, but you guys listening to this podcast this is meaningful. This isn’t void of, I think, and he knows that I can see him on Skype and he’s smiling.

Josh: Do you want to just host this show, Ben? I mean, Brandon, why don’t we check out?

Ben: Look guys, I’m a teacher. I can’t help myself. I love to teach people this stuff.

Brandon: No, that’s good.

Josh: No, it was a good point. It was a good point.

Brandon: We will come back to that because I want to talk about what the current market is like today investing in rental properties today versus what it was 5 years ago, but before we do, Serge, what’s your market like?

Josh: Serge.

Serge: I’m in Arizona, primarily metro Phoenix. It’s a very cyclical market; high population growth syphoning off a lot of the population of, like Ben said, California and the Midwest. We have a lot of transplants. Population has been growing very steadily for about, a little blip during the recession, but for the past 10 years one of the fastest growing states in the United States. Houses, again, when I was buying them in the metro Phoenix were $40,000 to $100,000 for bread and butter rentals that rent for anywhere between $700 to $1,400. Today you’re looking at probably a baseline of $90,000 to $250,000 for probably the same rents, maybe $50 to $100 higher. Multi-family is going to go for anywhere between $30,000 to $150,000, we’ve had a boom in multi-family building. One of the highest growth states as far as units to come on line. A lot of class A buildings coming on line. A lot of competition, a lot of investors from all over the United States trying to capitalize on the cyclicality of our market. A lot of people made a lot of money during the recession, but a lot of people are still buying.

So the story gets very different as soon as you get outside of metro Phoenix, we look a little bit more like the Midwest. We have counties that the populations maybe isn’t growing as fast and prices there you’re looking now at about $45,000 to $100,000 for about $600 to $900 rents.

Brandon: Okay.

Josh: Right on. So I want to circle back a bit for all three of you guys. Serge you kind of touched upon it in your last statement, but we want to kind of look at where the market is today versus in the past. Ben, you know, kind of hinted at that as well. You know, first I kind of want your opinions. You guys are all experts; you know this business as well as anybody. What do you guys think, at the macro level, is gonna happen to the housing market over the course of the next, you know, 12 to 18 months? Do you guys see any major political economic things coming to fruition that are going to affect the markets on a macro scale?

Then, talk from a micro level your local market; where do you guys see those markets kind of going over the next 12 to 18? Why don’t we start with Serge this time?

Serge: I’d say it’s a tale of two markets, right? Multi-family and single-family, although they’re both susceptible to the same shocks, I think multi-family is probably one or two economic shocks away from, I don’t want to say a crisis, calamity or collapse, I don’t think it’s going to look like it did last time, but I think you have people that are over-leveraged. I think you have people that are getting into asset classes that they’ve never been in. I think people have gotten very used to low cap rates and low interest rates. I think the market—I don’t know where we’re at. I don’t know if we’re in the 6th inning or the 8th inning or the 5th inning. You can have that debate all day, but we’re moving along on that cycle there’s no doubt about that. My concern is what shocks can the multi-family sector withstand?

So, when you talk about shocks you talk about, perhaps it’s an interest rate hike, how many points can we withstand? Can we withstand interest rates going up 1%? 2%? 4%? I don’t know, but I don’t think there’s that much. When you look at the cap rates people have purchased under and the loans that they’ve purchased under I think in 5 to 7 years you’re going to see a very different story than you are today.

The second concern is the amount of building going on. Sorry, Brandon.

Brandon: No, keep going.

Serge: The amount of building going on, particularly in my market and some of the higher growth markets, even if you look in Ben’s market Columbus, Ohio, you look at Houston, Texas. I was in the Bay Area over the Thanksgiving holiday literally every single sliver of land has new multi-family on it. So the amount of the units that have come on line over the past 3 to 4 years with the easy money you’ve gotta ask yourself, is there an over-supply of multi-family and where does that leave the class A space?

Then it all trickles down from the class A. When the class A gets hit and class A slowly becomes class B what happens to class B and what happens to class C? So there will always be a play for value add, but I think that at this point it’s really important to get in and know when and where and how your exit’s going to look and not sit there and buy on a blank long-term hold ten-year approach because I think we’re going to be staring at a very different market 5 to 7 years down the road.

Single family a little bit different. Single family is always going to be driven by FHA, you know, government sponsored entity financing. What that looks like, there’s been some changes to that. I think that market can withstand a little bit more interest rate shock than perhaps the multi-family can, but I also do see a lot of building going on in single family as well. So, in the states where population is going to grow and going to continue to grow I think you’ll probably be okay. You’ll probably get back to historical norms. If you look at where we’re at you look at through the recession and where we are now you’re back to 2%-3% growth that you’ve seen regularly so I think in the single family sector you’re probably just going to hum along. Again, unless there is significant shocks which I don’t know where those are going to come from in the single family.

So, in my market in Arizona, again, it’s gonna be where is our population? What happens with immigration? Do we still have net inflow of immigration in our state? What’s government policy going to look like there? Where is interest rates going to be and where is building going to be? And obviously the job outlook.

So I’m a look more bullish on single family as far as, you know, holding its value; not so much as far as equity growth. In the multi-family I would be very, very careful and I would be sure that I’m buying projects at their intrinsic value rather than at a capitalized value or counting on future rent growth. I would not underwrite future rent growth at this point in time.

Josh: Interesting, interesting.

Brandon: There’s a lot of really good stuff in there, Serge.

Josh: Yeah.

Brandon: I’m going to let people know you can go back and rewind that and listen again cause I’m going to listen to that after this show. Everything you just said there I think was awesome.

Josh: Yeah.

Brandon: You guys want to add to that? Brian or Ben?

Josh: I was going to say, do you want to add or do you guys want to kind of take a different angle?

Brian: Well, I can take a little bit of a different angle. It is a bit of a challenge to answer the question of what is the market gonna do because I’m a strong believer that there’s no such thing as “the market” when you’re talking about real estate. You have macro and micro and they can work opposite to one another.

Furthermore, when you’re talking about single family versus multi-family those don’t track in tandem either and even within those asset classes if you’re talking rentals versus resale prices those also don’t track in tandem so it’s a little bit difficult to predict and there’s a lot of different movements.

When I mentioned earlier that my strategy was focused on shorter term holds it’s because of all those dynamics and the way that they inter play with one another. It causes me to try to focus on ones where I believe that there’s some kind of a trajectory that I can predict. So from that standpoint looking at just a macro overview of the market, if there is such a thing as “the market”, I think that we’ve had a run-up in prices in a lot of areas and I think that there’s some sustainability to that as opposed to 2005 when it was unsustainable because it was primarily driven by funny loans and whatever else, but now there’s some actual fundamentals behind single family price growth.

Now, looking forward, the question is how much sustainability is there for continued growth in pricing on the single family sector? In some markets, like California for example, we’ve gone up substantially since the bottom of the market in 2008. If you look at the San Francisco Bay Area, in particular the South Bay, if you ask most people when the peak of the market was in most places people would tell you the peak of the market was in ’05 or ’06, but in the peninsula South Bay of San Francisco and San Jose area the peak of the market is now. Prices there are well in excess of where they were in 2006 and climbing.

So at a certain point you have to ask yourself, how much additional runway is there in that pricing relative to the incomes of the people that are seeking to purchase those properties?

Josh: Yeah.

Brian: Without income growth there’s a point where price growth becomes impossible. There is a lot of old money influence in California so that does have some impact that negates the limitations of income growth and we are starting to see some income growth, but with this large run-up in pricing I think we’re going to start to see some plateauing; not a drop off and not a calamity or catastrophe like some people predict. I think we’re going to see a plateau and that may be true in a lot of metros.

On the rent side, on the other hand, we’ve seen tremendous rent growth in a lot of markets, especially California and Texas. Serge touched on whether or not rent growth is continued to be sustainable and in some areas I think it is and in other areas it’s likely not, doesn’t have much more runway. As rents grow in multi-family you say, “okay, increasing rent equals increasing prices,” but they don’t necessarily track in tandem because interest rates influence cap rates, demand for a sector can alter cap rates, you can have compression and decompression. So with all those factors it’s pretty much a coin toss of trying to predict what’s going to happen, but you just have to look at all the nuances of every market and try to find strategies in markets that have a predictable and logical path of success.

Brandon: I like that.

Josh: Wow.

Brandon: I was going to ask, you mentioned about how high, you know, how long will the runway go compared to income and what people can afford in those areas. Especially in your area I like to think about, you know, to me anyway, I could be totally wrong because I’m not in the northern California area, but I like to think that the massive growth of the tech industry in that area, especially over the last 5 or 10 years and these billion dollar companies that are throwing 200, 300, 400 thousand dollars at developers who are coming out of school in 2 weeks, you know? Like, do you guys worry about that bubble popping, the tech bubble popping which then would just destroy price values, or is it varied enough that it’s not all dependent on that industry?

Brian: Well, I don’t worry about it day to day because I don’t participate in it. I don’t invest in the South Bay in those tech-heavy areas. I don’t think I’d want to either. I do have some concern that if these companies decide that they could move to Lima, Ohio and open up all their shops over there that would dramatically impact both markets if they were going to do that, but they’re trying to stay where the talent is. As we know, you know, Ben doesn’t have any talent so they bring em out here.

Brandon: Alright, Ben, your turn. You’ve gotta respond to Serge and Brian’s thing I think. Do you agree?

Ben: Well, it’s important to funnel this conversation down to what people can understand. Most people listening to this are probably more concerned about buying a triplex than they are buying 300 units.

Brandon: Okay.

Ben: What you guys need to understand is, and I’m not talking to you guys I’m talking to the folks listening to the podcast.

Brandon: Yeah, Brian was like, “yeah, let’s hear it, babe. What do I need to understand?”

Ben: Is that, you know, you have real estate investors, then you have talented real estate investors, and then you have another level of people with imagination to reimagine what real estate investing really is. I suppose this is true in every profession. That, I mean, I’m fortunate to kind of have more of a glimpse than a lot of people into what Brian does and it’s brilliant. I mean, the way that he rationalizes real estate and the way that he thinks about it, the way, you know, Arthur Schopenhauer said that talent can hit a target nobody can hit, a genius can hit a target no one can see. That right there is Brian Burke, so, you know, take this show with a grain of salt because you are not going to listen to every BP podcast and become Burke. Shukhat same thing. I wrote an article about it, like, three days ago, I mean, how he does what he does management wise is beyond my comprehension. I don’t want to know, you know?

So I drive my car and I’m waiting for my wife who ran into the store and a friend and his father drive by and I happen to be sitting in a Tesla and they want to look at the Tesla because his father owns stock in Tesla.

Brandon: Yeah, I was waiting for that.

Ben: But he gets into the car and we start talking. Before he leaves I say, “hey, I want to buy all the real estate he’s got,” and he looks at me because I know he’s got a lot of commercial storefront real estate which at this point I’m interested in, and he looks at me and he says, “you know, at my age I really kind of want to sell all of it and I want to finance it”. That’s how real estate is bought and sold in small tertiary markets where you guys live where it matters. You know, you don’t have to be a super star.

You know, Brian Burke and Serge Shukhat is Hollywood of real estate. It’s very difficult to be and do what those guys are, I mean you know, it’s like Josh Dorkin of the internet, you know? It’s very hard, but you don’t have to do that. You know, you can tell everybody you know that you want to buy some buildings, that you want to buy a duplex and a triplex and a fourplex and you can simply retire better than your friends on social security. I mean, what do we care what happens to tech sector at the end of the day guys? I mean, you know, this is a podcast to launch a book teaching people how to buy real estate, right? We’re not teaching them how to buy 300 units. We’re teaching them how to buy a flipping, you know, duplex, right?

Josh: That depends because, I mean, you guys are out there doing these things. Lots of people say, “hey, I want to just go and buy a house or two houses or three houses,” or they want to figure out what their retirement number, I forget what we call it, the magic number that, you know, I need 6 houses to replace my income. Okay, great, but then BiggerPockets is encompassed of folks who see Brian Burke and Serge and say, “I want to do what these guys are doing,” not necessarily what Ben’s doing, but what Serge and Brian Burke are doing and it’s important.

I think the beauty of this conversation, this is gold right now by the way, I mean, the amount of knowledge that’s coming out is unbelievable. Ben, your points are very well taken because there are those people who just care about the duplexes and the 2’s and the 3’s. So, what should that triplex investor be doing, then? Given your thought or your take on the market the guy who wants to by the 2, 3 or 4-plex, what’s should they do?

Ben: You have to buy below intrinsic value. I don’t care what, when, how, or why, you just cannot be a retail investor ever because one of the things I learned from Brian is this idea of underwriting everything you do to the internal rate. There’s a lot of reasons to do that, but the most important one is that doing so requires you to project an exit and that goes back to—

Brandon: What do you mean by that? For those people who don’t know what that means, the internal rate. I mean, I know we can get really deep on that, but what’s a good—what do you mean?

Ben: Internal rate of return is a metric that tracks and times all of the cash flow events, and the biggest cash flow event is the disposition of the property, or the refinance to get your money out of the property completely. So, you know, Brian is a flipper and he looks at multi-family real estate as a slow flip which leads him to underwrite how am I going to get out of this thing before anything else, I mean the most important thing, and I learned that and it makes a whole lot of sense because if you can make sure that you discount the worst case scenario and you can buy the thing right so you can get out as you planned I don’t care how much you’ve got it discounted just discount it enough so that you’re guaranteed to get out of it.

That’s the only way to buy. You can’t be a retail investor. You can’t go out there and capitalize cash flow and think that you’re buying anything real. You’ve gotta buy value ad proposition, you’ve gotta buy, you know, you’ve gotta buy below intrinsic value.

Brandon: In other words, you’re just saying you’ve gotta go out and buy a good deal, you’ve gotta hustle to find a good deal.

Ben: Yeah, but you’ve gotta know how to define what a good deal is. Just because it’s cheap doesn’t make it a good deal.

Brandon: That’s a good point.

Ben: But to come back to Josh’s point, you know, or joke which wasn’t good if you ask me but what do I know, listen to what Serge and Brian—there’s a big difference between me and Serge and Brian. Like I said, they are, in my mind, this is who I call when I have questions, right? They’re superstars. They see things other people don’t see. What I am is a guy who discovered I had multiple sclerosis and couldn’t play the violin. I don’t know why in the world I even became a violinist, but I certainly didn’t set myself up for financial success in doing it and then on top of it I was told I couldn’t even do that. So from there I get to where I am here which may not be much, but I don’t have a job and I don’t need a job and I drive a Tesla, you know? My wife doesn’t have a job and she doesn’t need a job. So, you know.

Brandon: What I like about what you’re saying here—

Ben: It isn’t only that, but the point is they can relate to this.

Brandon: Yeah, so what I like about what you’re saying Ben, I mean besides the Tesla, is—

Ben: Yeah, and the Tesla, wow, man!

Brandon: Hey, did you guys hear Ben got a Tesla?

Ben: It’s the bomb!

Josh: Hey, listen, Tesla, what? Who’s buying stock?

Brandon: Serge also has a Tesla and I’m waiting for Brian to order his, but so—

Brian: I don’t need one, I have an airplane. I fly over them.

Brandon: That’s true. No, what I like about what Ben’s saying is that, like, you know, there’s people that their goal is to become a superstar. There’s people whose goal is to become Brian Burke and other people whose goal is to become Serge and other people’s goal is to become Ben and that actually changes throughout life too. Originally I wanted to become Ben. I wanted enough to be able to pay the bills, to have a Tesla maybe, and to just have that financial freedom. Other people want to actually build bigger wealth. Some people want to build massive financial freedom so I like that. You know, Brian and Serge do you guys agree with Ben on that? I mean, his you can’t be a retail investor and that’s the only way to invest today? What are you guys’ thoughts on that?

Serge: Well, I agree with him. It’s absolutely true. I’ve never been a retail investor. I’ve never bought properties at full market value. It’s never been a part of my DNA. I think a couple of points that Ben brought up that were particularly good, and I say that in amazement because I think that’s the first time that’s ever happened, is that two things.

Ben: I just tell them that he’s brilliant and he—

Josh: Shh! Stop talking, Ben. Give him a chance.

Serge: So what was I saying? Oh, anyway. So one thing that Ben said in there that was particularly important was the question of why. He asked, “why am I going to become a violinist? Why did I make that decision and why did I make this decision to get into real estate?” and I think that that has a lot to do with this conversation because when I’m talking about what’s happening in an economic perspective and Ben’s saying, “what difference does that make to the guy buying a duplex or a single family?” it all comes down to the why. Why would that person choose to buy a single family versus a duplex versus a strip center versus a hotel versus a commercial property? You know, you’ve gotta think a lot about why you’re getting into this business and what your objectives are because that’s the most important question is why.

The second most important thing is always to invest in reverse. You’re doing the business backwards. So when you’re looking at I want to get into apartment buildings, well, the first thing you need to know about the apartment building you’re looking at is what’s it going to be worth when you go to get out of it? You want to look at that exit and plan that exit and then work backwards to what you can pay. It’s just like doing a flip on a house.

If you’re going to flip a house you’re going to say, “well, the ARV, the after repair value, is $250,000. It’s going to cost me $50,000 to fix it up so what can I pay for that house to acquire and still make money?” Buying an income property, whether it’s a single family rental, duplex, triplex or a 300-unit apartment complex, works no differently than that house flip where you’re looking at what’s it going to be worth, what’s it going to take for me to get it to a point where it’s going to be worth that and what’s the income stream going to look like in the meantime? When you put all those components together that’s how you develop your internal rate of return, and that’s a complex discussion for another day, but the biggest point that Ben brought up there is to look at that exit and never buy at retail and I fully agree with him there. Please don’t make me agree with Ben again.

Ben: If I can add, though, because I’m in Lima, Ohio so I cannot project appreciation. Period, case closed, and that, my friends, is most of America. The A class market isn’t most of America. Most of America is secondary and tertiary markets where you have 5 factories, 2 hospitals and that’s the entirety of your economic base. So how do you project appreciation? You can’t. So what do you have to do to guarantee an exit? You have to buy right.

Josh: Can we get back to that? Because I want to get to appreciation, that’s on our list. Can we just hear from Serge, really quickly, on answering on your other point and then we’ll come back to you guys on appreciation?

Serge: Yeah, Ben’s point is absolutely right, but to get a little deeper into what Brian was saying it’s not just the why, it’s know who you are as an investor, right? Who are you? Why are you doing this? You know, I have friends that call me and say, “it’s so cool you’re looking at multi-family. I want an apartment complex also,” but my comment is why do you want an apartment complex? What makes you think you’re an apartment complex investor? Why are you doing it? What’s your competitive advantage? What’s going to make you better than Brian Burke buying in your market? Or Ben Leybovich buying in another market? What’s going to make you better? This is a very competitive market with very low margins, it’s as simple as that, and a lot of risk. There’s a lot of risk in these deals so it’s not for everybody. Real estate investing is not for everybody, you see it all the time. Half the deals that we buy are from people that should have never been real estate investors to begin with.

So a lot of people jump into this not knowing who they are. I want to buy single family because I know a guy that killed it buying single family. I know an old man that never had to work for 40 years because he had 20 single family properties. Well, we all know that’s not the real story. What makes sense for one guy isn’t what makes sense for the other guy. Ben may look at me and say, “you’re crazy managing these properties,” it doesn’t make sense for you. For me that’s where I can compete. That’s how I can push my margins, right? And those margins may be good enough for me. That’s why I invest in the asset class I invest in.

Now, if I didn’t have those competitive advantages I may be a retail strip center investor. Maybe if I was a commercial real estate broker for 10 years and knew that market and had the connections I’d be that. It all comes down to figuring out who you are, what you’re good at, what’s your competitive advantage and then matching that to an asset class that syncs to who you are and realizing that it’s not for everybody. You know, the guy with no money in his bank account I would tell him you’re not ready to be a real estate investor.

Josh: Yeah.

Ben: Brian Burke told me at one point in time don’t play someone else’s game, but knowing what your game is is about what Serge was just talking about: knowing yourself. Also you need to understand everybody talks about cycles. Yeah, there are cycles in the marketplace. There are also investor cycles. We all as we mature, as we achieve, you know, go through cycles. Something that’s right for me 5 years ago is absolutely not something I’m going to do today.

Brandon: Yep.

Ben: And that’s very, very, very real.

Josh: Right on. Hey, so I want to go back to what you had talked about before on appreciation. You were talking about you can’t predict it. I believe that’s true. I believe that you can certainly have educated guesses as you, you know, have a market where jobs are increasing, population growth, things like that. You know, the odds of things going better than a Lima, Ohio, for example, or Detroit, well actually Detroit’s probably appreciating at these point so I can’t use that anymore, but appreciation as an investor.

I know we’ve talked about this separately on all of our podcasts with each of you guys, but particularly for newer investors, should they be factoring appreciation at all into these deals and opportunities, or should it be something that’s just the icing on the cake? Let’s start with Brian.

Brian: Well, the answer to that question is yes they should, but the way that they factor appreciation may be different than what you’re thinking of. Appreciation to me is something that I can do to create added value to a property.

So, for example, let’s say I’m going to buy a single family home as a rental, and your approach to how you view appreciation is what separates you and defines you as either an amateur investor or a professional investor, or taking an amateur approach versus taking a professional approach. So an amateur’s approach is to pay full-value and it’s a buy and pray model. You’re just hoping that the market is going to carry your value higher. You’re hoping that the rental market is going to carry your rents higher. The professional’s approach is one where you’re actively involved and you’re going in and you’re buying the property under current market value because there’s some type of a defect and what you’re looking for is you’re looking for a correctable defect. That correctable defect could be bad ownership, it could be physical deficiencies, it could be any number of things that the property needs to bring it to full value.

So what I’m looking at when I’m looking at appreciation is what is that property worth today if I do all of the things that I do all of the things that I intend to do? So, small scale example, a single family house; it looks terrible, it’s dirty, it’s run-down, the landscape or curb appeal are bad.

Ben: You’re describing Serge’s house.

Brian: Well, you’ve been there. So, you know, what you’re going to do is you’re going to go in and you’re going to improve that and you’re going to make it look nice and appealing to a different renter demographic. So you can predict what that house is going to be worth after you’re done. What you can’t predict is what it’s going to be worth 15 years from now long after you’ve done what you’re able to do. That’s one of the reasons why I tend to be more of a mid-to-short term in my buy and hold strategy because I know that, let’s say I’m going to be doing it on a larger scale and I’m going to be doing an apartment complex, and I know if I can buy this apartment complex for $10,000,000, put $2,000,000 in repairs and sell it for $20,000,000 in 3 to 5 years that’s a darn good deal. I don’t really care what it’s worth 20 years from now cause I’m not going to be in it that long and I can’t predict that far ahead. So I’ll do what I can predict, I’ll take that hockey stick of the income and I’ll get out at the top. That appreciation is what I built, not what I prayed for.

Brandon: I like that. Serge, what do you think?

Josh: That’s awesome.

Serge: You know, I’d say it’s—I’d echo Brian’s statement where you’re not looking at what market forces, you’re not looking at this asset’s going to increase. It’s not a stock. It’s not going to increase 3% a year, right? I like to look at, when we talk about intrinsic value, what does that mean? Factors such as rebuild cost. How much does it cost to rebuild in this neighborhood per square foot? How much are the builders going to build this type of comparable asset for?

So if you’re buying a single family home and you know that building’s going to resume at one point in time, whether it’s 5 years or whether it’s 10 years, and one thing you can count on is inflation in the cost of materials, right? So you know that building costs are going to go up. So you know you’re going to have an exit and you know that your floor is going to be set by the builders at the very least, right?

There’s always going to be foreclosures and there’s going to be cyclical markets. If you buy cheap enough, you can hold through those dips. If you know that comparable stuff costs $100,000 and you can buy that asset for $50,000 and you know that worst case scenario rent is $800 even if it dips 20% and you still have cash flow that’s a pretty safe bet, right? It’s where you’re buying at the same $100,000 and you can’t afford those dips in rent that’s what you’re watching out for, right?

Josh: Right on. That’s great. You guys, that’s awesome.

Brandon: Yep, I like it. I just want to add in, because you know this is half my show here, so I’m going to jump in. Alright, so here’s what I want to say about appreciation. A lot of this is going to depend, and I know you guys covered this as well, but a lot of it’s going to depend on, you know whether or not you include appreciation in there, it’s going to depend on you and your goals as well.

What I mean by that is when I first started I was buying these just junky, not necessarily junky, but pretty lower income multi-family properties that cash flowed really well when I was managing it and I was doing my own maintenance and it all worked really well for me and those ones will not appreciate. However, today now I don’t need the cash flow anymore. I don’t really want the month to month cash flow. What I want is long-term wealth.

So I’ve shifted my strategy over a lot where lately, I’ve been doing what Brian says, I’ve been doing more value ad single family where I can add a bunch of equity. At the same time maybe I’m not going to buy a bad deal based on appreciation, but my plan is really, really hoping on appreciation because I’m buying in the best neighborhoods and I’m buying a great deal. So even if appreciation carries forward at, you know, whatever the economy takes it, I mean, not even real estate but just in general the cost of the dollar going one direction. You know, my goal, again, is not cash flow. My goal is long-term appreciation with some of these properties because that’s just a different goal. It might take me 5, 10, or 15 years, but that’s still part of it. So, anyway, I just wanted to throw that out there that, you know, it does depend a little bit on your goals and where you’re headed as well as your location.

Josh: How do you—

Brian: I have no idea what you just said.

Serge: Well, Brandon, you make a good point. You’re probably also a lot more realistic on your expenses. You realize that the higher asset class and the reality of owning that, managing that, right? Over the long run is compared to lower end properties where on paper they always look like a home run. When you factor in the lack of appreciation and you factor in the true expenses of the turnover in that class of tenant, right? You get a more realistic picture, but you’ve gotta be in the business for how long before you get that, right? You look at Ben’s articles on not buying, you know, C, D class assets and people still argue that, hey, I can manage it better than anybody else and my expenses, you know, they’ll argue on the cost of the window, right?

Brandon: When we re-launch these books, well, officially they’re coming out here in about an hour from when we’re recording this, but one of the things I did I added, like, an hour long bonus video and it’s called The Truth About Investing in $30,000 Rental Houses and it’s based on you guys, Ben and Serge, you guys wrote that article a while back and so I just talk about that concept because that’s the things that I learn. Because I used to think that a $30,000 rental house was a great deal, you know, and things have shifted a lot in my mind mainly because of you three guys have shifted it quite a bit.

Serge: I must admit, before Ben outs me, that I do still buy $30,000 houses.

Brandon: So, okay, I might as well, right? I actually talk about this in my video. Here’s my thinking, right? If you want to buy a $30,000 house great, but I want to buy that house in a location, like, I want to buy the house for $30,000 and put $20,000 and have it be worth $100,000 when I’m done. At that point even if I get into appreciation hopefully it’s still worth $100,000.

Ben: But that’s not a $30,000 house. When we talk about a $30,000, a pig, we talk about functionally and monetarily obsolescent. It’s never going to be that $100,000 no matter what you do. You could put gold plated toilets in there it’s still a $30,000 pig. That’s the essence of a $30,000 pig. What you’re talking about is buying below intrinsic value which is what you’re supposed to be doing.

Brandon: Yep.

Josh: Big difference. Well, so, Brandon, I mean, you said that you don’t want to do it anymore and you’re not focused on it. Serge, you said psh, don’t tell anybody I’m on it. What about the listeners? You know, should new investors be thinking about these $30,000 houses or man, maybe I’m going the wrong way with this, but, you know. let’s go to Burke. You haven’t talked about these $30,000 houses, what’s your take?

Brian: It’s like watching a tennis match between Serge and Ben about the $30,000 houses and who’s going to have the stronger point one way or another. You know, I don’t know. I’ve never done it so I don’t really have a really strong opinion. I have bought properties for $30,000, but they certainly weren’t worth $30,000. I think there’s a difference between buying something at a $30,000 entry and buying something that only has a $30,000 exit. In the latter case where it’s the $30,000 exit, you know, there may be some addition risk factors in play because there are fixed costs that aren’t a percentage of the sales price or the rent. So, you know, that does come in to play a little bit of a role, but aside from that argument because of my limited experience in that market I’m going to defer to these two guys and let them duke it out.

Brandon: Well, so let me ask about, like, people are wondering about the $30,000 house thing because it’s a very popular topic on BP. Ben’s written, like, 17 articles about it because he knows he’s going to get 100 comments every time.

Josh: Well, and because people are attracted to it at the end of the day.

Brandon: People are attracted, yep.

Josh: Especially newbies that are like, “hey, well, I hear I can buy a house for almost nothing, you know, let me get into that”. It’s very attractive.

Brandon: Yeah, in this bonus video that I did I asked this question, I said, “let me give you guys a hypothetical question. Should you buy a $30,000 house that rents for $500 a month?” Because that’s what turnkey providers are oftentimes selling and I see in the Midwest is a $30,000 house will rent for $500 a month. That’s almost the 2% rule, right?

Josh: That’s pretty close.

Brandon: That’s pretty good. I mean, even a $30,000 house for $600 a month that is the 2% rule.

Serge: Sure.

Brandon: Why is that a dangerous idea?

Ben: Because of what Brian just said. There are fixed costs involved with running property and owning property for a period of time that happen regardless of what you do on the management side. Things like Capex, you know, things have a lifespan and once it’s up, it’s up. $500 for an SFR just doesn’t pencil out. It just doesn’t work because of those fixed costs.

Brandon: What are those fixed costs?

Ben: Well, every time you have a vacancy if you trace that backwards there’s a story about how that happened, why, how much it costs and what’s it going to cost to fix it? So a lot of times what I see in TK performances, you know, they’ll be nice enough and include a 7% vacancy, but there’s never any bad debt, there’s never any lost lease, there’s never any increased fees in terms of card fees and everything else. Because, of course, you have to evict the bum because, you know, they didn’t pay.

There’s never any of that, but by the time you really think the story through the 7% physical vacancy becomes an 18% economic vacancy and then you have capital expenses because the fact of it is that a water heater is only going to last as long as it’s going to last no matter how you baby it eventually you’re going to have to replace it and it’s not a cost that’s a percentage of your income. It’s a fixed cost. The water heater costs what it costs. A roof, a window, flooring, you name it. Every piece of that building costs what it does and by the time you break those out you understand the cost of what it is to hold the property for 5, 7, 10 years. You don’t know when this breaks down. You can try to time to sell it before the next Capex wave happens, but I don’t think that’s the wisest thing to do. The wiser thing to do is to be well capitalized so that when things come up you can afford to pay for it. The problem is on a $500 SFR rental you cannot afford to be that well capitalized.

Serge: I can throw in a counterpoint to Ben and then he can fry me and hang me from the tallest tree, but…

Brandon: Let’s hear it.

Serge: Real estate doesn’t just throw off cash flow as an investment. It throws off one more thing. The thing that real estate investments throw off outside of monetarily is knowledge. So if you’re a new investor who has no experience in owning rental properties and you just absolutely have to get into this business because this is your goal and the only thing that you can figure out how to get your feet into is a $30,000 pig, as Ben likes to define it, then maybe that’s not the worst thing in the world for you because one of two things is going to happen.

One, you’re going to learn some valuable lessons that are going to teach you really why not to do $30,000 houses, or you might have some level of success which produces a result that catapults you into going to the next level and selling that $30,000 house and then buying a $50,000 house then buying a $70,000 house. Being one that has come from absolutely having not one single dime to my name, literally living off the overdraft protection on my checking account when I first bought my first real estate investment, to where I am today of having bought over $200,000,000 worth of real estate, I didn’t get there because I waited and waited and waited until I could get into the ultimate investment that I wanted to get into. I got into something that I probably shouldn’t have. It wasn’t the greatest deal, but it taught me so much that allowed me to get to the next level, and you can learn how to do this business from guys like Ben. He’s really sharp and he can teach you how to be good, but one thing I have learned in watching a lot of investors over time is that I can teach them everything I know and they’ll listen to about 5% of it and they’ll go do their own thing and they’ll learn their real lessons from their hands on activity. So, you know, use Ben’s knowledge to get you what you need to know, but you’ll learn everything out on the street.

So, to that end, I think $30,000 houses may have some place in the investor’s repertoire, it just doesn’t happen to be in mine.

Brandon: Yeah, I like that a lot.

Brian: Or mine.

Brandon: Yeah, my early deals, I think all of us could agree to this, that our early deals probably a lot of them sucked quite a bit yet we probably wouldn’t do back and change that because it made us who we are today.

Serge: That’s right.

Brandon: So, like, I’m not saying go out and buy a bad deal. I don’t think anybody here is saying go buy a bad deal, but, you know, don’t let your fear of buying that bad deal stop you from ever investing in the first place.

Josh: So wise.

Ben: But there’s BiggerPockets, though. I mean, there is BiggerPockets, there is Ben Leybovich, there’s Brandon Turner, the point is these guys don’t have to lose money like we did in order to learn those lessons. These guys, you know, when I wanted to understand syndication I reached out to Brian, there’s a reason for that.

Brandon: Yeah. I mean, it’s true. I did a webinar a few months ago and that was, like, the first line that I put on all the Facebook ads for it and it just said, “yes, you should learn from your mistakes, but the secret is you can also learn from other people’s mistakes,” you know, if you’re wise to do that. I think that’s important and I think that’s why all of us are pretty open with talking about our mistakes and our issues. We’ve all done that on separate podcasts and we’ve all made them.

Josh: Yeah, awesome. Hey, guys, starting to run out of time so my last question, unless you guys strike up something in me to beg more of you and I want to start with Serge, is what are the downsides of rental properties? You know, we’re doing this podcast today because we’ve got a couple new books coming out on the business and, you know, it’s not all roses, right? I mean, we’ve talked about some of this stuff and I think that’s kind of the thing that BiggerPockets is best at. I think that we’re the best at being realistic about this business and this conversation so far I think we need to go and do another 3 hours of this for future podcasts, but what do you guys see as the big downsides of rental properties particularly, again, for newer real estate investors? Let’s start with you Serge.

Serge: Certainly, certainly. If you’re managing yourself dealing with tenants is going to be a challenge. You may not be used to that caliber of person, you know, the lying. You’re going to see all different sides of the human spirit, right? When you’re a landlord. If you’re not property managing yourself, you’re probably not going to be making money when you start that. It’s the difference between expectations and reality for the real estate investor, especially on the low end. When you grow and you can start to build some scale like Brian and build a professional organization then you can make a corporate environment out of it, but for your average listener that’s starting it’s going to be a lot of work for not a lot of money. I like what Brian said, that $30,000 pig, whether it made you money at the end of the day or it didn’t, it bought you an education and it’s better than sitting on the sidelines and doing nothing.

The first three rental properties I bought I would never have bought those again, but it taught me my lifelong philosophy of what tenant that I want and what tenant I can make money with and I build all of my purchases based on going after that specific tenant, that specific customer. So you’re going to deal with a lot and the numbers are never going to work like you think they are and you’re going to question why am I doing this? What’s the point? And be ready to switch models. Be ready to say maybe I’m not a buy and hold investor. Maybe I don’t have the capital or the skill or the knowledge to manage things. Maybe flipping is what I need to do, right? There’s a lot of different strategies and just be fluid and ready to adapt.

Josh: Nice.

Brandon: Yeah, I like that.

Josh: What would you say, Ben? Downsides to rentals?

Ben: I think Serge’s point is right on. Be ready to adapt, I’ll come back to that. Yeah, I’ve had a knife pulled on me by a sub. You know, I’ve had them call me names that I’m going to not mention on this podcast, but when you get in and you don’t know the difference between a footer and the rafter and you don’t have any contacts you’re just shoe stringing the whole operation because this is what life needs to do right now it’s rough. I mean, it really, really is rough.

When you couple that with not having money, which majority of the listeners do not, I mean, if you have a $40,000-$50,000 job and a family you don’t have any money. That’s just how it is. You just don’t have any money. So when you do that and you’re looking to creatively finance I can’t—it works. I am the example. I’m not Brian Burke, I’m not Serge Shukhat, I didn’t take companies public. I don’t come from a corporate background, but it works. You know, but I haven’t bought anything since 2013. I shifted my strategy because of my cycle, my investor cycle, I mentioned it before, my life cycle. So it works, but you’re going to have to get a lot of it to get to a point of stability where your life does what it’s meant to do.

My back was really to the wall and I really didn’t have any other options and I was going to succeed no matter what, but had I had a $120,000 corporate job I don’t know if I would’ve because I really don’t like real estate. I think these guys get off on real estate, I really don’t. I don’t like real estate. I respect it a lot, I appreciate how powerful it is and what it can do for regular people, but I don’t love it. I don’t love the chase. I don’t get tingly feelings in my legs, you know, like Chris Matthews, none of that about real estate. None of that because the numbers never are what you think they’re going to be. The tenants never behave like you think they’re going to behave. The contractors that’s easy now, I’ve been around long enough that I hand them the key and they pick up the key off the board and they bring it back and it’s done, but it wasn’t like that in the beginning. I had a knife pulled on me so why are you doing this? I mean, it comes back to why are you doing this?

Josh: And I’ve gotta say, Ben, that’s actually pretty brave of you to say that you don’t like it, but you see it as a means to an end, right?

Ben: It’s a means to an end.

Josh: Yeah.

Ben: It taught me so much about what I know, but, you know, my story, and it’s very logical, you know, I teach now. I have a course and I teach now and there’s a reason for that and that’s because I financed myself out the wazoo in order to get into this real estate because when they told me I had MS I had not a cent to my name. So I got this job to build a music school for $30,000 a year and I had nothing.

So in order to do this I decided real estate was going to be it and I had to be very creative. I had to find deals below intrinsic value but, having said that, I financed 100% of those things. What that meant was 3 year balloons, 5 year balloons, 7 years balloons and do you know what your cash flow really looks like when you’ve got these balloons hanging over your head and when your reputation is on the line? My investors have never lost money. I’ve lost money, but my investors have never lost money, but I finally then got to a point where I don’t have any more balloons and I have a stable portfolio and I take account of my life. It’s that life cycle thing. I take account of my life and I say to myself, “do I want to buy more real estate like I have been in Lima, Ohio or is my life calling me to do something else?” and, frankly, from a place where a doctor told me I’m not sure how long you’re going to be out of a wheelchair to a place where I am now people need to know what I know so I teach. That’s what I do nowadays is I teach people and the next step is going to be, you know, buying a 40 unit in beautiful Arizona, buying a house next to Serge Shukhat and being done with the whole thing.

Brandon: I think one thing you said there that I thought was really good is that you just mentioned that it is hard, especially when you have no money. It is really hard and it’s stressful, and I’ve said this before, there’s so many nights where I’m up until 3, like not so much anymore, but I’ve been up til 2, 3, or 4 in the morning trying to figure out how do I get out of this? Or how do I put this together? How do I get this? And I think that’s just what happens. So, Brian, would you agree with what Ben and Serge have said? Do you have anything you want to add onto that or what are your thoughts?

Brian: Yeah, I do agree with it and just to specifically answer Josh’s question about, or what that your question, Brandon? I forgot. It was so long ago.

Josh: The downside to rental properties? Yeah, that was mine.

Brian: Yeah, the downside to rental property. You know, I think that the biggest downside of rental property is that it can fail to meet your expectations. So, I think, it’s very important for people when they get into this business to realize that it is what it is and realize it for what it is. In 2004 and 2005 I remember people at real estate club meetings talking about how, “oh my gosh my plumber made $100,000 on this house he bought as a rental and recently it’s gone up that fast and I’m going to buy a bunch of rental houses,” you know, for $450,000 that rent for $1,500 a month, good luck. Then the market tanks and so those folks their expectations were not met at all because they bought at such a high basis, the market went down and they were underwater. They were in negative cash flow because they thought that they could accept negative cash flow because the appreciation would bail them out and that didn’t work.

So, I think, that people have to realize that this is not a get rich quick scheme. It’s not even a get rich quick business, and have the proper expectations going in or the downside will be that it won’t meet your expectations. If you properly set your expectations from the outset, then the downsides are exactly what Ben and Serge outlined.

Josh: Right on. Hey, guys, you guys have talked about some real scary stuff. It’s very negative, really, like awful. I’d never want to buy a rental property actually. A lot of people are probably sitting and listening and saying, “wow, this is scary,” so I want you guys to flip it around. Let’s keep it to one sentence per person and then we’re going to let Brandon close up the podcast. So why, given all the negatives, should somebody be investing in real estate? Ben.

Ben: Because nothing else can do, ultimately if you can sustain the heat, nothing else is going to answer the call like real estate can.

Josh: Cool. Serge?

Serge: It’s the fastest way to control your path to building wealth. Every other aspect, every other investment you’re betting on somebody else, you’re betting on something else; real estate you’re betting on yourself.

Josh: Love it. Brian?

Brian: I would say that everything those two guys said is absolutely true if you educate yourself and learn how to do it and the one thing that’s great about real estate is that you can learn how to do it properly and I think that’s part of the reason why you’re doing this podcast is to teach people this business. There’s books, there’s podcasts, there’s BiggerPockets, and people need to leverage that and use that knowledge in order to get the result Ben and Serge just outlined.

Josh: Awesome.

Brandon: Love it. Cool. Alright, cool, well I am going to take us out, but before we go to the—normally we have a Fire Round and then the Famous Four, but today we’re going to combine those into what we call the Famous One. It’s going to be a one question to each of you on the so-called panel and I’m going to ask you that. Before we get to the Famous One and before you hear what that question is let’s hear from our sponsor of the Famous One, or the Famous Four, or the Fire Round, and that is Booth.

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Brandon: Now, let’s get to the Famous One. Alright, the question is: what is the best real estate book you’ve read written by Brandon Turner in the past month or two? Just kidding. Alright, but the question actually is: if you guys could give one final tip, just one final tip for those listening today, who are maybe—

Josh: Quick Tip.

Brandon: Yeah, one Quick Tip that you could give people that are listening who are maybe they’ve never done a single deal, or maybe they’ve done one or two deals, you know, like I don’t want to say complete newbies, but newbies or just they haven’t done a lot. What’s the one tip you would give them just to encourage them going forward in their businesses? Why don’t we start with, I don’t know, anybody want to take it? Raise your hand. Anybody? Ben’ll take it.

Ben: Ben’ll take it. I say buy quality. I know what Brian said about the pigs, I understand the sentiment, but we’re at the top the market, the spreads are very narrow, mistakes are very painful, reverse is very fast. Buy quality, buy something with a lot of aspects of desirability that people will want, have wanted in the past, want it now and they will for some reason want it in the future. Don’t think you’re going to take something and make it appealing to people. Buy something with a proven intrinsic record of why it’s quality. It could be mismanaged, but it’s still quality. What it is, where it is, it’s quality. Stick to that and you should be fine.

Brandon: Okay, I like it.

Brian: I’ll take the next one. My advice would be to align yourself with someone that has the knowledge or experience in the field that you’re trying to get into. So if you want to buy single family homes and you don’t know anything about buying single family homes get to know somebody that owns single family homes whether that’s going to your real estate club, hanging out on the forums at BiggerPockets, moving in next door to Ben Leybovich and assaulting him every time he gets out of his car to walk into his house. Whatever it may be try to find somebody that you can learn the knowledge that you don’t already have. That would be mine.

Brandon: I like it. Alright, Serge?

Serge: I would second that. Invest in yourself first and foremost before looking to buy a $30,000 to $50,000 or $100,000 house it’s irrelevant what you buy. You’re going to fail if you didn’t invest in yourself first and foremost and getting to know who’s doing it in your community, that’s part of that process. You’ll probably find out if you want to be a single family investor and you hang out with a guy like Ben for a month you’ll probably realize, “hey, I don’t want to become a single family investor,” I don’t want a life like Ben, right? Or you might say, “that’s exactly what I want to do,” but invest in that first before jumping into something. Invest in yourself, invest in your knowledge. Find out who you want to be and why you want to be that.

Brandon: I love it. Why don’t I ask you the same question, Josh? We don’t ever get to ask you cause you’re the host. Why don’t we ask you the question? What’s one piece of advice you want to give people about getting into rental properties?

Josh: I think I’d just parrot what these guys are saying. I get asked the question every day. I get emails, I get private messages on the website, and what I tell them is pretty much the same. I’d say get out there. Learn what it is that real estate is. Learn what your options are, learn what the possibilities are. Build up, at least, a base of knowledge. Now, there’s a point when there’s only so much you can learn before getting out there and doing it and that’s been parroted by guest after guest on this show. So, you know, you want to learn, you want to get that base of knowledge. Know enough to not do what I did which is just go in blind assuming you know enough and go and make every damn mistake in the book. Do not do that. That is just a terrible idea. I don’t care if you go to MIT, or Harvard and you’re sharp as a tack. It doesn’t matter. That’s not gonna make you successful. It’s understanding the business that’s going to make you successful. So at least getting the rudimentary understanding of the business.

A few resources would be our BiggerPockets Ultimate Beginner’s Guide, listening to this podcast, you know, there’s countless other ways, but those are the two ways I like to tell people. Then at some point, and I can’t tell you what that point is but you have to figure it out, at some point you have to pull the trigger. You’ve gotta be out there. You’ve gotta be analyzing deals. That’s part of the education process, but you’ve gotta eventually go and pull the trigger and it’s gonna be scary and you’re not going to know completely what you’re doing. You’re not going to have 100% of the knowledge that you need to go ahead and do that and that’s okay. You will go ahead and make mistakes and that’s okay because everybody here has made mistakes and will continue to make mistakes. So just keep that in mind, know that, and go ahead and do it. Listen, at the end of the day it may not be for you. You may try single family and it may not be for you. You may try multi-family and it may not be for you. Real estate, after trying everything, may not work for you at all and that’s fine. There’s something else that might work for you, but you’ve gotta give it a shot. So that’s my long short answer.

Brandon: Nice. Cool. Alright. Shall we get out of here?

Josh: Let’s do this. Guys, it’s been a pleasure. Serge, Ben, Brian, thank you so much for coming on the show. We really do appreciate it. You guys are all three for three. Sorry, Ben, you’re not the first, but thanks for coming on guys.

Brian: Thanks for having me.

Serge: My pleasure.

Ben: Thanks.

Josh: Alright, guys. That was Ben, Brian and Serge. Absolute, absolute all stars in the BiggerPockets world. These guys are all stars just in the world in general, man. All really, really, really smart folks and fellas and we love having them as part of our family. We love having them as part of the BiggerPockets community. They, you know, they really give so much of themselves to everybody at BiggerPockets so we really do appreciate that. What a show, man.

Brandon: Yeah.

Josh: Mind blown. Want to go back and listen up and, you know, learn a thing or two, man. I got schooled.

Brandon: Yeah, I know. Every time I talk to these guys my brain hurts afterwards and that’s why I try to make it a point to talk to them, right? Talk to people who are smarter than you. These guys are smarter than me.

Josh: Well, that wouldn’t be hard for you.

Brandon: Thanks. Well, let’s get out of here, but one more time, Josh, do you want to tell them where to find the books? Because I’ve talked about myself enough.

Josh: BiggerPockets.com/RentalBook. That’s BiggerPockets.com/RentalBook. Check it out. Also, guys, thanks so much. We’ve got lots of great, great podcasts lined up for you in the next coming weeks so definitely stay tuned and be safe out there during this holiday season. Let’s get out of here. I’m Josh Dorkin, signing off.

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